IRS Practice & Procedure
Tax Controversy &
Dispute Resolution
March 23, 2012
TEI Florida Chapter IRS Liaison Meeting
Deerfield Beach, Florida
Agenda
Part I
• Uncertain Tax Position Statement: Background and Recent Developments
• Foreign Bank Account Report (FBAR): Technical Aspects for Consideration
• Understanding the Basics and Issues Surrounding EIN Assignment and
"Check the Box" Entity Classification
Part II
• Foreign Tax: Election to Deduct or Credit
• IRS Implementation of Unique Reference Identification Number Requirement
• Form 1139: Utilizing Losses and Credits to Successfully Obtain a Quick Refund
• Statute of Limitations: Nuts and Bolts
• Protective Claims
Part III
• Quality Examination Process (QEP)
• TEFRA Partnerships: Background, Penalty Application & Audit Procedures
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www.pwc.com
Part I
Devin W. Blackburn
Uncertain Tax Position Statement:
Background and Recent Developments
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Uncertain Tax Positions
Development of Schedule UTP
• Need for increased transparency
- Currently, the IRS spends as much as 25% of audit time searching for issues rather
than actually auditing issues
- Primary goal of the IRS is to reduce time spent searching for issues, and enhance
focus on completing examinations
• Reasons IRS released Schedule UTP
- Political environment
- Economic factors
- Challenges sustaining tax base
• Final Schedule UTP released on September 24, 2010
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Uncertain Tax Positions
Key Elements of Reporting
• Who Must File?
- Corporate taxpayers who file:
◦ Form 1120
◦ Form 1120-F
◦ Form 1120-L
◦ Form 1120-PC
• Phased Effective Date
- Calendar year 2010 for corporate taxpayers with total assets ≥ $100 Million
- Calendar year 2012 for corporate taxpayers with total assets ≥ $50 Million
- Calendar year 2014 for corporate taxpayers with total assets ≥ $10 Million
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Uncertain Tax Positions
Key Elements of Reporting
• Disclosure on Schedule UTP is required if two criteria are met:
1. Corporation has taken a tax position on its U.S. Federal income tax return for the
current tax year or a prior tax year;
and
2. Either the corporation or a related party has recorded a reserve with respect to that
tax position for U.S. Federal income tax in audited financial statements, or did not
record a reserve for that tax position because the corporation or related party
―expects to litigate‖ the position.
•
The initial recording of a reserve will trigger reporting of a tax position taken on a
return. However, subsequent reserve increases or decreases with respect to the tax
position will not.
•
Transition Rule – A corporation is not required to report a UTP for a tax position
taken in a tax year beginning before January 1, 2010
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Uncertain Tax Positions
Key Elements of Reporting
• Taxpayers must provide a concise description for each tax position listed on
Schedule UTP, including:
- A description of the relevant facts affecting the tax treatment of the position; and
- Information that can reasonably be expected to apprise the IRS of the identity and
nature of the tax position.
• The concise description should not include:
- Assessment of the hazards of a tax position;
- Analysis of the support for or against the tax position; or
- Any privileged information.
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Uncertain Tax Positions
IRS Implementation & Guidance
• IRS will not assert waiver of privilege during examinations solely because taxpayer
has provided the document to their independent auditor
(Announcement 2010-76)
- Does not apply if taxpayer has waived privilege
- Does not apply to requests for tax accrual workpapers with respect to the taxpayer’s
involvement in listed transactions and unusual circumstances
• IRS has established a centralized repository to process all Schedule UTPs shortly after
the filing of the return
• Schedule UTP is provided to examination teams to review in conjunction with the CAP
program
- CAP Account Coordinators may request copies from taxpayers to expedite review
- Examiners may consult with taxpayers to confirm intent of disclosures
- Examiners may not ask taxpayers about the make-up of reserves
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Uncertain Tax Positions
Planning for Schedule UTP
• Develop an effective and efficient UTP reporting process beginning with the initial
calendar tax year of reporting
- Identify positions to be reported given changes in reserves
- Develop or modify existing processes and operational controls to capture necessary
information to comply with reporting requirements
• Strategically address IRS examination issues
• Reduce or eliminate uncertainty prior to the release of the year-end financial
statements and/or prior to the filing of the initial Schedule UTP
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Uncertain Tax Positions
Compliance and Management of Schedule UTP
Now
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Initial Disclosure
Ongoing
Assess the process –
consider the impact on
resources, controls and
procedures
Consider solutions for
compliance or technology
issues
Communicate UTP and
other tax risk matters to the
Board
Determine additional
information needed during
provision cycle
Improve infrastructure and
processes
Evaluate and document
UTPs as transactions occur
Mitigate uncertainty
Streamline and enhance the
use of financial data
Develop a strategy to
manage all disclosures
Prepare descriptions
Determine IRS examination
strategy
Monitor legislative and
judicial changes that impact
Schedule UTP
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Foreign Bank Account Report (FBAR):
Technical Aspects for Consideration
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Foreign Bank Account Reporting (FBAR)
What to File
Form TD F90-22.1
• Part I and Part V for consolidated report
• Part IV for individuals with signature authority only and no financial interest
When to File
By June 30th of the year following the year in which the account is maintained
• No process for requesting an extension available
• Mailbox Rule does not apply
• Under the simplified reporting rules, a US entity may file a consolidated FBAR report on
behalf of itself and entities in which it owns a greater than 50% interest by vote or value
Other Rules
• If reporting signature authority of 25+ accounts, limited information regarding such foreign
accounts is required
• FBAR is filed separately from an income tax return, but must be disclosed on returns
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Foreign Bank Account Reporting (FBAR)
Specifics of reporting requirements
U.S. Person
• U.S. citizen or resident
• Any entity formed under laws of U.S. (corporations,
partnerships, LLCs, estates, trusts)
• Beginning with 2010 filing, persons in and doing
business in US on regular and continuous basis
Financial Interest or Signature Authority
• Owner of record or legal title
• Authority of an individual to control the disposition of
money, funds, assets held in financial account by direct
communication to person maintaining account
• Test – Whether financial institution will act upon direct
communication
Financial Account
• Bank or securities accounts, insurance and annuity
policies with a cash value, mutual funds or similar
pooled funds
Exceptions:
• Bonds, notes, stock certificates
• Hedge funds (currently, but see FATCA)
Foreign Country
• Any geographic area outside of the US
• Situs of the account, not the situs of the institution
controls
• Account with a foreign bank at a branch in US is not a
foreign account
• Account with a US bank at a branch outside of US is a
foreign account
If these requirements are met, FBAR must be filed if the aggregate balance
of foreign accounts is greater than $10,000
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FBAR — Compliance
Entity’s Consolidated FBAR Filing
• Collect data necessary to identify foreign financial accounts owned by the consolidated
filer and all entities in which the consolidated filer has a greater than 50% interest
• Prepare and file FBARs by June 30
Officers and Employees with Signature or Other Authority
• Identify US citizens and residents with signature or other authority over foreign
financial accounts
• Determine to the extent possible application of FBAR exceptions
• Communicate information about FBAR reporting and account information to affected
employees
- Employees need the information in time to complete Line 7 of Schedule B of the
Form 1040
• Decide what FBAR compliance assistance to provide to employees
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Foreign Bank Account Reporting (FBAR)
Signature Authority Exceptions
SEC Act § 12(g)
filer (not publicly
traded on US
exchange)
Regulated banks and
financial institutions
registered with SEC or
CFTC
§1010.350(f)(2)(v)
§1010.350(f)(2)(i) & (ii)
Covered by (iv)
exception and account
owned by the
subsidiary
Covered and
account owned by
the subsidiary by (v)
exception
Covered by (ii) exception
and account owned by the
subsidiary
Covered by (iii)
exception and account
owned by the subsidiary
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Employee of a
U.S. Sub
Not covered by the
exception; no
consolidated report
Covered if account
included in the
consolidated FBAR
filed for parent and
subsidiary and
account owned by the
subsidiary
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Employee
employed within
the group, but not
by the owner of
the account
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Not covered by the
exception
Foreign Parent
Publicly traded on a
US exchange (ADR)
U.S. Parent Publicly
traded on a US
exchange
§1010.350(f)(2)(iv)
§1010.350(f)(2)(iv)
Employee of the
Entity
Covered by (iv)
exception and account
owned by the entity
Employee of a
Foreign Sub
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RIC Authorized Service
Provider registered
and examined by SEC
§1010.350(f)(2)(iii)
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FBAR Examples and Decision Tree
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Example 1
U.S. Parent
(public company)
U.S. parent
employee
(U.S. person)
No employee filing
requirement
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 2
U.S. Parent
(public company)
U.S. parent
employee
(U.S. person)
Foreign sub
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 3
U.S. Parent
(public company)
Foreign sub
employee
(U.S. person)
Foreign sub
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 4
U.S. Parent
(public company)
U.S. employee
seconded to foreign
sub (U.S. person)
Foreign sub
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 5
U.S. Parent
(public company)
U.S. employee
seconded to foreign
sub (U.S. person)
Foreign sub
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 6
U.S. Parent
(public company)
Foreign sub
employee
(U.S. person)
Foreign sub
(disregarded entity)
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 7
U.S. Parent
(public company)
Foreign branch
employee
(U.S. person)
Foreign branch (not a
legal entity in the
foreign country)
No employee filing
requirement
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 8
U.S. Parent
(private company*)
U.S. parent
employee
(U.S. person)
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
* Not a SEC 12(g) filer (generally more than $10 million in assets and more than 500 or more shareholders)
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Example 9
Foreign Parent
(public company
ADRs on NYSE)
No employee filing
requirement
Foreign parent
employee
(U.S. person)
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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Example 10
Foreign Parent
(public company
ADRs on NYSE)
U.S. sub
employee
(U.S. person)
U.S. sub
Employee required
to file
Foreign Bank Accounts
(employee has
signature authority, but
no financial interest)
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FBAR — Decision Tree to Identify Required Filers
1. Identify foreign accounts
Bank Accounts
Securities
Accounts
Other Financial Accounts
On an account by account basis, perform the following step:
2. Identify officers and employees with signature or other authority
Continue to Step 3
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FBAR — Individuals with signature or other authority
3. Is the individual a citizen or
resident of the US or a US territory
or possession?
