Partnership Administrative Adjustment Requests

• November 8, 2022
• Carey M. Heyman, CPA

Four years ago, the Bipartisan Budget Act of 2015 (BBA) replaced the Tax Equality and Fiscal Responsibility Act of 1982 (TEFRA), creating the Centralized Partnership Audit Regime (CPAR) for tax years beginning on or after January 1, 2018. Under the BBA audit procedures, the IRS can make adjustments, determine an imputed tax, and assess and collect tax at the partnership entity level. The biggest change to those not in the know, is that changes to BBA partnerships are now requested via an Administrative Adjustment Request (AAR), rather than through an amended tax return.

There are a couple of ways that an AAR can be avoided; and it is worthwhile to verify before preparing an AAR. If the partnership tax return was extended, and the extended due date has not yet passed, then a superseded federal tax return can be filed instead. Additionally, a partnership that made a valid election out of the CPAR rules with their original tax return, will instead file an amended tax return to make any corrections. Practitioners can verify the partnership’s election by checking Schedule B of the IRS Form 1065.

The partnership representative is the only partner who may file an AAR on behalf of the entity. The partnership representative may file an AAR on behalf of the partnership either as a substituted tax return AAR or as a claim for refund AAR. The primary differences between these two types of AARs are the purposes served by the AARs, and the options that the IRS has available in responding to the AARs.

A substituted tax return AAR should be used when the partnership wishes to increase or decrease the partnership taxable income, often due to a clerical or mathematical error, or when the partnership desires to increase the taxable income. If the partnership intends to utilize the AAR as a way to reduce partnership taxable income and generate partner refunds, the partnership representative should file a claim for a refund AAR, which does not request substituted tax return treatment. Any time the partnership representative files an AAR on behalf of the partnership, either as a substituted tax return AAR or as a claim for refund AAR, the partnership representative is required to inform all partners. It should also be noted that separate AARs can be filed on different issues for the same taxable year.

Under TEFRA, partnerships and their partners used IRS Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, for all modifications of the original partnership tax return, including administrative adjustments. Other types of passthrough entities used IRS Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), to report such items as contrary tax positions. The multiple uses of the form created confusion amongst practitioners and taxpayers. Accordingly, the IRS developed IRS Form 1065-X, Amended Return or Administrative Adjustment Request (AAR), and revised IRS Form 8082. If the taxpayer-initiated change will be paper filed, the IRS requires the partnership to utilize IRS Form 1065X. If the AAR will be electronically filed, IRS Form 8082 should be used.

Source: Bloomberg Tax

Tags: Administrative Adjustment Request, Bipartisan Budget Act, Centralized Partnership Audit Regime, Real Estate, Federal and state taxation, including proposed regulations, Year-end tax planning | Comments Off on Partnership Administrative Adjustment Requests