I Want My Two Dollars: Correcting a Prior Imputed Underpayment, Part 2
by Jenni Black
Jenni Black is a managing director in Citrin Cooperman’s national tax office and the practice leader of the tax procedure and controversy practice. She is also a contributing author for Procedurally Taxing.
In this post, Black discusses how to determine the tax year for which a partnership can get a refund of a prior, incorrectly calculated imputed underpayment under the Bipartisan Budget Act of 2015.
Under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, a partnership files an administrative adjustment request (AAR) to correct its previously filed return. We’ve been discussing the ways in which a partnership could adjust (and be refunded) an imputed underpayment (IU) contained on a previously filed AAR if it made errors in the calculation. Part 1 of this article discussed the methods a partnership might use to adjust the IU on the prior AAR. This part discusses what year the adjustment to the IU (our $2) is for.
For What Year is the AAR Filed?
Now that we’ve determined that an AAR is likely the way to adjust an IU reported on a previously filed AAR, for what year is the AAR
filed? Under section 6232(a), the IU is assessed and collected as if it were a tax imposed by subtitle A for the adjustment year (for an AAR, the tax year in which the AAR is filed), not the reviewed year (the tax year to which the adjustments relate). Does this mean that the AAR is filed for the adjustment year? As BBA has no rules for partnerships to correct IUs from previously filed AARs, BBA does not answer this question. But if you want to know what I think (and why would you be reading this article otherwise?), I say the AAR is filed for the reviewed year. Why?
The IU is calculated on adjustments made to the partnership’s reviewed year return.1
Practically, the IU being for the reviewed year (even if assessed and collected “as if” it was a tax in the adjustment year) makes the most sense. If the IU is a tax for the adjustment year, whether the partnership could correct the IU would depend on facts unrelated to anything in the reviewed year. For example, under section 6227(c) (flush language), a partnership cannot file an AAR if a notice of administrative proceeding (NAP) has been issued for the tax year. This means that, if the IRS audited the adjustment year return and issued an NAP, the partnership would be unable to file an AAR to correct an IU reported on the AAR for the reviewed year, even though the audit of the adjustment year is completely unrelated to the AAR filed for the reviewed year.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman. 1
In addition, if the IU was a tax for the adjustment year, if the IRS examines the AAR, it may have to open two audits — one for the reviewed year to examine the adjustments, and one for the adjustment year for any calculation issues with the IU. If the IRS has to open an exam
for the adjustment year, that exam may preclude the IRS from examining the adjustment year return, so the IRS may decide to review the adjustment year return when it examines the IU calculated on adjustments to the reviewed year. Nobody wants this. Any audit of the adjustment year would be based off the period of limitations on making adjustments to the adjustment year, not the reviewed year. In many cases, the period of limitations for the adjustment year will be later than the period of limitations for the reviewed year. Therefore, if the IU is a tax for the adjustment year, the period of limitations on adjusting the IU would be later than the period of limitations to make adjustments to the partnership-related items (PRI) on the AAR. That doesn’t make sense. But what about the fact that section 6232(a) says the IU is assessed and collected as if it were a tax imposed by the adjustment year? Doesn’t that make it for sure a PRI for the adjustment year? Maybe not, but it does make life more confusing. Although section 6232(a) treats the IU as a tax imposed by subtitle A for assessment and collection purposes, this does not mean that the IU is a tax under subtitle A; it just seems to mean that BBA adopts those rules for assessment and collection (that is, “as if it were” as opposed to “is”). I mean, the IU is imposed under subchapter C of chapter 63 in subtitle F; not subtitle A. Section 6232(a) is not the only place BBA does this. Under section 6233(a)(3), penalties on the partnership under BBA are determined “as if” the partnership was an individual for the reviewed year, and the IU were an actual underpayment (or understatement) for such year. As with section 6232(a), section 6233(a)(3) seems to merely adopt the rules for individuals for purposes of calculating penalties on the partnership under BBA. Section 6233(a)(3) doesn’t make a partnership an actual individual and doesn’t make the IU an underpayment or understatement for purposes other than calculating penalties. Just like section 6233(a)(3) adopts the rules applicable to individuals and underpayments and understatements for purposes of calculating
penalties (and doesn’t make the partnership an actual individual), so too does section 6232(a) adopt the rules for assessing and collecting tax under subtitle A when assessing and collecting the IU (without necessarily making the IU an actual tax under subtitle A for the adjustment year).
Perhaps another reason why Congress would have the IU assessed and collected “as if it were” a tax under subtitle A for the adjustment year is nothing in BBA holds open the period of limitations on assessing tax. Although BBA has a period of limitations on making adjustments, the IU is still assessed and, under section 6232(a), it is assessed as if it were a tax under subtitle A. Taxes under subtitle A must be assessed within the period of limitations on making assessments under section 6501. Therefore, if the IU was assessed for the reviewed year and the IU was determined as part of an audit, the time to assess the IU would, in all likelihood, be expired by the time the IU was finally determined. Shoving the tax impacts of adjustments to PRIs in a “current” year is a major feature of BBA. While the time to assess the IU (if it was assessed in the reviewed year) would likely not be closed at the time an AAR was filed (as it can only be filed within 3 years of when the partnership return was filed (see part 1)), BBA does not treat audits and AARs differently in this regard. So, it seems to me at least, that while section 6232(a) adopts the rules for assessing and collecting tax under subtitle A for the adjustment year, it does not actually alter what the IU actually is (imposed by subtitle F and calculated on adjustments to the reviewed year). But reasonable minds could differ here.
For these reasons, I think a partnership would file an AAR for the reviewed year to adjust the IU reported on a prior AAR filed for the reviewed year, but it would be nice to get clarification on this. But aside from the period of limitations on filing an AAR under section 6227(c), what other limits may apply to getting our $2 back? We’ll figure that out in part 3 of this article.