Yes
No
4. Is the individual an officer or
employee of the entity that owns
the account?
Yes
5. Identify type of entity that owns or maintains the account
(or provides services in the case of an authorized service provider)
Continue to Step 6
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STOP – No filing
requirement with
respect to this
account
No
FBAR must be filed by the
employee with respect to
this account
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FBAR — Entity that owns or maintains the account
6. Is the entity (foreign or domestic) publicly traded on a US exchange, an SEC §12(g)
filer ($10 million in assets and 500 or more shareholders), a covered regulated bank
or financial institution, or a regulated RIC Authorized Service Provider?
No
7. Is the account owned by a US subsidiary that is greater than 50%
owned by a US parent AND the account is included in the US parent’s
consolidated FBAR filing?
Yes
STOP – No filing
requirement with
respect to this account
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Yes
STOP – No filing
requirement with
respect to this account
No
FBAR must be filed by the
employee with respect to
this account
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IRS Enforcement
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Foreign Bank Account Reporting (FBAR)
Risks of Non-Compliance
• Six year statute of limitations from the FBAR due date
- June 30, 2013 – Extended filing deadline for individuals with Signature Authority
• Failure to File Penalties
- Willful Violation – Greater of $100,000 or 50% of highest balance in accounts
- Non-Willful Violation - $10,000 per unreported account
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Foreign Bank Account Reporting (FBAR)
Illustration of potential penalties
Assume a taxpayer has the following amounts in a foreign account over a
period of years, and willfully fails to file complete and correct FBARs
Year
Amount on Deposit
2006
Account Balance
Penalties
$50,000
$1,050,000
$525,000
2007
$50,000
$1,100,000
$550,000
2008
$50,000
$1,150,000
$575,000
2009
$50,000
$1,200,000
$600,000
2010
$50,000
$1,250,000
$625,000
Total Penalties
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$1,000,000
Interest Income
$2,875,000
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Foreign Bank Account Reporting (FBAR)
2012 OVDI
• Offshore Voluntary Disclosure Initiative
- No Set Deadline
- Maximum Penalty – 27.5% of highest aggregate balance in foreign accounts
during tax years within the OVDI period
- Lowered Penalty – 12.5% or 5%, but must qualify
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Foreign Bank Account Reporting (FBAR)
Next Steps
• Appoint someone in your company to be responsible for FBAR matters
• Consult stakeholders and external advisors regarding FBAR requirements and how
they impact your business
• Create procedures to gather and process information
• Consider available technology assistance for more efficient FBAR compliance
• Document FBAR procedures and management/employee communications,
set timetable
• Prepare FBARs for entities required to file
• Participate in 2012 OVDI to take advantage of reduced penalties
• Consider whether to prepare FBARs for employees who are required to report
company accounts
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Understanding the Basics and Issues
Surrounding EIN Assignment and
"Check the Box" Entity Classification
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Default and Elective Classifications of Domestic Entities
• Default Classification Rules of Business Entities
- Corporation – Organized under a Federal or State Statute, if the statute refers
to the entity as incorporated or as a corporation, corporate body
- Other Business Entity– Unless otherwise elected, it is:
◦ A partnership if it has two or more members;
◦ Disregarded as an entity separate from its owner if it has a single owner.
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Default and Elective Classifications of Foreign Entities
• What is a foreign entity?
- An entity organized under laws other than a U.S. State or a Federal Statute
• Foreign entities classified as per-se corporations for federal tax purposes are not
eligible to make an entity classification election
(See Treas. Reg. § 301.7701-2(b)(8) for a list of such per se corporations per country)
• Default Classification Rules
- Foreign Eligible Entities – Unless otherwise elected, it is:
◦ A partnership if it has two or more members and at least one member does
not have limited liability;
◦ An association if all members have limited liability; or
◦ Disregarded as an entity separate from its owner if it has a single owner that
does not have limited liability.
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Form 8832 – Entity Classification Election
• Due Date
- Within 75 days following the desired effective date of the election; or
- No more than 12 months prior to the desired effective date.
• Late Election Relief
- Rev. Proc. 2009-41 – Electing entity must demonstrate that:
◦ Entity has not filed federal income tax or information return for the first year in
which its election was intended; or entity timely filed all required federal tax
returns and information returns consistent with its requested classification;
◦ Entity has reasonable cause for its failure to timely make the election;
◦ 3 years and 75 days from the requested effective date of the election has not
passed.
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Form 8832 – Entity Classification Election
• What to watch for:
- Obtain EIN for foreign entity prior to filing Form 8832
- Ensure that the Form is signed by each member of the electing entity who is an
owner at the time the election is filed
- Ownership change during lookback period – Each person who was an owner
between the date the election is effective and the date the election is filed, but
not at the time of the filing must also sign the election
- Attach a copy of Form 8832 to the entity’s U.S. federal income tax return for the
year in which the election is effective
- If Form 8832 is filed to change an entity’s federal tax classification, such entity
may not file another Form 8832 to change its classification again for 60 months.
Exception: If there has been a 50% ownership change
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Issues Surrounding EIN Assignment
• Dormant Entities
Example:
- In the midst of a reorganization in Year 1, Profit Corporation organizes multiple
LLCs for which it obtains EINs and elects to have each taxed as a corporation.
After the reorganization the LLCs do not have any activity, but continue to exist.
In Year 4, each LLC receives IRS notices regarding Form 1120 filing requirements.
• Erroneous or Multiple EINs
Example:
- In Year 1, ACME Corporation is formed and a representative obtains an EIN. In
Year 3, it changes its name to ABC Corporation and a representative erroneously
applies for an EIN. In Years 3 and 4, ABC Corporation files Form 1120 under the
second erroneously EIN. However, in Year 5, Form 1120 is somehow filed under
the originally issued EIN. The IRS return processor realizes that the EIN does not
match the entity name, and assigns a third EIN.
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www.pwc.com
Part II
Janice Flood
Foreign Tax:
Election to Deduct or Credit
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10 Year Statute to Elect Foreign Tax Deduction – Maybe Not
• In recent CCA 201136021 and 201204008, the IRS determined that the filing of an
amended return to claim a refund based on a change from a foreign tax credit to a
foreign tax deduction is not timely under I.R.C. § 6511(d)(3)(A).
• The IRS states that the 10 year period of limitations provided by I.R.C. § 6511(d)(3)
only applies if the claim for refund or credit relates to an overpayment attributable to
any taxes paid or accrued for which credit, and only a credit, is allowed against U.S.
income tax under I.R.C. § 901.
- The 10 year period is not applicable if the claim for refund or credit results from a
deduction of foreign income taxes paid.
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10 Year Statute to Elect Foreign Tax Deduction – Maybe Not
• CCA 201204008 states that pursuant to the plain language of I.R.C. § 6511(d)(3)(A),
the 10 year period of limitations only applies if the claim for refund or credit related to
an overpayment attributable to any taxes paid or accrued for which credit is allowed
against U.S. income tax under I.R.C. § 901 (emphasis in CCA).
- The CCA emphasizes ―allowed‖ credit in the section, instead of the usage of
―allowable‖ credit; the distinction between these two words is an ―important one‖
according to the CCA.
- Citing the Random House Dictionary, the CCA states that ―allowable‖ is defined as
―that which may be allowed, legitimate, permissible.‖ In seeming contrast,
according to the CCA, ―allowed‖ is defined as that which is permitted.
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Deduction vs. Credit – IRS Position
• The CCA attempts to apply its distinction of allowed and allowable to the application
of I.R.C. § 6511(d)(3). It first establishes that I.R.C. § 164(a)(3) provides that a deduction
is allowed for the taxable year within which foreign income, war profits, and excess
profits taxes are paid or accrued.
• The CCA then provides: Under I.R.C. § 275(a)(4) and the regulations under IRS I.R.C.
§§ 164 and 901, a deduction for foreign taxes paid or accrued is allowable unless and until
the foreign tax credit has been claimed with respect to the such taxes [emphasis added].
Once a credit is taken, such deduction is not allowed; similarly a foreign tax credit is
allowable for such taxes unless and until a deduction has been claimed…at which point
the credit is not allowed.
• The IRS pairs the term ―allowed‖ with a requirement that the foreign tax credit
actually and finally be claimed and produce a tax benefit for the taxpayer in order to be
―allowed.‖ Therefore, in reading § 6511(d)(3), an ―allowed‖ credit, to which the special 10
year period of limitations applies, can only refer to the foreign tax credit, and not the
―allowable‖ foreign tax deduction.
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Deduction vs. Credit
Allow or Allowable that is the Question
•
―Allow‖ versus ―Allowable‖
- These two terms cannot be given static definitions that carry through every Code
section. The definition of each word is more appropriately determined section by
section based on the Congressional purpose and intent of the particular section.
• Distinctions between the Code's usage and definition of ―allow‖ and ―allowable‖ cannot
simply be made by referencing a single English dictionary as the IRS has done in the
CCA.
- Dictionaries have multiple and different definitions of ―allowed‖ and ―allowable.‖
- Example: The Oxford English Dictionary defines
◦ ―allowed‖ among other things as ―not prevent the occurrence of; not prevent a
person from doing something; permit;‖ and
◦ ―allowable‖ as "appropriate, satisfactory, permissible, tolerable, legitimate."
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Code Usage of ―Allow‖ and ―Allowable‖
The usage of the terms ―allow‖ and ―allowable‖ in the Code are too great and varied to
equate one particular definition to each word for each particular Code section the words
are used in.
