CPAR partnerships reporting changes to Form 1065: the administrative adjustment request

Beginning with the 2018 tax year, partnerships subject to the centralized partnership audit regime (CPAR) in general cannot file an amended return to report any changes to a previously filed partnership tax return. This article focuses on the procedures that CPAR partnerships must follow to report changes to a previously filed Form 1065 for tax years beginning after Dec. 31, 2017.

Key takeaways

• Beginning with the 2018 tax year, partnerships subject to CPAR in general cannot file an amended return to report any changes to a previously filed partnership tax return.
• Instead, CPAR partnerships report changes to a Form 1065 on Form 8082, Administrative Adjustment Request (AAR).
• If the adjustments on Form 8082 result in an imputed underpayment, the partnership is, for the most part, required to pay the imputed underpayment and any interest and penalty associated with the imputed underpayment at the time of filing.
• The determination of any underpayment involves a complicated process (see discussion below) that involves grouping and allocating the items that have changed on the return.
• While partnerships subject to CPAR cannot file an amended return, they can file a superseding return through the due date of the return. Superseding a return will eliminate the need to go through the AAR process so that the partnership does not have to remit tax, interest, and penalties.
• Form 7004 will preserve a partnership’s ability to file a superseding original return if needed to correct an item on Form 1065 up to the extended due date for filing the Form 1065. If an error is found or it is otherwise necessary to correct an item on a Form 1065 or Schedule K-1, a superseding original return is much easier to use than filing an AAR.
• On April 8, 2020, the IRS issued Rev. Proc. 2020-23, which permits CPAR partnerships to file amended Forms 1065 and corresponding Schedules K-1 for tax years beginning in 2018 or 2019 before Sept. 30, 2020.

Background and discussion

CPAR, which was enacted as part of the Bipartisan Budget Act of 2015, permits the IRS to make assessments and collect those assessments at the partnership entity level. In general, CPAR partnerships report changes to a Form 1065 on Form 8082, Administrative Adjustment Request. The Partnership Representative designated on the originally filed Form 1065 must sign the AAR, under penalties of perjury.

Step 1: Determine whether the partnership adjustment results in an imputed underpayment

First, the partnership must determine whether the adjustments reported on the AAR result in an imputed underpayment (i.e., an assessment against the partnership). A negative adjustment is any adjustment that is a decrease in an item of income or an increase in an item of loss or deduction. A positive adjustment is any adjustment that is not a negative adjustment. In order to determine an imputed underpayment, each partnership adjustment is first placed into one of four groupings according to the type of partnership-related item being adjusted:

1. Reallocation grouping: Any adjustment that allocates or reallocates a partnership-related item to and from a particular partner or partners, except for credit or creditable expenditure allocations.
2. Credit grouping: Any adjustment to a partnership-related item that is or could be reported as a credit on the partnership’s return.
3. Creditable expenditure grouping: Any adjustment to a creditable expenditure if any person could take the adjusted item as a credit.
4. Residual grouping: A catch-all group that includes any adjustment not within in the prior three groupings.

Adjustments within each group are then subgrouped, when appropriate, according to how the adjustment would be required to be taken into account separately under section 702(a) or any other provision of the Code or regulations applicable to the adjusted partnership-related item.

After the adjustments are grouped (and subgrouped, if appropriate), then the adjustments are netted within each separate grouping (and subgrouping, if applicable). Note, however, that adjustments are not netted across different groupings or subgroupings. Note further that net negative adjustments are not taken into account for purposes of computing an imputed underpayment.

A partnership calculates its imputed underpayment by taking the sum of all net positive adjustments in the reallocation grouping and the residual grouping. This sum is then multiplied by the highest rate of tax in effect under section 1 or 11 for the reviewed year. This amount is then increased by any net positive adjustment from the credit grouping and the creditable expenditure grouping.

If the resulting calculated amount is positive, then the partnership has an imputed underpayment.

Step 2A: AAR that results in an imputed underpayment

If the adjustments on Form 8082 result in an imputed underpayment, the partnership is generally required to pay the imputed underpayment and any interest and penalty associated with the imputed underpayment at the time of filing.

Note that the current version of Form 8082 prescribed by the IRS for filing an AAR is not designed to accommodate the reporting of multiple imputed underpayments. A partnership may file multiple AARs to allocate adjustments into separate imputed underpayments. For example, the partnership may file one AAR reporting an imputed underpayment that the partnership pays, while filing another AAR reporting an imputed underpayment for which the partnership elects to push out the adjustments associated with that imputed underpayment (discussed below).

A CPAR partnership must attach a schedule to the AAR that supports the positions reported on the Form 8082 that result in an imputed underpayment as well as provides support for any modification of the imputed underpayment that is allowed under section 6225(c).

i. Modifications to the imputed underpayment

Under section 301.6227-2(a)(2), a partnership may modify an imputed underpayment resulting from adjustments requested in an AAR using only the following provisions:

• Tax-exempt partners
• Modification of applicable tax rate
• Specified passive activity losses
• Limitations or restrictions in the grouping adjustments
• Certain qualified investment activities
• Tax treaty modifications
• As provided in forms, instructions, or other guidance prescribed by the IRS with respect to AARs.

