In tax controversy and litigation matters, sometimes procedure trumps the merits. The statute of limitations is a great example. Even if the taxpayer made a mistake on a prior year return, the IRS generally can’t open an audit if the applicable statute of limitations period has expired.
The Bipartisan Budget Act of 2015 (BBA) has its own statute of limitations rules associated with partnerships. Because the BBA partnership rules are relatively new—they did not go into effect until the 2018 tax year—the rules contain traps for the unwary. Indeed, a recent IRS Chief Counsel memorandum shows that these traps can also ensnare the IRS.
The BBA Generally
Enacted in 2015, the BBA generally applies to partnership tax returns filed for the 2018 and later years. Under the BBA, the partnership pays income tax (referred to as an “imputed underpayment”) by default unless the partnership makes a timely election to have the IRS adjustments pushed out to the partners.
In addition to the imputed underpayment rules, the BBA created the “partnership representative” (PR). The PR has sole authority to act on behalf of the partnership, including executing statute of limitations extension forms and actions related to an IRS examination. Generally, the partnership designates a PR by identifying an eligible entity or individual on the partnership’s tax return. After this designation, the PR continues to serve as the representative for that year until the PR resigns, the partnership revokes the designation, or the IRS concludes that the designation is no longer effective (the partnership can designate different PRs for different tax years).
The BBA Statute Of Limitations
By statute, the BBA requires the IRS to issue three different notices to the partnership and PR related to an examination. First, the agency must issue a notice of administrative proceeding notifying the partnership of the audit. Second, the IRS must issue a notice of proposed partnership adjustment (NOPPA). Third, the IRS must issue a notice of final partnership adjustment (FPA).
The BBA also has its own statute of limitations rules. Under the general three-year rule, the agency can’t make a partnership adjustment three years after the later of:
- The date the partnership files its tax return (i.e., Form 1065);
- The partnership’s return filing deadline;
- The date on which the partnership files an administrative adjustment request (AAR).
However, certain events can extend the three-year period. For example, the IRS has 330 days from the NOPPA issuance date to make a partnership adjustment if that date is later than the three-year period above. But the NOPPA is timely only if the IRS issued it within the three-year period.
There are numerous exceptions to the statute of limitations period, including the submission of a fraudulent return. In addition, the BBA provides the PR and the IRS with the option of extending the statute of limitations period if the partnership signs a notice in writing, waiving the default statute of limitations period.
The Chief Counsel Memorandum
In CCA 202505027, the IRS commenced an examination of a BBA partnership income tax return for the 2018 and 2019 tax years. The partnership filed its 2018 return on September 13, 2019, and its 2019 return on September 14, 2020. Thus, under the general three-year rule, the IRS had until September 13, 2022, and September 14, 2023, to propose adjustments to the partnership’s 2018 and 2019 tax years, respectively.
The facts in the memorandum suggest the IRS examiner needed more time. Accordingly, the agent sought and received signed statute of limitations extensions (i.e., Forms 872-M) from managers of the partnership, including the CFO/Treasurer. These individuals were not, however, PRs of the partnership.
On these facts, IRS Chief Counsel concluded that the Forms 872-M were invalid to extend the statute of limitations. In the memorandum, IRS Chief Counsel commented that the PR was the sole individual authorized to extend the statute of limitations for the partnership and therefore the IRS was barred from proposing adjustments to the partnership’s 2018 and 2019 tax returns.
Conclusion
Tax professionals and taxpayers should always keep tax procedure issues top of mind during an IRS audit. As CCA 202505027 shows, sometimes raising the issue alone may be sufficient to successfully defend against proposed adjustments or assessments.
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