• Usage in Code
- "allow" – 44
- "allowed" – 517
- "allowable" – 312
- "allowance" – 517
- "shall be allowed―– 345
- "may be allowed" – 10
• In other words, ―allow‖ in one Code section could have a different denotation and
connotation than in another Code section based on the Congressional intent for that
section; the same can be said for the term ―allowable.‖
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Supreme Court Interpretation
•
Thus, to say that ―allow‖ always means X, and ―allowable‖ always means Y in every
Code section, would be taking an overly simplified, and unreasonable, position.
Therefore, there is no plain or dictionary definition of the terms that can be derived
from the term ―allowed‖ in section 6511(d)(3)(A).
•
In United States v. Hemme, 476 U.S. 558 (1986) the Supreme Court held that
―allowed‖ as used in the Code does not have a standard definition but must be
interpreted by context and Congressional Intent
- Addresses whether there is a distinction in meaning between "allowed" and
"allowable."
- "The term 'allowed' is a familiar denizen of the Tax Code. In some sections it
appears unqualified, while in others, Congress has clearly embellished the term
with the 'tax benefit" qualification..."
- In Hemme, the Government argued that "allowed" simply meant "allowable" or
provided by the Code, and did not require any actual claim or benefit to the
taxpayer.
- The Supreme Court held that the term "allowed" has no fixed meaning in the Code,
but the context of the term needs to be examined to determine its meaning in a
given case.
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Foreign Tax: Deduction vs. Credit
I.R.C. § 901 and Treasury Regulations
• The IRS concludes that the statute of limitations for claims of refunds where the
overpayment is related to a choice of a deduction is three years. However, it is clear
that under I.R.C. § 901 and its regulations, the period is 10 years. While the CCA
recognizes the election under I.R.C. § 901, it does not recognize that its interpretation
conflicts with those provisions.
- I.R.C. § 901(a) provides, in pertinent part, that:
Such choice [of credit or deduction] for any taxable year may be made or changed
at any time before the expiration of the period prescribed for making a claim for
credit or refund of the tax imposed by this chapter for such taxable year.
•
Treas. Reg. §1.901-1(d) provides the times prescribed for making the credit/deduction
choice, and hence the period of limitations for claims resulting from that choice:
(d) Period during which election can be made or changed. — The taxpayer may, for
a particular taxable year, claim the benefits of section 901 (or claim a deduction in
lieu of a foreign tax credit) at any time before the expiration of the period
prescribed by section 6511(d)(3)(A) (or section 6511(c) if the period is extended by
agreement).[emphasis added]
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Foreign Tax: Deduction vs. Credit
Treasury Regulation Not Considered by CCA
• Thus, in the context of the equating by I.R.C. § 901(a) of conterminous periods for
making the election and the refund period of limitations, this regulation clearly states that
the period of limitations for refunds attribution to foreign tax deductions is the 10 year
period (the only period prescribed by section 6511(d)(3)(A)).
• In its current position, the CCA fails to recognize that the above regulation in the
context of the statute specifies that a taxpayer may claim a foreign tax credit under I.R.C.
§ 901 or claim a deduction in lieu of a foreign tax credit, and obtain a refund at any point
during the 10 year period of limitations.
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URI:
IRS Implements Unique Reference Identification
Number Requirement
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URI Number
Little known requirement
• Beginning with U.S. federal tax return filed for the 2012 tax year, taxpayers who file
certain forms will be required to provide a Unique Reference Identification Number
(URI) or Employer Identification Number (EIN) for all foreign entities reported on the
following forms:
1. Form 5471 (Information Return of US Persons With Respect To CFCs)
2. Form 8858 (Information Return of US Disregarded Entities)
3. Form 8865 (Return of US Persons With Respect to Certain Foreign
Partnerships)
• A URI is a alpha numeric number limited to 50 characters or less that is selected by
the taxpayer. The taxpayer need not apply nor have approved by the IRS.
• Once a URI is selected by a taxpayer it must remain the same for the foreign entity to
which it is assigned. If a liquidation or disposition of the entity occurs the URI may
not be transferred or used with a different entity.
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URI Number
• The IRS website suggests that where multiple taxpayer each have an independent
filing requirement with respect to a single foreign entity, a URI will be established
separately by each taxpayer.
• Change of ownership of the foreign entity may result in the need to correlate the
URIs
- Example 1
In the case of a merger or acquisition, Form 5471 must correlate a new URI
assigned to the foreign corporation by the acquired entity with the previous URI
used by the target.
- Example 2
If Form 8832 is filed to change a foreign entity’s classification to be disregarded,
then the URI previously used on Form 5471 must be correlated to the new URI
used on Form 8858.
• 2011 Forms 5471, 8858 and 8865 have been updated to include a line for reporting of
the URI. Although the instructions to these forms state the URI is mandatory for
years beginning in 2012, the IRS website states that a penalty may be assessed for
failure to provide the URI.
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URI Number
• In brief, it appears that the implementation of URIs is part of the IRS’s continued
enforcement efforts in the international area. The use of URIs will allow the IRS the
ability to identify taxpayers’ foreign entities and follow their activities more closely.
• The IRS has been working with software providers to ensure they are prepared to
handle the URI implementation. However, the IRS has said little to taxpayers about
the new requirement and therefore taxpayers should take the time this year to ensure
their system will comply with the new requirements.
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Form 1139:
Utilizing Losses and Credits to
Successfully Obtain a Quick Refund
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Utilizing Losses & Credits to Obtain a Quick Refund via Form 1139
• Form 1139, Corporation Application for Tentative Refund
- Carry back NOLs, net capital losses and business credits
◦ NOLs – 2 years
◦ Capital Losses – 3 years
◦ Business Credits – 1 year
- Timing
◦ Must be filed within 12 months after the end of the tax year in which the loss or
credit was generated; but
◦ May not be filed before the filing of Form 1120 for the year in which the loss or
credit was generated (Exception: Barebones Return)
• Barebones Return
- Ability to obtain refund before the filing of Form 1120 for the year in which the loss
or credit was generated
› First – File Barebones Return for Form 1120
› Second – File Form 1139
› Last – File Superseding Return for Form 1120 by extended due date
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Utilizing Losses & Credits to Obtain a Quick Refund via Form 1139
Form 1139
Tentative adjustment of tax liability
Formal claim for refund or adjustment
Taxpayer receives refund before IRS
audits the return
May be subject to an IRS examination
before it is paid
No matter the amount, refunds are not
subject to pre-refund review
However, amounts in excess of $2M will
be subject to post-refund review
IRS must act within 90 days of filing, and
typically pays refund within 45 days
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Form 1120X
Refunds in excess of $2M are subject to
review by the Joint Committee on Taxation
Refund may take up to two years to be
received
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Statute of Limitations:
Nuts and Bolts
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Statute of Limitations
Overview
• The periods of limitation establish the period in which the IRS can assess additional
tax, and the period in which the taxpayer may recover a refund of taxes already paid
• The two periods of limitation that are most significant:
1. I.R.C. §6501 – Statute of Limitations on Assessments
2. I.R.C. § 6511 – Statute of Limitations on Claiming a Refund
• There are separate periods of limitation that may apply to overpayment interest and
collection matters
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Limitation on Adjustments
• Generally, there is no limitation on the making of adjustments in any year, to the
extent that the adjustment, applying the normal carryover or carryback provisions of
the Code, would affect another year for which the period of limitations for assessment
or refund remains open
• Other procedural issues, i.e., elections, estoppel, and methods of accounting
principles, however, may provide restrictions on adjustments after a period of time
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Assessments
• I.R.C. §6501(a) provides that the amount of tax must be assessed within 3 years after
the original return was filed. "Filed" means received by the IRS. Original return also
includes a "superseding" return which is a later return which is nevertheless received
by the due date.
- An original return filed before the last day prescribed by law or by regulations for
filing the return is deemed filed on the last day prescribed by such law or
regulations but this rule applies only to original due dates, not extended due dates
- Returns mailed before the due date of the return (including extensions), but
received by the IRS after the due date are deemed to be ―filed‖ on the date the
envelope is postmarked
• Effect of Amended Returns
- Amended return reporting additional tax - IRC § 6501(c)(7)
- Amended returns claiming refunds have no effect on limitations
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Assessments
• Common exceptions to 3-year Statute of Limitations period
- False or fraudulent return
- No return filed
- Extension by agreement
- Substantial omissions
- Net operating losses or capital loss carrybacks
- Credit carrybacks under IRC section 39
- Tentative carryback adjustments
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2012
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Exceptions to 3 Year Statute
• Listed Transactions
- Current guidance on the extended period of limitations for undisclosed listed
transactions exists in Rev. Proc. 2005-26
- Recent proposed regulations were issued
- Under I.R.C. § 6501(c)(10), where a taxpayer fails to disclose participation in a
listed transaction the period of limitations for those taxable years to which the
failure to disclose relates, will not expire before the earlier of:
◦ One year after the date on which the taxpayer makes a disclosure as described in
the regulations; or
◦ One year after the date on which a material advisor makes a section 6112
disclosure
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Exceptions to 3 Year Statute
• During the extended limitations period, any tax ―with respect to the listed
transaction‖ may be assessed including:
- The tax consequences of the transaction, interest and penalties;
- Items affected by the listed transaction even if those items are unrelated (e.g., as
the result of a change to AGI)
• The proposed regulations operate to extend the general limitations period for
assessment of tax; however, the limitations period is never shortened
• The rules of Treas. Reg. § 301.6501(c)-1(g) apply on a taxpayer-by-taxpayer basis
- Even if a partnership complies with disclosure provisions with respect to a listed
transaction, the extended period of limitations will still apply to the partners if
they do not
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Exceptions to 3 Year Statute
• Foreign Tax Credit
- I.R.C. § 905(c) provides that adjustments are made in two instances:
1. When accrued taxes, when paid, differ from the amounts claimed as credits; or
2. If any taxes paid are refunded by the foreign jurisdiction.
Note: The taxpayer is required to notify the IRS when this occurs
- When the adjustment causes a deficiency in the domestic tax liability, there is no
period of limitations
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Exceptions to 3 Year Statute
• Foreign Tax Credit (continued)
- Not every change in FTC will give rise to an exception to the 3-year period of
limitations.
