Explanation of Provision

Transcription

1 Explanation of Provision The provision revises section 6051 to require employers to include an identifying number for each employee, rather than an employee s SSN, on Form W-2. This change will permit the Department of the Treasury to promulgate regulations requiring or permitting a truncated SSN on Form W-2, under authority currently provided in section 6109(d). The provision is effective on the date of enactment. 10. Clarification of enrolled agent credentials (sec. 410 of the bill) Present Law Treasury Department Circular No. 230 provides rules relating to practice before the IRS by attorneys, certified public accountants, enrolled agents, enrolled actuaries, and others. Explanation of Provision The provision amends Title 31 of the U.S. Code to permit enrolled agents meeting the Secretary s qualifications to use the designation enrolled agent, EA, or E.A. The provision is effective on the date of enactment. 11. Partnership audit rules (sec. 411 of the bill and secs. 6225, 6226, 6234, 6235, and 6031 of the Code) Present Law Under recent amendments to Chapter 63, 794 relating to partnership audit rules, the returns filed for partnership taxable years beginning after 2017 are subject to a centralized system for audit, adjustment and collection of tax that applies to all partnerships, except those eligible partnerships that have filed a valid election out. The Secretary may initiate an examination of a partnership by issuing a notice of administrative proceeding to the partnership or its designated 794 Sections 6221 through 6241, as amended by section 1101, The Bipartisan Budget Act of 2015, Pub. L For years prior to the effective date of the new provisions, there remain three sets of rules for tax audits of partners and partnerships. Partnerships with more than 100 partners may elect the electing large partnership audit rules of sections 6240 through Partnerships with more than 10 partners (and that are not electing large partnerships) are subject to the TEFRA partnership audit rules enacted in 1982, found in sections 6221 through Under these two sets of rules, partnership items generally are determined at the partnership level under unified audit procedures. All other partnerships (those with 10 or fewer partners that have not elected the TEFRA audit rules) are subject to the audit rules applicable generally, with the tax treatment of an adjustment to a partnership s items of income, gain, loss, deduction, or credit determined for each partner in separate proceedings, both administrative and judicial. 248

2 representative. 795 Any adjustment to items of income, gain, loss, deduction, or credit of a partnership for a partnership taxable year, and any partner s distributive share thereof, generally is determined at the partnership level. 796 The Secretary is required to notify the partnership and the partnership representative of any proposed partnership adjustment before the Secretary may issue a notice of final partnership adjustment. 797 Any notice of a proposed adjustment issued to the partnership must identify all adjustments and inform the partnership of the amount of any imputed underpayment. If the adjustments result in any underpayment of tax attributable to these items, the tax is generally imputed to the partnership and may be assessed and collected at the partnership level in the year that the partnership adjustment becomes final (the adjustment year). 798 As an alternative to partnership payment of the imputed underpayment, a partnership may elect to furnish an adjusted statement (similar to a Schedule K-1) to each reviewed-year partner, who is then required to pay tax attributable to the partnership adjustment. 799 An imputed underpayment of tax with respect to a partnership adjustment for any reviewed year is determined by netting all adjustments of items of income, gain, loss, or deduction and multiplying the net amount by the highest rate of Federal income tax applicable either to individuals or to corporations that is in effect for the reviewed year. 800 Any adjustments to items of credit are taken into account as an increase or decrease of the product of this multiplication. Any net increase or decrease in loss is treated as a decrease or increase, respectively, in income. Netting is done taking into account applicable limitations, restrictions, and special rules under present law. Modification of an imputed underpayment generally If the partnership disagrees with the computation of the imputed underpayment during an administrative proceeding, it may seek modification of the computation. 801 Modification procedures permit redetermination of the imputed underpayment (1) to take into account amounts paid with amended returns filed by reviewed year partners, (2) to disregard the portion allocable to a tax-exempt partner, and (3) to take into account a rate of tax lower than the highest 795 Sec. 6231(a)(1). 796 Sec. 6221(a). 797 Secs. 6231(a)(1) and (2). 798 For purposes of the centralized system, the reviewed year means the partnership taxable year to which the item being adjusted relates (sec. 6225(d)(1)). The adjustment year means (1) in the case of an adjustment pursuant to the decision of a court (under the centralized system s judicial review provisions), the partnership taxable year in which the decision becomes final; (2) in the case of an administrative adjustment request, the partnership taxable year in which it is made; or (3) in any other case, the partnership taxable year in which the notice of final partnership adjustment is mailed (sec. 6225(d)(2)). 799 Sec Sec. 6225(b)(1). 801 Sec. 6225(c). 249

