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Partnership Audit Guidance Soon?

On January 1, 2018 the new partnership audit rules become effective.  Proposed regulations were issued in January of this year to provide broad-based guidance on the implementation and operation of the new statutory regime, but those proposed regulations were withdrawn in the same month due to the new administration’s position freezing proposed regulations and requiring agency review before re-issuance.  With a little over six months to go before the new rules become effective, a considerable amount of uncertainty associated remains and regulatory guidance is desperately needed.  At this point, gaining an understanding of the proposed/withdrawn regulations is the best course of action, as there is no current indication that the proposed rules will be altered in a material way, if issued by the end of the year.

Partnership Proposed Regulations Issued – New Audit Rules For Partnerships

The IRS has issued Proposed Regulations addressing the Centralized Partnership Audit Regime.  Back in November of 2015, statutory changes were enacted to replace the traditional audit rules for partnerships and replacing them with a new centralized partnership audit which, in most instances, places the tax liability at the partnership level rather than at the partner level.

Partnerships are pass through entities for US tax purposes and items of income, expense and credits are taken on the personal income tax returns of the individual partners.  Under the new statute, an audit of the partnership could result in additional taxes being owed at the partnership level rather than flowing through to the individual partners.

“It has taken over a year for the proposed regulations to be issued,” said James N. Mastracchio, Co-Chair of Denton’s Tax Controversy Practice, “and that is a good thing.”  The proposed regulations are “extensive” and “cover a number of issues that we face as advisors to our clients.” added Mastracchio.

There will be a long comment period with the ultimate effective date of the regulations to take place in early 2018.

Is Your Conservation Easement a Listed Transaction?

If you invested in a partnership or other passthrough entity, which provides pass-through deductions for conservation easements, that arrangement may be considered a “syndicated conservation easement” and a “listed transaction,”  and you may be faced with  new IRS reporting obligations.

According to Notice 2017-10, if you entered into this type of arrangement on or after January 1, 2010, and if that arrangement is “the same as or substantially similar to” the syndicated conservation easements described in the Notice, the “listed transaction” provisions of  §1.6011-4(b)(2) and §§6111 and 6112 become effective December 23, 2016.  If these provisions apply, you must disclose the transaction to the IRS, for each taxable year in which you participated in the transaction, provided that the period of limitations for assessment of tax has not ended on or before December 23, 2016.  Failure to disclose your participation can result in stiff civil monetary penalties.

Further, according to the Notice, promoters, material advisors, including appraisers, who make a tax statement on or after January 1, 2010, with respect to transactions entered into on or after January 1, 2010, have disclosure and list maintenance obligations under §§6111 and 6112. See §§301.6111-3 , 301.6112-1.  Failure to comply with these provisions also carries significant civil monetary penalties.

With the 2016 income tax filing season opening this month, this issue may affect tax returns filed in the coming months and requires a look-back to 2010 as well.  For questions regarding syndicated conservation easements, or listed transactions, please contact Jim Mastracchio at (202) 496-7251; james.mastracchio@dentons.com

 

Fast Track Settlements for Collection Cases

Late last year the IRS issued guidance on Fast Track settlement procedures for collection cases.  The goal of the process is to provide resolution of disputed issues within 30-40 calendar days.  Generally, issues involving an offer-in-comprise or trust fund recovery penalties can be brought before an Appeals mediator.  The new program is called SB/SE Fast Track Mediation- Collection (FTMC) and should provide a meaningful avenue to resolve differences.  Ultimate settlement authority continues to reside with Collections and not with IRS Appeals.  See guidance at Rev. Proc 2016-57.

House Ways and Means Wants Probable Cause Before Seizure

The Internal Revenue Service (IRS) has come under scrutiny recently for seizing assets that the IRS claims were the subject of structuring violations. Structuring is the practice of consistently making cash deposits and/or withdrawals of less than $10,000 to avoid mandatory reporting requirements (filing a form 8300), a large part of which were put in place to prevent money laundering and tax evasion. Prior to a policy change in 2014, the IRS was seizing funds that they believed were the subject of structuring violations whether or not the IRS knew that the funds were coming from a legal or an illegal source.

Recent hearings conducted by the House Ways and Means Committee have shown that there are more than 600 cases of the government seizing legally sourced funds prior to the 2014 policy shift and frozen assets involved in these 600 cases yet to be returned to the taxpayers.