◦ Must have an actual redetermination by the foreign jurisdiction
◦ Does not include adjustments that are caused by factors knowable within the
normal period of limitations
◦ Does not include adjustments that are computational (as opposed to those that
result from substantive judgment of the foreign jurisdiction)
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2012
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Exception to 3 Year Period
• Carrybacks – NOLs, Capital Loss, Credits
- Statute of Limitations period runs from the date of the loss or credit return year,
not to the year to which carried
- May impact other years if carryback dislodges items of carryback year which must
now be carried to a different year
• Tentative Carryback Adjustments
- Statute of Limitations period for assessment runs from the date the return is filed
for the year of NOL, capital loss, or credit giving rise to carryback
- Tentative carryback claim must be filed within one year of close of loss year on
either Form 1139 or 1045
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Other Exceptions to 3 Year Statute
• I.R.C. § 6503(h) – Bankruptcy Stay
• I.R.C. § 6672(b)(3)(A) – After Protest of Preliminary Notice of 100% Liability –
expires not before 90 days after notice
• I.R.C. § 7508(a)(1)(G) – Service in Combat Zone
• I.R.C. § 7508A – Presidentially Declared Disaster Areas
• Tax Treaties – Many treaties waive periods of limitations for competent
authority actions
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Exception to 3 Year Statute
Refunds
• Unlike the statute of limitations period for assessments, two separate periods must be
examined for refunds
1. There is the period of limitations for which a claim for the refund must be filed
2. There are separate but somewhat coordinated rules which provide, given the
claim filed at a particular time, the extent of the refund that can be recovered
• Timeliness General Rule – A claim for credit or refund of any tax with respect to which
a taxpayer is required to file a return must be filed within 3 years from the time the
return was filed or 2 years from the time the tax was paid
• Look-back General Rule – As a general rule, the amount recoverable is the amount
paid within three years of the time the claim was filed (if filed under three-year rule),
or two years before the claim was filed (if the claim was filed under two-year rule)
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Exception to 3 Year Statute
Refunds
• Amount of credit or refund limitation
• Voluntary extensions
• NOL or capital loss carrybacks
• Foreign Tax Credit
• I.R.C. § 39 – General Business Credits
• I.R.C. § 6511(h) – ―Financially Disabled‖ Individuals
• Protective Refund Claims
Barred Years:
•
IRS may adjust deductions/credits in closed year if the carryforward of those
adjustments affects tax due in an open year
• IRS may not assess additional tax or authorize refund in a closed year
• But, look for mitigation
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Protective Claims
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Concept of Protective Claim
• A protective claim for refund is well-established, even though the term does not
appear in the Code or regulations
- Commonly filed when a taxpayer's right to a refund is contingent on future events
that will not be resolved until after the statute of limitations has expired
- In these circumstances, a timely and proper protective claim will preserve the
taxpayer's right to obtain a refund.
• Conditioned on the timely filing and compliance with the procedural requirements of
Treas. Reg. § 301.6402-2, protective claims will constitute valid refund claims
pursuant to which the IRS may issue refunds (or credit overpayments against other
liabilities of the taxpayer)
• Upon resolution of the future event, protective claims may (and should) be ―perfected‖
by filing complete Forms 1120X
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When to File a Protective Claim
• General Counsel Memorandum 38786 describes various circumstances in which
filing a protective claim would be appropriate when the expiration of the refund SOL is
imminent:
- Pending Litigation
- Competent Authority
- Change in statutory or regulatory law
- SOL imminent but supporting documentation not currently available
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2012
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Disallowance of Protective Claim
• There have been instances in which the IRS has formally disallowed protective refund
claims when the taxpayer specifically described the grounds on which it believed it was
entitled to a refund (e.g., entitled to a larger Sec. 41 research credit), but was unable to
quantify precisely the overpayment amount because of an incomplete research credit
study
• Service Center Advice Memorandum 199941039
IRS sought to distinguish protective refund claims from what it calls ―incomplete
claims.‖ However, the memorandum does not discuss GCM 38786, which includes the
most comprehensive discussion of protective refund claims. Some support for the
incomplete claim concept can be found in Treas. Reg. § 301.6402-3(a)(5), which
provides ―[a] return or Amended Return shall constitute a claim for refund or credit if
it contains a statement setting forth the amount determined as an overpayment....‖
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Action to Take Upon Disallowance of Claim
• If the IRS disallows a protective claim, the taxpayer might be forced to file a refund
suit because the 2-year statute of limitations for doing so runs from the date the claim
is disallowed. In reality, the Service has great discretion in the way it handles refund
claims.
• The IRS has set forth a current procedure to alert taxpayers on a yearly basis of their
protective claim and procedures set forth to perfect if the contingent aspect has been
resolved.
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www.pwc.com
Part III
Bill Laverty,
Quality Examination Process (QEP)
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Quality Exam Process (QEP)
Background
• A decade has passed since the implementation of the Joint Audit Planning Process
which was jointly developed with Tax Executives Institute
• Agents found the process useful but it needed streamlining, additional flexibility, and
more opportunities for taxpayer involvement
• Taxpayers and their advisors observed inconsistent use of the process; some very
involved and others not at all
• The new Quality Examination Process replaces the Joint Audit Planning Process
• While Joint Audit Planning was a set of suggested best practices, the new QEP
contains ―requirements‖ for the Service and encourages taxpayer participation which
cannot be mandated
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Quality Exam Process (QEP)
Background
• Joint Audit Planning Process ended for examinations started after May 30, 2010.
Quality Exam Process took place of Joint Audit Planning Process for all examinations
initiated after June1, 2010.
• The Joint Audit Planning check sheet eliminated.
• The QEP is incorporated in the IRM.
• QEP focuses on three elements or PER
- Planning
- Examination
- Resolution
• For revenue agents the ―shoulds‖ of Joint Audit Planning are now ―wills‖ – QEP is
required. The QEP process brochure must be shared with taxpayer at beginning of
audit.
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Quality Exam Process (QEP)
Collaborative audit process ―Rules of the road‖
• Educate both parties
• Reach agreements regarding procedures to obtain related party returns, claims,
affirmative issues and third party contacts
• Obtain basic data needed to prepare exam plan
• Clarify use/role of specialists, Counsel, and Technical Advisors
• Discussion of potential issues/risk analysis
• Discussion of the Information Document Request (IDR) process
• Develop and agree on schedule for periodic meetings
• Issue Resolution Process including early submission of Technical Advice Requests,
Industry Issue Resolution program, etc.
• Statute Extensions understandings
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Quality Exam Process (QEP)
Audit scope and issue priority
The exam team and taxpayer discuss:
• Limited scope audits include LIFE exams, follow-up on issues raised in preceding cycle
and repeat examinations where unabsorbed claimed credits (e.g., foreign tax credits)
are so large as to preclude a productive full scope audit
• Prior audit results
• Claims and affirmative issues
• Mandatory issues – including Tiered issues, Coordinated issues and compliance
checks
• Permanent or timing issues; accounting or non-accounting issues
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Quality Exam Process (QEP)
Audit scope and issue priority
Materiality:
• Total dollars
• Dollars to income
• Dollar value of deductions to total deductions
• Tax benefit to total tax
• Credit to tax
• Compare to gross receipts and/or gross assets
• Materiality was used for financial statements and tax return
• Absence of an item
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Quality Exam Process (QEP)
The exam plan: Audit scope and issue priority
Ongoing Risk Analysis – But must be conducted during initial planning, and when 50% of
time applied, or significant event occurs
• Level of compliance
• Adjustment potential/expected result of examination
• Future impact
• Industry trends, practices, issues
• Financial state of entity
• Compliance
• Prior experience
• Cost benefit – resources/time
• Taxpayer systems and internal controls
• Appeals and litigation considerations
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Quality Exam Process (QEP)
The exam plan: Audit scope and issue prioritization
• All of the factors used to determine scope and issue prioritization should be shared
and discussed with taxpayer during planning discussions/meetings and in the
exam plan
• The Exam Team will explain to the taxpayer why the issue was selected
• Taxpayers should also discuss the audit team’s proposed examination techniques to
determine that the most effective and efficient methods are employed
• The Exam Team solicits the taxpayer’s input on best approaches for examining the
issue/transaction
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Quality Exam Process (QEP)
The exam plan: Establishing timelines
Teams will establish mutually agreeable timelines including:
• Start and completion dates
• Risk Analysis review, completed, and shared
• Last date for IDRs to be issued
• Last date for claims to be filed
• Last date for F5071(s) to be issued
• RAR target date
• Specialist work timeline
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Quality Exam Process (QEP)
Information document request process
• Establish contact points for both parties for IDRs to go to/from
• Before issuing an IDR the team will discuss and agree on the records necessary to
address the examiner’s issues/concerns, what sources for obtaining information are
available, alternative records, and the purpose/intent of request
• Should be specific, clear, and concise
• Will specify timeframes for taxpayer to respond after discussion
• Will specify timeframes for IRS to notify taxpayer that response is complete or what
else is needed
• Will agree on process to elevate concerns or address delays quickly
• Note: The IDR management process should be documented and become a part of the
Exam Plan.
