Notice 2016-23: Request for comments, new partnership audit rules

Notice 2016-23: New partnership audit rules, comments

The IRS today released an advance copy of Notice 2016-23 that requests comments concerning implementation of new law (enacted November 2, 2015) that replaced the current partnership audit rules with a new “centralized” partnership audit regime that allows for assessment and collection of tax at the partnership level. The comments are due by April 15, 2016.

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Summary

The new partnership audit procedures are effective for partnership tax years beginning after December 31, 2017—except that a partnership may elect to apply provisions of the new regime for partnership tax years beginning after November 2, 2015, and before January 1, 2018 (in a form and manner set forth by the Treasury Secretary).

Notice 2016-23 [PDF 39 KB] explains that the IRS and Treasury Department intend to issue guidance to implement the new partnership audit regime. Specifically, guidance will be issued to set forth procedures for making the election to have parts of the new partnership audit regime apply to tax years beginning after November 2, 2015, and before January 1, 2018. The IRS notice states that this guidance is expected to be published “in the near future” and that partnerships that want to make this election “should wait until that guidance is published to ensure the election complies with the requirements for making a valid election.”

Comments requested

The IRS in Notice 2016-23 stated that to assist in the development of the future guidance, comments are being requested on 12 items concerning:

  • Whether the election out of the new centralized partnership audit regime under section 6221(b) for partnerships that are required to furnish 100 or fewer Schedules K-1 is to be treated under rules similar to the special rules applicable to S corporations
  • The designation of the partnership representative 
  • The determination of the imputed underpayment 
  • Modification of the imputed underpayment 
  • How an adjustment made by the IRS that does not result in an imputed underpayment is to be taken into account by the partnership
  • The election to use the alternative to payment of the imputed underpayment 
  • How a partnership makes an administrative adjustment request (AAR) and the effect of such a request
  • The effect of adjustments on the basis of the partners in their partnership interests and the basis of the partnership in its assets
  • The rules for consistent filing of partner returns
  • The effect of bankruptcy and the treatment under the new partnership audit rules where a partnership ceases to exist
  • Procedural rules
  • Any other issues relevant to the implementation of the new partnership audit rules, including for example the interaction of these rules with international tax provisions

KPMG observation

Tax professionals have observed that today’s IRS notice does not specifically request comments on one item that has concerned many taxpayers and practitioners—that is, in a tiered-partnership arrangement, whether a  partner that is itself a partnership has the ability to pass through the imputed underpayment amounts to its partners.

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