As a result of the Committee hearings, legislation has been introduced that would require the IRS to establish probable cause to show that the source of funds involved in a structuring scheme originated from an illegal source before the funds could be seized.   Under the proposed legislation, the IRS would be required, in most cases, to give 30 days of pre-seizure notice and hold a post-seizure hearing within 30 days of the notice.   Additionally, as a bonus, any interest that accrues on the wrongly seized funds will be exempt from income tax. The proposed legislation was scheduled for a mark up by the House Ways and Means Committee on July 7, 2016.

LB&I Introduces New Examination Process Designed to Provide Transparency and Collaboration

The Internal Revenue Service (“IRS”) Large and International Business (LB&I) has announced it will be implementing changes to its examination process, effective May 1, 2016.  LB&I’s new procedures are designed to provide an organizational approach for conducting professional examinations from the first contact with the taxpayer through the final stages of issue resolution.  By adopting these procedures, the IRS hopes to add efficiency to the examination process and permits the taxpayer and the examination team to work together in “the spirit of cooperation, responsiveness, and transparency.” Under the new procedures, the examination will be divided into three phases: planning, execution, and resolution, each of which focus on achieving certain specified goals.

The planning phase is focused upon identifying specific issues in the taxpayer’s case.  Once issues are identified, the exam team will explain to the taxpayer why each issue is being considered.  Thereafter, an issue team, comprising LB&I employees most familiar with the particular issue, will work with the taxpayer to establish the relevant facts.  Although a case manager will have overall responsibility for the case, each issue will have a designated manager who oversees the planning, execution and resolution of the issue.

During the execution phase, the issue teams will fully develop their particular issue, including determining the facts, applying the law to those facts, and understanding the various tax implications of the issue.  This process will include interactive discussions with the taxpayer followed by the issuance of Information Document Requests (IDRs) to develop the facts.  The new procedures note that a meaningful discussion with the taxpayer prior to issuing an IDR will result in a more effective process.  After gathering relevant facts, the issue team will document the agreed facts and obtain acknowledgement from the taxpayer with respect to the unagreed facts.

Finally, in the resolution phase, LB&I encourages its employees to use all available tools to resolve issues.  As facts have been fully developed and documented in the execution phase, the taxpayer and the issue team will be able to work more productively in the resolution stage.  Although there are numerous strategies to work towards resolution, LB&I requires its employees to consider Fast Track Settlement for all unagreed issues.  Fast Track consists of a mediation where the taxpayer, the issue team and Appeals must agree to participate and agree to a mutual resolution.   The goal of the resolution phase is tax certainty for both the taxpayer and LB&I.  Thus, at the conclusion of the resolution phase, taxpayers and LB&I may be asked to perform a joint critique of the exam process and recommend improvements.

LB&I emphasizes the significance of bringing all information to light as soon as possible to avoid issues relating to the expiration of the statute of limitations, or the possibility of new information coming to light during the Appeals process, which would return the case to Examination.  This policy is reflected in LB&I’s request that taxpayer’s bring any potential refund claim to the exam team’s attention as soon as possible.  LB&I specifically indicated it would only accept informal claims that are provided to the exam team within 30 calendar days of the opening conference.  If such claims are brought within that time period, they can be developed and processed by exam, providing higher possibilities for tax certainty for both the taxpayer & LB&I.  Refund claims submitted within this time period must meet the standards of Treas. Reg. § 301.6402-2, which provides that a valid claim must set forth in detail each ground upon which credit or refund is claimed, present facts sufficient to apprise the IRS of the exact basis for the claim, and contain a written declaration that it is made under penalties of perjury.   However, in the interest of incentivizing taxpayer’s to bring refund claims forward in a timely manner, LB&I has indicated it will discuss deficiencies not meeting the Treasury Regulations and provide the taxpayer an opportunity to correct the deficiencies.  If refund claims are not brought within the specified 30 days, they must be filed using the applicable amended tax return or Form 843, Claim for Refund and Request for Abatement.

The reorganization of the LB&I examination process reflects the IRS’s desire to achieve fair and final resolutions during the Examination Process that is achieved with an issue specific approach, involving issue teams that are well versed on the facts to fully develop the facts relevant to each issue.  Notably, Publication 5125 mentions the significance of meaningful discussions with the taxpayer on numerous occasions, including conversations to ensure the taxpayer fully understands the issues are identified, conversations prior to issuing IDRs, and acknowledgements of agreed and unagreed issues.  Upon its implementation, the IRS hopes the new examination process will allow LB&I to work transparently in a collaborative manner with the taxpayer to understand their business and share the issues that have been identified for examination.  This, in turn, should lead to LB&I’s ultimate goal of increasing the final resolutions reached during the exam process.

Please contact Jeffry Erney (jeffry.erney@dentons.com) or Sunny Dhaliwal (sunny.dhaliwal@dentons.com).