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Quality Exam Process (QEP)
The exam plan: Overview
• Part I: Taxpayer Information Section includes overall plan of examination and the
taxpayer is asked to sign off
• Part II: Service Management Information Section is the team manager’s instructions
to the audit team members
• Part III: Examination Procedures Section contains each team member’s assignment
and the procedures to be used to accomplish that assignment; includes planned start
and completion dates, estimate of time by issues, description of exam
technique/sampling, prioritization of issues
• ALL parts of the plan should be shared with the taxpayer (unless Law Enforcement
Criteria or Official Use Only)
• Representatives for the IRS and the taxpayer sign the examination plan acknowledging
understanding and commitment
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Quality Exam Process (QEP)
Establish issue resolution process
• Generally, before issuing a Form 5701 - Notice of Proposed Adjustment (NOPA), the
taxpayer and exam team will discuss the issue associated with the proposed
adjustment. NOPAs should not be a surprise. The taxpayer will, at a minimum,
confirm the facts of the issue in question and clarify their position.
• Taxpayers should provide additional facts and/or supporting evidence to validate facts
presented during issue discussion.
• The exam team may engage specialists, technical advisors, Counsel, and other experts
in issue discussions.
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TEFRA Partnerships
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Course objectives
At the end of this session you will be able to:
• Understand why Congress enacted the TEFRA partnership provisions
• Identify the entities to which the rules apply
• Define partnership items, non-partnership items and affected items
• How penalties apply in to TEFRA partners
• Understand the different statute rules when TEFRA applies
• How to amend a TEFRA partnership return
• How the IRS TEFRA audit procedures differ from general audit procedures
• Identify the important roles and responsibilities of the Tax Matters Partner.
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Agenda
Session
Time
Introduction & Objectives
5 min
Background of TEFRA and IRC Structure
5 min
TEFRA entities defined
5 min
Partnership Items, non-partnership items, & affected items
10 min
Penalties application for TEFRA partners
5 min
Statute of limitations applicable to TEFRA partners
5 min
Amending a TEFRA partnership return
10 min
Different Audit procedures for TEFRA partnerships
10 min
Roles and responsibilities of the TMP
Total
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5 min
60 mins
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Background of TEFRA and IRC Structure
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Background of TEFRA and IRC Structure
• Prior to the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), any partnership
examination was performed at the partner level
•
The Service was required to audit each partner's return separately and its
determination as to the treatment of a partnership item applied only to that partner
• Previously, a form 1065 was simply an information return:
• it was not binding on the partners in any way
• the IRS was required to individually examine and adjust the items of each partner
• each partner's period for assessment and refund depended entirely upon the
partner's unique circumstance and no "extension" could be obtained from the
partnership for all partners
•
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Individual partners also filed claims on their own and no "amended" partnership
return was required
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Background of TEFRA and IRC Structure
• With the Tax Equity and Fiscal Responsibility Act of 1982 Congress enacted I.R.C.§§
6221 through 6233 which created two different partnership types for procedural
purposes:
• TEFRA" partnerships, governed by special procedures, and
• other partnerships (now called small partnerships" or non-TEFRA partnerships)
which remain governed by the pre-TEFRA -the old rules still apply
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2012
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Background of TEFRA and IRC Structure
TEFRA rules are significantly different than the old rules:
•
All adjustments to partnership items are determined in a single proceeding at the
partnership level
•
Each partner must either report his partnership items consistently with the
partnership return or notify the Service that he is not doing so •
Failure to do so permits the IRS to adjust the partner return, by "computational
adjustment" to be consistent with the filed partnership
•
The Service must audit the partnership under TEFRA proceeding to make changes in
the return with respect to partnership items
•
When the partnership is audited, the Service will generally deal with one partner--the
Tax Matters Partner,
•
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but other partners are entitled to participate fully in the audit, and in appeals
conferences and litigation.
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Background of TEFRA and IRC Structure
TEFRA rules are significantly different than the old rules, (contd):
The Service can settle separately with one or more partners,
•
•
but must allow any partner to enter into a settlement consistent with that offered
to another partner, if requested by a partner
•
All partners have the right to participate in litigation; however, only the Tax Matters
Partner or a ―notice partner‖ may commence such litigation
•
The statute of limitations for assessing tax to the partners from a change in the
treatment of a partnership item is generally controlled at the partnership level
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What entities are subject to the TEFRA rules?
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What entities are subject to the TEFRA rules?
• The TEFRA rules apply to all partnerships required to file a return under § 6031(a),
except, for Small Partnerships that have not otherwise elected the TEFRA procedures
• The Small Partnership exception includes partnerships if:
- It has 10 or fewer partners
◦ tested by number or partners at any time during the year)
◦ A husband and wife and estates count as one
- All partners are natural persons, C corps or estates at all times during the year
◦ If any partner is a passthrough entity at any time during the year, the
partnership is disqualified from the Small Partnership exception
•
An entity which has properly elected classification of a partnership (for instance LLC
or LLP), or which defaults to a partnership, is treated as a partnership which may be
subject to TEFRA
•
Therefore an entity may be subject to TEFRA audit procedures even though it may be
treated differently under local business law or state tax law
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2012
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What entities are subject to the TEFRA rules?
Uncertain Status Based on Partnership Return
•
IRC § 6231(g) provides that the TEFRA non-TEFRA determination should be made by
the IRS from the partnership return alone
•
The IRS can determine
(a) the number of partners,
(b) the nature of the partners, and
(c) whether the partnership has elected out of the small partnership exception
all from the partnership return itself without further inquiry and can apply that
information to determine TEFRA qualification and status -generally, the number and nature of the partner can be determined by examining form K-1's since Part II, line I
requires that the type of entity of the partner be stated
-In addition, see Schedule B, item 2 which asks if any partner is a passthrough
•
If, based on the return, the IRS reasonably determines that TEFRA applies, it applies
•
If, based on the return the IRS reasonably determines that TEFRA does not apply, it
does not apply
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What entities are subject to the TEFRA rules?
Nature of Partners
• Generally, a partner is whatever classification it gets under Treas. Reg. § 301.7701-3
• Thus, an LLC can be either a partnership, corporation, or disregarded entity
depending on the number of members and its election
-
A tax-exempt organization is considered to be a C corporation. Rev. Rul. 2003-69
-
A foreign corporation is also considered to be a C corporation. Rev. Rul. 2003-69
• However, a foreign individual is not an eligible partner for the small partnership
exception
-
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Thus, if an alien individual wishes to hold a partnership interest and it desires non-TEFRA
procedures, it should hold the interest through an entity regarded as a corporation for US
purposes under § 301.7701-3 (regardless of its treatment for foreign purposes).
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What entities are subject to the TEFRA rules?
Nature of Partners
• For classification of partners, a disregarded entity is not disregarded but is rather
considered a "pass-through" entity, rather than the partner having the classification of
the DE's owner.
- Therefore, if a disregarded entity of a corporation holds an interest in a partnership,
the interest is treated as being held by a flow-through entity and therefore the
partnership is a TEFRA Partnership, not eligible for the small partnership
exception. Rev. Rul. 2004-88.
- See Primco Management Co., T.C. Memo. 1997-332, which held that the fact that a
grantor trust which was ignored as an entity separate from its owner for federal tax
purposes, was nevertheless a flow-through partner for the TEFRA rules and
disqualified the partnership from the small partnership exception.
• While disregard entities (including grantor trusts) may disqualify an otherwise
qualifying small partnership, if the DE and its owner are the only partners, the entity is
not a partnership. Rev. Rul. 2004-77. See also CCA 200250012
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What entities are subject to the TEFRA rules?
Electing Out of Small Partnership Exception
• Even if a partnership meets the small partnership exception criteria, it may elect out of
the exception and back into the TEFRA procedures. §6231(a)(l)(B)(ii).
• Form 8893 is designed for the election and must be signed by all partners
• See also Schedule B, item 5 of the Form 1065 which asks if the election was made.
• Treas. Reg. 301.9100-2 will permit an automatic extension to 6 months after the
original due date of the partnership return. The return can be amended to make the
election until that time.
• Once an election is made, it continues from year to year unless revoked with the
consent of the Commissioner. Treas. Reg. § 301.6231 (a)(l )-1 (b)(3).
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Partnership Items, non-partnership
items, & affected items
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Partnership Items, non-partnership items, & affected items
Partnership Items – In General
A partnership item is any item more appropriately determined at the partnership level
than at the partner level. 1.R.C § 6231 (a)(3).
1.
Important because section 6221 states that the tax treatment of any partnership
item is to be determined at the partnership level –which means that a TEFRA
proceeding is necessary to resolve that item, it cannot be adjusted in a normal
deficiency or refund proceeding.
2.
The TEFRA audit rules apply only to "partnership items." Therefore, all other
aspects of a partner's tax liability for a given year will continue to be subject to the
general audit, deficiency and refund procedures, and cannot be part of the
TEFRA proceeding.
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Partnership Items, non-partnership items, & affected items
Partnership Items – The Regs
1. Treas. Reg. § 301.623 1(a)(3)-1 states that "partnership items" include the following:
a)
the partnership aggregate and each partner's share of items of income, gain, loss, deduction, or
credit of the partnership;
b) expenditures by the partnership that are not deductible in computing its taxable income, such
as foreign taxes or charitable contributions;
c)
any item that could be a tax preference item for any partner;
d) exempt income;
e)
the amount and type of any partnership liabilities (e.g., recourse or no recourse);
f)
guaranteed payments;
g)
optional adjustments to the basis of partnership property pursuant to a section 754 election
(including necessary preliminary determinations, such as the determination of a transferee
partner's basis in a partnership interest); and
h)
Other amounts determinable at the partnership level with respect to partnership assets,
investments, transactions, and operations necessary to enable the partnership or the partners
to determine the investment credit, recapture of the investment credit, and amounts at risk in
the activity.
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Partnership Items, non-partnership items, & affected items
Partnership Items –The Regs
2. A partnership needs to determine the character of
-
any amount received from a partner,
-
the amount of money contributed, and
-
the basis to the partnership of contributed property.
a) To the extent that a determination of an item relating to a contribution can be made from
determinations that the partnership is required to make, that item is a partnership item.
b) To the extent that the above-mentioned determination requires information that the
partnership is not required to determine under Subtitle A of the Internal Revenue Code, that
determination is not a partnership item. Treas. Reg. §301.623 1(a)(3)-1 (c).