Under section 301.6227-2(a)(2)(i), the partnership is not required to seek approval from the IRS prior to applying modifications to the amount of any AAR imputed underpayment. This rule permits a partnership to determine an imputed underpayment that results from the adjustments requested in an AAR and apply modifications when calculating the amount of the imputed underpayment the partnership needs to pay when filing the AAR.

ii. Push-out election

A partnership may make the push-out election to have its reviewed-year partners take into account the adjustments requested in the AAR that are associated with the imputed underpayment. If the partnership makes a valid push-out election, the partnership is not liable for, nor required to pay, the imputed underpayment to which the election relates. Instead, each reviewed-year partner must take into account its share of the adjustments reported in the AAR that are associated with such imputed underpayment.

A partnership makes the election at the time the AAR is filed. The partnership is required to furnish to each partner of the partnership for the reviewed year, and file with the AAR, a statement of the partner’s share of any adjustment reported in the AAR. Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Items, is used for this purpose.

Step 2B: AAR that does not result in an imputed underpayment

If any adjustments in an AAR do not result in an imputed underpayment, then the partnership must furnish Form 8986 statements to each reviewed-year partner that support the reviewed-year partner’s share of those adjustments and file such statements along with the AAR.

Step 3: Reviewed-year partners taking into account adjustments from AAR

As discussed, reviewed-year partners take AAR adjustments into account if either (i) the partnership elects to have its partners take the adjustments into account instead of paying the imputed underpayment or (ii) the partnership adjustments did not result in an imputed underpayment.

In general, a reviewed-year partner that receives a furnished statement from the partnership with AAR adjustments must take into account the adjustments on its tax return for the tax year in which the reviewed-year partner receives the statement.

To take the adjustments into account, a reviewed-year partner attaches to its tax return Form 8978, Partner’s Additional Reporting Year Tax. Note that the calculations require a recomputation of the reviewed-year partner’s income tax beginning with the reviewed year and continuing with each subsequent year until the year the statement is received.

Pass-through partners: If a pass-through partner receives a push-out statement from a CPAR partnership that is associated with an imputed underpayment, then the pass-through partner may (i) compute and pay its share of the imputed underpayment or (ii) issue further push-out statements of the adjustments to its partners.

If a pass-through partner receives a partnership push-out statement from a CPAR partnership with adjustments that would not have resulted in an imputed underpayment, then the pass-through partner must issue a further push-out statement to its partners with respect to those adjustments and file with the IRS a partnership adjustment tracking report.

Form 8985, Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report, is used for pass-through partners to file with the IRS a partnership adjustment tracking report.

The pass-through partner must furnish push-out statements to its partners and file the adjustment tracking report no later than the extended due date for the return of the adjustment-year (the partnership year in which the AAR is filed).

Additional considerations

1. Superseding return – Consider filing Form 7004 for CPAR partnerships even if the partnership plans to file Form 1065 by the original due date

While partnerships subject to CPAR in general cannot file an amended return, they can file a superseding return through the due date of the return. Superseding a return will eliminate the need to go through the AAR process so that the partnership does not have to remit tax, interest, and penalties.

Form 7004 will preserve the ability to file a superseding original return if needed to correct an item on Form 1065 up to the extended due date for filing the Form 1065. If an error is found or it is otherwise necessary to correct an item on a Form 1065 or Schedule K-1, a superseding original return is much easier to use than filing an AAR.

2. CPAR partnerships may utilize Rev. Proc. 2020-23 to file amended 2018 or 2019 Forms 1065 and issue amended Schedules K-1 before Sept. 30, 2020

Rev. Proc. 2020-23 was issued to enable CPAR partnerships to take advantage of Coronavirus Aid, Relief, and Economic Security (CARES) Act provisions. Prior to the revenue procedure, partnerships that already filed 2018 or 2019 returns were not able to account for CARES Act benefits except by filing an AAR. This process would delay relief found in the CARES Act to these taxpayers. If a partnership did not file its 2019 Form 1065 before April 8, 2020, it will be unable to file an amended return for 2019 under Rev. Proc. 2020-23.

The partnership is still permitted the option of filing an AAR instead of an amended return if it chooses. The amended returns may take into account tax changes brought about by the CARES Act as well as any other tax attributes to which the partnership is entitled by law.

To amend the partnership return, the “amended return” box on Form 1065 and all schedules K-1 must be checked. In addition, “FILED PURSUANT TO REV. PROC. 2020-23” must be clearly written at the top of the amended return. A statement with the same notation must also be attached to each Schedule K-1.

If a CPAR partnership previously filed an AAR, the partnership should use the adjusted amounts per the AAR from which to change in the amended return.

3. Late section 754 election

Because CPAR partnerships in general cannot file amended returns, there is an open question on how a CPAR partnership effectuates a late section 754 election. The IRS has not issued written guidance specifically on this issue.

CPAR partnerships beginning in 2018 or 2019 may utilize Rev. Proc. 2020-23 for this purpose before Sept. 30, 2020.

4. Partnerships may elect into CPAR for tax periods beginning after Nov. 2, 2015, and before Jan. 1, 2018, by filing an AAR

A partnership that meets the definition of a CPAR partnership during this time may file an AAR to report changes to the originally filed Form 1065. This option comes into play when the partners prefer to avoid filing amended Forms 1040 to report the adjustments. Under this procedure, the partnership pays any tax, interest, and penalty related to the imputed underpayment with the AAR.

The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.