3 tax rate for individuals or corporations for the reviewed year. In addition, regulations or guidance may provide for additional procedures to modify imputed underpayment amounts on the basis of other necessary or appropriate factors. In the case of a publicly traded partnership, such other appropriate factors could include taking into account the present-law section 469(k) rule requiring that deductions that exceed income (passive activity losses) be carried forward and applied against income from the publicly traded partnership, not against other income of the partners. Modifying an imputed underpayment based on applicable highest tax rates The partnership may seek to modify an imputed underpayment amount by demonstrating that a lower tax rate is applicable to partners. 802 For example, the partnership may demonstrate that a portion of an imputed underpayment is allocable to a partner that is a C corporation, and for that C corporation partner, the highest marginal rate of Federal income tax (35 percent in 2015, for example) for ordinary income for the reviewed year is lower than the highest marginal rate of Federal income tax for individuals (39.6 percent in 2015, for example). The statutory language refers to ordinary income but does not refer to capital gain of a corporation, which is generally subject to tax at the same rate as ordinary income of a corporation. Limitations period for partnership adjustments In general, the Secretary may adjust an item on a partnership return at any time within three years of the date a return is filed (or the return due date, if the return is not filed) or an administrative adjustment request is made. The time within which the adjustment is made by the Secretary may be later if a notice of proposed adjustment 803 is issued, because the issuance of a notice of proposed partnership adjustment begins the running of a period of 270 days in which the partnership may seek a modification of the imputed underpayment. Although the partnership generally is limited to 270 days from the issuance of that notice to seek a modification of the imputed underpayment, extensions may be permitted by the IRS. During the 270-day period, the Secretary may not issue a notice of final partnership adjustment. If the proposed adjustment resulting in an imputed underpayment is issued within the three-year period, the final partnership notice may be issued no later than either the date which is 270 days after the partnership has completed its response seeking a revision of an imputed underpayment, or, if the partnership provides an incomplete or no response, no later than 270 days after the date of a notice of proposed adjustment. Forum for judicial review A partnership may seek judicial review of a notice of final partnership adjustment within 90 days after the notice is mailed, in the U.S. Tax Court, the Court of Federal Claims or a U.S. 802 Sec. 6225(c)(4). 803 Sec

4 district court for the district in which the partnership has its principal place of business. The statutory language refers to the Claims Court rather than the Court of Federal Claims. Restriction on authority to amend partner information statements Partner information returns (currently Schedules K-1) required to be furnished by the partnership may not be amended after the due date of the partnership return to which the partner information returns relate. 804 A conforming amendment inadvertently strikes newly added language relating to the restriction on amended partner information statements. Explanation of Provision The provision corrects and clarifies several provisions relating to partnership audits to express the intended rule. Modifying an imputed underpayment based on applicable highest tax rates The provision strikes the reference to ordinary income of corporations in the rule that provides procedures for modification of an imputed underpayment to make clear that a lower rate of tax may be taken into account in the case of either capital gain or ordinary income of a partner that is a C corporation. Modifying an imputed underpayment based on certain passive losses of publicly traded partnerships Under the provision, certain section 469(k) passive activity losses can reduce the imputed underpayment of a publicly traded partnership under the centralized system. The imputed underpayment can be determined without regard to the portion of the underpayment that the partnership demonstrates is attributable to (i.e., would be offset by) specified passive activity losses attributable to a specified partner. The amount of the specified passive activity loss is concomitantly decreased, and the partnership takes the decrease into account in the adjustment year with respect to the specified partners to which the decrease relates. A specified passive activity loss for any specified partner of a publicly traded partnership means the lesser of the section 469(k) passive activity loss of that partner (1) for the partner s taxable year in which or with which the reviewed year of the partnership ends, or (2) for the partner s taxable year in which or with which the adjustment year of the partnership ends. A specified partner is a person who continuously meets each of three requirements for the period starting with the partner s taxable year in which or with which the partnership reviewed year ends through the partner s taxable year in which or with which the partnership adjustment year ends. These three requirements are that the person is a partner of the publicly traded partnership; the person is an individual, estate, trust, closely held C corporation, or personal service After that date, a timely administrative adjustment request may address Schedule K-1 errors. Sec. 251

5 corporation; and the person has a specified passive activity loss with respect to the publicly traded partnership. Limitations period for partnership adjustments The provision clarifies the unintended conflict between section 6231 (barring the Secretary from issuing the notice of final partnership adjustment earlier than the expiration of the 270 days after the notice of a proposed adjustment) and section 6235 (requiring that a notice of final partnership adjustment be filed no later than 270 days after the notice of proposed adjustment in the case of a partnership that does not seek modification of the imputed underpayment). As amended, section 6235 provides that a notice of final partnership adjustment to a partnership that does not seek modification of an underpayment in response to a notice of proposed adjustment may be issued up to 330 days (plus any additional number of days that were agreed upon as an extension of time for taxpayer response) after the notice of proposed adjustment. Forum for judicial review The provision correctly identifies the Court of Federal Claims in section The provision adds a cross reference within the alternative payment rules 805 to the time period for seeking judicial review, 806 clarifying that judicial review is available to a partnership that has made the election 807 under the alternative payment rules. Restriction on authority to amend partner information statements The provision corrects the conforming amendment so that it correctly strikes the last sentence of section 6031(b) under prior law, which sentence related to repealed provisions on electing large partnerships. The provision is effective as if included in section 1101 of the Bipartisan Budget Act of Sec Sec. 6234(a). 807 Sec. 6226(a)(1). 808 Pub. L. No , enacted November 2,