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Partnership Items, non-partnership items, & affected items
Partnership Items –Other Partnership Items
3. The following issues have also been held to involve partnership items:
a)
Whether a particular entity is or is not a partner.
b) Whether the period of limitations for making a partnership adjustment has expired with
respect to a partner.
c)
A partner's distributive share of a special partnership item. (distributive share of a cancellation
of indebtedness income) Blonien v. Commissioner, 118 T.C. 541 (2002) and 86 T.C.M. 548
(2003) (Supplemental Opinion).
d) Whether partnership has terminated. Harbor Cove Marina v Commissioner, 123 T.C. 64
(2004)
e)
Withholding taxes under § 1446.
f)
Since 1997, penalties and additions to taxes relating to partnership items, § 6221, except these
defenses "that are personal to the partner or are dependent upon the partner's separate
return." Treas. Reg. § 301.6221- l(d).
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Partnership Items, non-partnership items, & affected items
Non-partnership Items – In General
•
Section 6231 (a)(4) states that a non-partnership item is an item that is not (or is not
treated as) a partnership item.
•
Items which have been held to be non-partnership items include:
•
Effect of partner's note as to the basis of the partner's partnership interest.
•
Character of the partnership interest in the hands of the partner.
•
Character of guaranteed payment as a qualifying tax-exempt disability payment
under § 104 (a) (3).
•
Equitable recoupment.
•
Innocent Spouse Relief - § 6230 (a)(3).
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109
Partnership Items, non-partnership items, & affected items
Non-partnership Items – Conversion
A partnership item will become a non-partnership item as to a particular partner when
and as of the date:
1. The Service sends the partner a notice that such item is to be treated as a nonpartnership item, but only if it is sent before a notice of the beginning of an
administrative proceeding is mailed to the TMP. I.R.C § 623 l(b)(l) (A) and 623 1
(b)(3).
2. The partner files suit under section 6228(b) after the Service fails to allow an
administrative adjustment request with respect to any of the items. I.R.C. § 6231
(b)(l)(B).
3. The Service and the partner enter into a settlement agreement with respect
to such items. I.R.C. § 623 l(b)(l)(C).
4. The Service determines that treating an item as a partnership item would interfere with
enforcement. I.R.C. 6230(b)(l)(D).
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2012
110
Partnership Items, non-partnership items, & affected items
Non-partnership Items – Conversion –special circumstances
5. Special Enforcement Areas -items automatically convert to non-partnership items
when:
a) a termination or jeopardy assessment is made (conversion occurs the moment
before the assessment is made);
b) a criminal investigation is instituted (conversion occurs on the date written notice
of conversion is received by the taxpayer);
c) an indirect method of proof is used (conversion occurs on the date the deficiency
notice is mailed);
d) a petition in bankruptcy is filed or receiver is appointed (conversion occurs on the
date the petition is filed or the receiver appointed);
e) a request for prompt assessment is filed (conversion occurs on the date the request
is filed).
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2012
111
Partnership Items, non-partnership items, & affected items
Non-partnership Items – Conversion –IRS Options
•
The IRS may treat partnership items with respect to a partner as non-partnership
items when:
1. The partner has:
◦
reported the item on his return inconsistently with its treatment by the
partnership,
◦
has properly notified the Service of the inconsistency, and
◦
has not subsequently requested that his return be conformed to the partnership
return. I.R.C. § 6231 (a)(2)(A),
2. Subsequent to the filing of his original return, the partner has filed an
administrative adjustment request ("AAR"), that would result in its treatment of
the item being inconsistent with its treatment by the partnership. I.R.C. §§ 623
l(b)(l)(A) and (b)(2)(B).
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2012
112
Partnership Items, non-partnership items, & affected items
Non-partnership Items – Conversion –The Effect
• Generally, the tax treatment of items that become non-partnership items is determined
under the regular audit, deficiency, and refund procedure instead of the TEFRA
procedures –thus regular procedures apply
• However, if the item is converted because of ―settlement‖, then the deficiency
proceedings do not apply
• Instead, the settled items may be immediately assessed
• In this case, the Service Center TEFRA Unit prepares an RAR (including Form 4549
and accompanying schedules and explanations) and mails to partner
• Partner may not Protest or Petition, but may have brief opportunity to question the
computation of effect of the settlement to the partner
• If questioned, IRS may still assess, leaving partner with only option of paying the
deficiency and filing claim to correct the report See § 6230(c)
• Claim must be filed within six months of mailing of the ―notice of computational
adjustment‖
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2012
113
Partnership Items, non-partnership items, & affected items
Affected Items _ In General
• An "affected item" is defined in section 6231(a)(5) as any item to the extent such item is
affected by a partnership item
• There are two types of affected items –
1. those that maybe directly assessed following the proceeding, i.e., a
computational adjustment, and
2. those which require partner level determinations to be made once the partnership
level proceeding is complete. See Maxwell v. Commissioner, 87 T.C. 783 (1986);
N.C.F. Enerrzv Partners v. Commissioner, 89 T.C. 741,744 (1987); Treas. Reg. §
301.623 1(a)(5)-1.
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2012
114
Partnership Items, non-partnership items, & affected items
Affected Items That May Be Immediately Assessed
•
A computational adjustment is defined as the change in tax liability of a partner
that properly reflects the treatment of a partnership item under ' Subchapter C of
Chapter 63. I.R.C. § 6231(a)(6).
•
Assessment of tax pursuant to a computational adjustment is specifically excluded
from the deficiency procedures of subchapter B of chapter 63 by section 6230(a)(l)
unless a partner level determination is first required.
•
A computational adjustment may also include any interest attributable to such tax.
Treas. Reg. § 301.623 1(a)(6)-1(b).
•
A computational adjustment may be immediately assessed at the conclusion of the
partnership proceeding where the effect of the partnership item on the partner's tax
liability can be computed mechanically or mathematically without further
determinations at the partner level. Olson v. United States, 172 F.3d 13 1 1 (Fed. Cir.
1999).
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2012
115
Partnership Items, non-partnership items, & affected items
Affected Items That May Be Immediately Assessed
Examples of computations that may be directly assessed after the partnership
proceeding include:
•
a) Items unrelated to items on the partnership return, but which vary if there is a
change in an individual partner's adjusted gross income, e.g., the threshold for the
medical expense deduction under section 213 which varies with the amount
partnership income. Treas. Reg. § 30 1.6231 (a)(5)-l(a).
b) Alternative Minimum Tax
•
computational adjustment resulting in a refund may be made irrespective of the
otherwise applicable period of limitations for filing claims under § 6511. See §
6230(d)(6) and Harris v. Commissioner, 99 T.C. 121 (1992). This should be done by
the IRS without the necessity of the partner filing a claim.
•
As mentioned, Section 6230(c) provides the exclusive means for challenging a directly
assessed computational adjustment. Under certain circumstances, §6230(c) permits a
partner to challenge the accuracy of a computational adjustment, but not its
substance, except for partner level defenses, by filing a claim for refund.
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2012
116
Partnership Items, non-partnership items, & affected items
Affected Items - which require partner level determinations to be made once the
partnership level proceeding is complete:
• Affected items that generally require factual determinations at the partner level include
at –
• risk limitations,
• a partner's basis in his partnership interest, and
• the application of the passive loss limitations.
• These types of affected items are subject to the deficiency procedures of subchapter B of
chapter 63 of the Code. I.R.C. 6230(a)(2).
• The partnership proceeding may make determinations regarding aspects of those items, and to
the extent determinable at the partnership level, those determinations are binding on the parties
in the affected item proceeding.
• However, other aspects of the item are determined at the partner level and the ultimate
conclusion of the item is determined in the affected item deficiency proceeding. For example
outside basis of partner -see Domulewicz v. Commissioner, 129 T.C. No. 3 (August 8, 2007)
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2012
117
Penalties application for TEFRA partners
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118
Penalties application for TEFRA partners
•
For taxable years ending after August 5, 1997, penalties, additions to tax, and
additional amounts may be directly assessed if their application is determined at the
partnership level. I.R.C. § 6230 (a)(2).
•
The applicability of any penalty, addition to tax, or additional amount may be
determined in the partnership proceeding and assessed immediately following the
partnership proceeding. I.R.C. §§ 6221 and 6230(a).
•
Partner level defenses (i.e., reasonable cause and good faith under I.R.C. § 6664) must
be raised through refund claims. Domulewicz v.Commissioner, 129 T.C. No. 3 (August
8,2007).
•
Penalties determined in the Partnership proceeding includes accuracy penalties
related to all partnership items in the proceeding, despite no inaccuracy in reporting
that item on the partnership return. See Jade Trading LLC. v. United States, Supp.
Op. (Ct. Fed. Cls. March 20, 2008)
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2012
119
Amending a Partnership Return
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Amending a Partnership Return –In General
• TEFRA Partnership returns are amended by initiating an "Administrative Adjustment
Request" (AAR) pursuant to § 6227, via new Form 1065X
1. TEFRA Partnership returns are not amended by checking the box "amended
return‖, that box is for amending non-TEFRA returns as an information matter or
as a "superseding" partnership return if filed on or before the original or extended
partnership return filing date.
2. The IRM provides that the IRS may treat an amended Form 1065 as a "nonsubstituted AAR" but it is possible that the IRS will ignore it completely as a not in
conformance with the TEFRA rules.
• TEFRA partnership return amendments are made on Form 8082 as an "Administrative
Adjustment Request‖
• Either the individual partners on their own behalf, or the TMP, on behalf of the
Partnership may file and AAR
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2012
121
Amending a Partnership Return –In General
The Form 8082 is can be a confusing and difficult form because it is used for multiple
purposes:
1. For the TMP to file an amended return on behalf of the partnership (all the
partners);
2. For a partner (or S Corporation shareholder) to file a notice of inconsistent
treatment of an item different than reported by the partnership (or S-Corporation);
3. For a partner to file an amended partnership return applicable only to it; and
4. For a partner (or S Corporation shareholder) to report that it has received no final
Form K-1 from the partnership or S Corporation and therefore is estimating the
amount of the items on its return.
