On April 8, 2020, the Internal Revenue Service (“IRS”) issued Revenue Procedure (“Rev. Proc.”) 2020-23 which allows partnerships subject to the centralized partnership audit rules, which were passed under the Bipartisan Budget Act of 2015, P.L. 114-74 (the “BBA Audit Rules”), to file amended partnership returns and to issue amended Schedule K-1s to their partners in order to take advantage of relief provided by Congress to taxpayers under the Coronavirus Aid, Relief and Economic Security Act, P.L. 116-136, passed on March 27, 2020 (the “CARES Act”).

Under the Cares Act, Congress provided retroactive tax relief for certain taxpayers in an effort to increase cash flow and liquidity for certain businesses and to temporarily reverse the economic impact of certain tax law changes made by Congress under the Tax Cuts and Jobs Act of 2017 (“TCJA”).  As discussed in our Tax Report entitled Tax Provisions of the Coronavirus Aid, Relief, and Economic Security Act, certain CARES Act provisions provide tax relief to partnerships and their partners, including the following (without limitation):

• Increase in the Sec. 163(j) limitation - The CARES Act relaxes the section 163(j) interest expense limitations imposed under TCJA and generally enables taxpayers to elect to increase their section 163(j) interest expense deduction for taxable years beginning in 2019 or 2020. 
• Expensing of Qualified Improvement Property - The CARES Act includes a technical correction to the TCJA and enables businesses to immediately deduct costs associated with improving facilities or “qualified improvement property” instead of being required to depreciate those improvements over 39 years. The CARES Act makes this correction retroactive to January 1, 2018 allowing companies to file amended returns for 2018 or 2019 when beneficial.

Prior to the publication of Rev. Proc. 2020-23, partnerships subject to the BBA Audit Rules were unable to file an amended tax return in most circumstances and instead were required to file an administrative adjustment request or “AAR” with the Internal Revenue Service in order to make adjustments to their tax returns for prior tax years.

Background on the BBA Audit Rules

As part of the Bipartisan Budget Act of 2015, Congress enacted new legislation to replace the unified partnership audit and litigation rules commonly referred to as the TEFRA partnership audit procedures (the “TEFRA Rules”).   The TEFRA Rules were replaced by a new centralized partnership audit regime applicable to partnerships for tax years beginning after December 31, 2017 (the “BBA Audit Rules”).  All partnerships (including limited liability companies taxed as partnerships) with tax years beginning after 2017 are subject to the BBA Audit Rules unless they make a valid election out of the BBA Rules (each such partnership without a valid election out of the BBA Rules, a “BBA Partnership”).  To make a valid election out, a partnership must have less than 100 partners and all partners must be either an individual, a C corporation, an S corporation, a foreign entity that is taxable as a corporation under Treasury Regulations Section 301.7701-2, or an estate of a deceased partner.

Under the BBA Audit Rules, after a BBA Partnership files its IRS Form 1065 tax return for the applicable tax year and furnishes a copy of the Schedule K-1 to each of its partners, the partnership is prohibited from amending that tax return and/or issuing amended Schedule K-1s to adjust its tax items unless (i) an amended tax return is filed with the IRS prior to the due date (with extensions) for filing in the relevant tax year; (ii) the partnership is required to make a payment to the IRS and shifts the responsibility for making that payment to its partners by using a “push out” election pursuant to section 6226 of the Internal Revenue Code; (iii) the partnership files an AAR with the IRS requesting an adjustment to certain partnership-related tax items for the relevant tax year; or (iv) the Secretary of Treasury provides relief.

Typically, an AAR may be made for a previous tax year.  Under the AAR procedures, an adjustment to a prior year’s taxable income (the reviewed year) that reduces taxable income in that year would be “pushed out” to the reviewed year partners. Each reviewed year partner would then claim a refund equal to the decrease in the partner’s tax as if the AAR adjustment had been claimed on the partner’s original tax return for the reviewed year. The decrease in tax is, however, required to be taken into account as a reduction in the partner’s tax liability for the year in which the AAR is filed (the reporting year), which makes it similar to a non-refundable credit. As a result, historic partners will not receive immediate refunds absent relief.

Each partner in a BBA Partnership is also required to treat partnership-related items included on their individual tax returns in a manner that is consistent with the treatment of such times by the BBA Partnership on its IRS Form 1065 and the related Schedule K-1.  Therefore, a partner’s individual tax return must be filed consistently with the information reported on their Schedule K-1 received from the partnership.  As a result, if a BBA Partnership tax return was filed in a previous tax year, without the relief provided under Rev. Proc. 2020-23, the BBA Partnership would be required to file an AAR in order to amend its Schedule K-1s and any immediate tangible benefit provided under the CARES Act would be significantly delayed.

Application of Rev. Proc. 2020-23

Rev. Proc. 2020-23 permits a BBA Partnership to file an amended partnership return and to issue amended Schedule K-1s instead of filing an AAR in order to claim tax benefits and relief provided under the CARES Act.  The relief provided under the CARES Act is retroactive in many cases and impacts partnerships for their 2018, 2019 and 2020 taxable years.  Without Rev. Proc. 2020-23, BBA Partnerships would be prohibited from filing amended returns.  If such a partnership previously filed its IRS Form 1065 for 2018 or 2019, its partners would be unable to avail themselves of CARES Act relief for those years until the partnership filed an AAR in 2020 and such partners filed their 2020 tax returns.  In order to accelerate the relief provided to partnerships and partners under the CARES Act, the revenue procedure provides a BBA Partnership with the option to file an amended return for 2018 or 2019 instead of an AAR.  A BBA partnership that files an amended return utilizing relief under Rev. Proc. 2020-23 remains subject to the centralized partnership audit procedures enacted under the BBA.  However, its partners will be able to then immediately amend their individual 2018 or 2019 returns and obtain a refund, if eligible.

Amended 2018 or 2019 partnership returns filed pursuant to this revenue procedure (and the corresponding amended Schedule K-1s) must be filed with the IRS on or before September 30, 2020.  These amended returns may take into account both changes provided under the CARES Act as well as other tax attributes the partnership is entitled to claim on its tax return.  Any amended returns filed pursuant to this revenue procedure will replace prior tax return filings (including any AAR filed by the partnership) for the relevant taxable year.  When filing the amended return, the BBA Partnership is required to stamp “FILED PURSUANT TO REV. PROC. 2020-23” at the top of the amended return and to attach a similar statement to each amended K-1 sent to its partners.  The return may be filed electronically or by mail, although due to IRS processing delays an electronically filed return will likely result in faster processing.  Additionally, if a BBA partnership is currently under examination by the IRS for a tax year beginning in 2018 or 2019, the partnership may utilize the relief provided under this revenue procedure by sending notice to the revenue agent (in writing) indicating that the partnership seeks to apply Rev. Proc. 2020-23.  The notice should be sent prior to or in connection with the filing of the amended return and the partnership must provide the revenue agent with a copy of the amended return as filed.

Taxpayers that are BBA Partnerships should consult with their NMRS tax attorneys and their accountants in order to comprehensively (i) assess the tax benefits they may be eligible to claim under the CARES Act and (ii) determine whether or not they should seek to file amended tax returns pursuant to this revenue procedure.

If you have any questions or comments about the foregoing summary of Rev. Proc. 2020-23, please contact Wells Hall who have contributed to the preparation of this Tax Report.