The year the push out statements are issued is the “reporting year.” The partners will use the statement to calculate the additional tax, interest and penalties for the audited year at the individual level. The interest rate increases by 2% if the push out election is made (federal short-term rate + 5% instead of 3%).
The partner will also need to calculate the additional liability for the years in between the audited year and the reporting year (“intervening years”) if tax attributes are affected in the initial year adjustment. The total additional tax, penalties and interest will be reported and paid with the tax return for the reporting year. Thus, no amended returns will be filed.
For example: A partnership’s 2013 tax return is audited. The audit is finalized and push out statements are issued to reviewed year partners in 2016. The partners in the 2013 tax year will calculate the additional tax, interest and penalties at the individual level based on the information in the push out statement for tax years 2013, 2014 and 2015 and include the additional liability on their 2016 individual tax returns.
If partners want to ensure that reviewed year partners will be liable for an imputed underpayment, a partnership may consider including a requirement for the PR to make a push out election in the partnership agreement.
The Pull-In Procedure
The imputed underpayment of the partnership can be reduced if a partner files amended tax returns for all tax years affected by the adjustment, includes all partnership adjustments allocable to them and pays the tax due with the amended tax returns. Thus, if all reviewed year partners met these requirements and filed amended tax returns, the partnership would no longer be responsible to pay the imputed underpayment.
To ease this burden, the IRS has an alternative procedure known as the “pull-in procedure” in Code section 6225, which has the same effect as filing amended tax returns without the partners having to file them. If a partner pays the tax that would have been due with the amended return, submits a statement to the IRS to substantiate that the tax is computed correctly and adjusts the tax attributes for future years, the imputed underpayment of the partnership will be modified and reduced for those amounts.
The payments and filings are due within 270 days from when the notice of proposed partnership adjustment is mailed by the IRS. Not all review year partners are required to participate in a pull-in procedure, and the partnership will be responsible to pay the tax due for the partners who do not participate.
The pull-in procedure is another way that partnerships can shift the liability to the reviewed year partners instead of paying the tax at the entity level, and which should be addressed in the partnership agreement.
Conclusion
Whether it involves choosing a PR, electing out of the new audit regime or determining who pays the tax liability, now is the time for partners to have discussions about IRS audit procedures with their accountants and attorneys. Other items such as how partnership payments of tax will be treated on the books and how certain items will be allocated if adjustments are assessed, are just a few of the many areas that should also be addressed when it comes to an IRS audit under these new rules. With increased IRS partnership audits on the horizon, it is important that partners have procedures in place and modify the partnership agreement, if necessary, to avoid unintended consequences in future audits.
Angelika Paskins is manager at Marks Paneth LLP, and Alan Blecher is Principal at Marks Paneth LLP.