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2012
122
Amending a Partnership Return –Form 8082
•
A Form 8082 AAR filed as an amended return:
1. Is essentially like a 1040X or 1120X in that it only describes the differences
between the original return and itself.
2. Contains no signature itself - an essentially blank first page of Form 1065 is
attached showing the information for the partnership and a signature on the Form
1065 by the TMP or partner (as applicable).
3. If filed by the TMP, must also contain revised Forms K-1 for all the partners in
accordance with the 8082 changes.
4. Many taxpayers include a pro forma Form 1065 "as amended" for the convenience
of the IRS - however, this is not required.
5. Must be filed at the same IRS Service Center where the original partnership return
was filed.
◦
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The IRS has illogically insisted on this, even though the filing locations for partnerships
have now changed, and all partnership returns are now housed in either Cincinnati or
Ogden.
2012
123
Amending a Partnership Return –Form 8082 –TMP Filed
AARs - Substituted Return vs Regular AAR
•
When a TMP files an AAR, the TMP has the option of filing it as:
-
a "Substituted Return" or
-
a regular AAR.
•
A ―Substitute Return‖ can be treated as mathematical corrections, and the IRS may
pass through the effect of the AAR to the partners without opening a TEFRA
administrative proceeding
•
A ―regular AAR‖ is treated in the same manner as a Substituted Return AAR, except:
-
Must open a partnership level procedure because it has no option to flow-through
any deficiency items to the partners
-
However, in a few instances the IRS has accepted the adjustments and flowthrough refunds to the partners, because the statute provides that the partners do
not need to file claims in order to receive credits or refunds.
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2012
124
Amending a Partnership Return –Form 8082 –TMP Filed
AARs - Substituted Return vs Regular AAR
•
A TMP chooses the Substitute Return procedure by checking Item 2 of the Form 8082
"Substituted Return‖ –otherwise, it is a ―regular AAR ―
•
The desired effect of a substituted return AAR is that the IRS can treat the changes as
mathematical corrections, without opening a TEFRA administrative proceeding.
•
When the IRS receives a TMP Substituted Return AAR, it can proceed along any of
the following paths:
• Treat as mathematical corrections and flow the adjustments to the partners;
• Accept return and pass-through credits and/or refunds to partners in accordance
with the Forms K-1;
• Conduct a partnership level proceeding; or
• Do nothing.
Caution: because the IRS can, and often does "do nothing," the partnership and
partners should be prepared to further act to get refunds or finalize deficiencies, if
desired.
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2012
125
Amending a Partnership Return –Form 8082 –Partner
Filed AARs
•
Any partner may file an AAR on behalf of itself, by filing the same Form 8082.
•
In that event, the information for the Partnership is contained in a different location
on the Form 8082.
•
A partner filed AAR affects only the items of that partner.
•
The IRS has a different set of options as to how to handle the filing:
1. It may process the items as non-partnership items and credit or refund to the
partner the tax effect of the adjustment
2. It can immediately assess any tax resulting from the adjustment to the partner
3. It can mail a notification to that partner that all of the partnership items of the
partner for that partnership year shall be treated as non-partnership items.
◦
In this event, the IRS will conduct a regular deficiency or claim examination of the partner; the AAR is
treated as a claim for refund. See section 6228(b)(l)(A).
4. Conduct a partnership level proceeding.
Caution: In the event the IRS does nothing, the partner needs to be prepared to bring
suite for refund.
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2012
126
Statute of Limitations –
TEFRA Partnerships
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Statute of Limitations –TEFRA Partnerships Assessments
•
Simply stated, adjustments attributable to partnership items may be assessed within
three years of the later of the date of filing or due date of the partnership return.
•
In essence, section 6229 holds open the section 6501 limitation period as to all
partners
•
for a fixed period of time,
•
providing a minimum period within which to assess adjustments attributable to
partnership items against all partners
In addition, it provides some additional safeguards to the Government:
•
•
No statute in event of fraud
•
No statute if no partnership return
•
Six years in event of 25% omission of income and
•
no statute until one year after partners are identified to the Secretary
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2012
128
Statute of Limitations –TEFRA Partnerships –in General
•
§§ 6501 (assessments) and 6511 (refunds) provide the rules for all non-TEFRA entities,
including, individuals, corporations, trusts, etc.
•
Prior to TEFRA, all items from a partnership were controlled at the partner level by
those sections
•
TERA rules introduced:
•
§ 6229 for statute of limitations on assessment of TEFRA related adjustments
•
§ 6227(c) for statute of limitations on refund claims based on TEFRA related
adjustments
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2012
129
Statute of Limitations –TEFRA Partnerships Assessments
• § 6501 remains the primary control of statutes for partners
• § 6501(n)(2) expressly references §6229 for additional provisions regarding
―partnership items‖
• §6229(a) provides that except as otherwise provided, the period for assessment of
partnership items (or affected items) for a partnership year will not expire before 3
years after the later of1. The date the partnership return is filed, or
2. The last day for filing such return (without regard to extensions)
§6229(b)(1) provides the period in (a) may be extended –
•
A. With respect to a single partner, by written agreement with the single partner
(Form 872) and
B. With respect to all partners, by written agreement with the TMP (872-P)
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2012
130
Statute of Limitations –TEFRA Partnerships Assessments
•
§6229(b)(3) provides any extension under § 6501(c)(4) will extend the statute for
partnership items, only if the agreement expressly provides that such agreement
applies to tax attributable to partnership items
•
Because of the interplay between § §6227 and 6229, the IRS lost a significant number
of statutes
•
As a result, in 2009 it changed its standard extension Form 872 to include boiler plate
language that builds in the §6229(b)(3) language in every extension
•
The language now includes two new paragraphs:
3. Paragraph (4) applies only to any taxpayer who holds an interest, either directly or indirectly, in any
partnership subject to subchapter C of chapter 63 of the Internal Revenue Code.
4. Without otherwise limiting the applicability of this agreement, this agreement also extends the period of
limitations for assessing any tax (including additions to tax and interest) attributable to any partnership items
(see section 6231 (a)(3)), affected items (see section 6231(a)(5)), computational adjustments (see section
6231(a)(6)), and partnership items converted to nonpartnership items (see section 6231(b)). This agreement
extends the period for filing a petition for adjustment under section 6228(b) but only if a timely request for
administrative adjustment is filed under section 6227. For partnership items which have converted to
nonpartnership items, this agreement extends the period for filing a suit for refund or credit under section 6532,
but only if a timely claim for refund is filed for such items.
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2012
131
Statute of Limitations –TEFRA Partnerships Assessments
Converted and Affected Items –
•
As discussed, certain situations cause partnership items to be converted to nonpartnership items –most commonly when the audit issues are settled
•
When that happens, §6229(f)(1) provides that the Service has one year from date of
conversion to assess tax attributable to those converted items
•
§6229(f)(1) acts to extend the otherwise applicable §6501 statute –see §6501(o)(1)
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2012
132
Statute of Limitations –TEFRA Partnerships Assessments
§6229 vs §6501 –which controls?
•
The courts have consistently held that the statutory scheme is that the statute is open
for assessment for the ―later of‖ §6229 or §6501
•
See Rhone-Poulenc Surfactants and Specialties, 114 T.C. 553 (2000) and subsequent
cases
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2012
133
Statute of Limitations –TEFRA Partnerships -Refunds
•
Under § 6227(a)(l), a partner may file a AAR at any time which is:
1. Within 3 years after the later of:
A. The date which the partnership return is filed, or
B. The last day for filing the partnership return (without regard to extensions),
and
2. Before the mailing of an FPAA
•
§ 6227(c) provides that if an extension for assessment was extended under § 6629,
then the period for refund is also extended 6 months after the expiration of the
extended statute
•
The statute under § 6227 does not use the ―later of‖ rule used for § 6229
•
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However, if the § 6229 is extended, that extension applies to refunds as well, plus 6 months
2012
134
How TEFRA Audit Procedures Differ from
Other Audit Procedures
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135
How TEFRA Audit Procedures Differ from Other Audit
Procedures
•
TEFRA audits must begin with a Notice of Beginning of Administrative Adjustment
(NBAP)
•
The NBAP must be given to the TMP at least 120 days before the Service can issue a
Final Partnership Administrative Adjustment (FPAA) - § 6223(d)
•
FPAA is the TEFRA equivalent of a Statutory Notice of Deficiency contained in §
6212 for income taxes not subject to TEFRA
The agent has 45 days from issuance of the NBAP to determine whether to pursue the
audit, if the agent decides not to audit, the NBAP is withdrawn –
•
•
this does happens occasionally
•
Sometimes agents will request some initial information and based on that decide
not to audit –so depending on facts, may be wise to comply
•
If agent begins the audit, the agent will ―link‖ all partners in the ―PCS‖ system
•
The NBAP is sent by the PCS unit to all ―notice partners‖
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2012
136
How TEFRA Audit Procedures Differ from Other Audit
Procedures
Notice Partners Defined•
For partnerships with 100 or fewer partners, all partners are notice partners
•
For partnerships with more than 100 partners:
•
Only partners with a 1% or greater interest, and
•
Partners who form a 5% ―notice group‖
•
The partnership ―interest‖ is defined as ―interest in the profits‖
•
A 5% notice group is a ―group of partners…having a 5 percent or more
interest…request and designate one of their members to receive the notice…‖ §
6223(c)
•
TMP is under obligation for forward notice to non-notice partners
•
Pass-through partners (second tier) are required to forward notice to indirect partners
•
However, if either TMP or Pass-through partners fail in this requirement,
Government is not harmed - § 6230(f)
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2012
137
How TEFRA Audit Procedures Differ from Other Audit
Procedures
The AuditAfter the NBAP, audit proceeds generally as any other audit-
•
•
Agents should follow the Joint Audit Planning Process
•
Agent issues IDRs
•
TMP responsible for responding to IDRs
•
Agent issues informal Form 5701s (Notice of Proposed Adjustments)
•
On completion, Agent issues a ―Summary Report‖ (similar to normal RAR)
•
Within 30 days of Summary Report, Agent offers a Summary Report Conference
•
Agents normally request ―Waiver of Right to Summary Conference‖
•
Since issues have normally be discussed with TMP, waiver is normally given, as
long as not partner wishes to attend
•
If issues are agreed, TMP will provide a waiver and bind the non-notice partners
and all other partners will sign Form 870-P(AD)
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2012
138
How TEFRA Audit Procedures Differ from Other Audit
Procedures
Conclusion of Audit -Unagreed
•
If any of the issues are not agree, the Agent prepares the ―60 Day Package‖ and
forwards to the central TEFRA processing unit for mailing ―60 Day Package‖ to all
notice partners
•
TEFRA processing units reviews and mails the ―60 Day Package‖
•
This is the equivalent of the 30 Day letter in other examinations
•
Contains the RAR and explanation of items
•
Contains Form 870-P in event TMP decides to agree
•
Provides 60 days for the TMP to file protest
•
TMP files protest (however any partner may also file protest) and case is sent to
Appeals
•
Appeals offers conference to any partner wishing to attend, generally this is only TMP
or its representative
•
If Agreed, Form 870-P(AD)s are obtained and Appeals forwards to TEFRA processing
unit for assessment and billing
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2012
139
How TEFRA Audit Procedures Differ from Other Audit
Procedures
Conclusion of Audit -Unagreed
•
If agreement not reached in Appeals, the Appeals Officers prepares a Final Notice of
Partnership Administrative Adjustment‖ (FPAA) package and forwards to TEFRA
processing unit
•
FPAA contains the listing of adjustments, explanation of issues and computes
adjustments for each partner
•
FPAA is sent to last known address for each notice partner
•
The FPAA is the equivalent of the Statutory Notice of Deficiency in other income tax
cases
•
Note: if no protest is filed by the Partnership and thus the Appeals process is by-passed, the
FPAA is prepared by the agent
The TMP has 90 Days to petition and, should the TMP not petition, any notice
partner (or the 5% group) may also file petition in the next 60 days
•
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2012
140
How TEFRA Audit Procedures Differ from Other Audit
Procedures
Conclusion of Audit -Litigation
•
No "Refund" Litigation: once an FPAA is issued, the partnership and partner must
act within the petition period or can be bound by the result of the FPAA.
•
There is no default, pay, wait 2 years, then file a refund suit procedure available for
TEFRA partnership items as there is with other income tax cases
•
All partnership items must be raised in the TEFRA partnership proceeding or they are
lost forever, so any affirmative issues must be raised in the petition
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2012
141
Roles and Responsibilities of the TMP
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Roles and Responsibilities of TMP
Tax Matters Partner - Defined
Section 6231 (a)(7) provides that the TMP of a partnership is:
•
The general partner designated as the TMP by the partnership in accordance with the
regulations (Treas. Reg. § 301.6231(a)(7)-1)
•
If a designation has not been made by the partnership, then the TMP is the general
partner having the largest profits interest at the close of the taxable year involved.
•
If a TMP has not been designated by the partnership and the Service the Service may
select any partner to be the TMP (including a limited partner).
•
Tax matters for LLC, or LLP treated as Partnership:
1. For determining who is equivalent of a "general partner:" only a membermanager" is considered a general partner.
2. A "member-manager is someone "vested with the conduct of the business.―
3. if there are no designated member-manager, then all members are considered
member-managers. Treas. Reg. § 30 1.623 1(a)(7)-2.
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2012
143
Roles and Responsibilities of TMP
Designation by the Partnership
• The TMP determination is made separately for each partnership taxable year - Service
may have to deal with a different TMP for each taxable year.
• In order to be designated the TMP, the person must have been a general partner at
some time during the taxable or is a general partner at the time the designation is made
• If a United States person is eligible to be designated the TMP, then a non-United States
person cannot be designated the TMP without the consent of the Service.
• The TMP need not be an individual; an entity can act as a TMP e.g. corporation or a
partnership).
1. When the TMP is an entity, the person authorized to act for that entity in practice
is the TMP, e.g., corporate officer of a partner corporation.
2. The IRS has ruled that even a disregarded entity can be a TMP. For this purpose, it
is not disregarded so long as it exists under a local non-tax law.
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2012
144
Roles and Responsibilities of TMP
•
CEO or CFO of an LLC (corporation for local law but partnership for federal taxes)
may not act as TMP unless that person also qualifies as a general partner.
• Also note that the rules for being a TMP are different than the rules as to who can sign the tax
return.
•
The TMP designation can be made by the partnership in any of the following ways:
- on the partnership by a general partner signing the return;
- after the partnership return is filed -- by the general partners with a majority
interest, or
- In limited circumstances after the partnership return is filed -- by partners holding
more than 50% of the profits interests in the partnership held by all partners (both
general and limited partners)
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2012
145
Roles and Responsibilities of TMP
Termination of the Designation
•
A TMP may resign at any time by filing a statement to that effect
•
the partnership can revoke the designation of a TMP at any time
•
A designation, resignation, or revocation is effective on the day that the statement is
filed, except where an NBAP has already been mailed.
•
•
A designation of a TMP terminates if:
•
•
In that case, the Service has 30 day to recognize
the TMP dies; is declared legally incompetent; is liquidated or dissolved (if an entity); TMP's partnership items
become non-partnership items under I.R.C. § 623 1(c) (relating to special enforcement areas); a new TMP is
designated; f. the TMP resigns; or g. there is a revocation of the designation by the partnership.
Treas. Reg. § 30 1.6231(a)(7)-1 specifically provides that a termination will not affect
the validity of any action taken by the TMP before the termination (e.g. extension of
the period of limitations).
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146
Roles and Responsibilities of TMP
Responsibilities of a TMP – in General
The TMP is required to keep each partner informed of all administrative and judicial
proceedings relating to the adjustments at the partnership level of partnership items.
The TMP is required to furnish information regarding:
•
closing conference with the examining agent;
•
proposed adjustments, appeal rights, and information for the filing of a protest;
•
time and place of an appeals conference;
•
acceptance by the Service of a settlement offer;
•
consent to the extension of the period of limitations with respect to all partners
filing of an administrative adjustment request (AAR), including substitute return
treatment on behalf of the partnership;
•
filing by the TMP or any other partner of a petition for judicial review;
•
filing of any appeal; and
•
final judicial determination.
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2012
147
Roles and Responsibilities of TMP
Responsibilities of a TMP – Treas. Reg. §301.6223(g)-1
•
•
The TMP is required to furnish the following notices to all non-notice partners:
•
Notice of beginning of an administrative proceeding (NBAP) within 75 days of its
mailing to the TMP; and
•
Notice of final partnership administrative adjustment (FPAA) within 60 days of its
mailing to the TMP. Treas. Reg. § 301.6223 (g)-1(a)(2).
Once an NBAP has been mailed to the TMP, the TMP must provide the following
information to the Service:
•
The names, addresses, profits interests, and TINS of all persons who were partners
in the partnership at any time during the taxable year under audit (including
indirect partners to the extent the TMP has such information) if that information
was not provided on the partnership return filed for that year; and
•
Corrections or revisions of any information required to be furnished Treas. Reg. §
301.6230(e)-l(b).
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Roles and Responsibilities of TMP
In addition to providing information, the TMP may
•
•
extend the period of limitations for assessing any tax attributable to partnership
items (and affected items) (I.R.C. § 6229(b)(l)(B)) and
•
enter into settlement agreements which bind non-notice partners (I.R.C. §
6224(c)(3)(A)).
•
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In order for the settlement agreement to be binding against the non-notice
partner(s), the agreement must expressly state that the agreement is to bind the
non-notice partner(s) and the non-notice partner(s) must not have filed a
statement with the Secretary providing that the TMP does not have authority to
enter into a settlement agreement on their behalf.
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Roles and Responsibilities of TMP
TMP –Sanctions
• § 6230(f) provides that:
The failure of the tax matters partner, a pass-thru partner, the representative of a notice group, or
any other representative of a partner to provide any notice or perform any act required under this
subchapter or under regulations prescribed under this subchapter on behalf of such partner does
not affect the applicability of any proceeding or adjustment under this subchapter to such partner.
• Accordingly, the Government will not be responsible or at risk for a TMP that does not
comply with the IRS or Regulations
• Although the IRC and Regulations impose certain responsibilities on the TMP, there is
no IRS sanction for failing to perform
• There may, of course, be other remedies as between partner against a TMP who fails to
full its obligations, but IRS has no sanctions
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Review of Course Objectives
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Review of course objectives
You are now able to:
• Understand why Congress enacted the TEFRA partnership provisions
• Identify the entities to which the rules apply
• Define partnership items, non-partnership items and affected items
• How penalties apply in to TEFRA partners
• Understand the different statute rules when TEFRA applies
• How to amend a TEFRA partnership return
• How the IRS TEFRA audit procedures differ from general audit procedures
• Identify the important roles and responsibilities of the Tax Matters Partner.
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Questions
Janice M. Flood
Managing Director (Chicago)
(312) 298-2521
Janice.M.Flood@us.pwc.com
Bill Laverty
Director (Atlanta)
(678) 419-1385
William.Laverty@us.pwc.com
Devin W. Blackburn
Senior Associate (Chicago)
(312) 298-2521
Devin.W.Blackburn@us.pwc.com
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services, investment advice, written tax advice under Circular 230 or professional advice of any kind. The information provided herein should not be used as a
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