The IRS has just issued Revenue Procedure 2020-23 to address a problem caused under prior law by some tax changes under the CARES Act for partnerships. This procedure provides relief permitting partnerships to obtain the benefit of the new tax provision more quickly.
The CARES Act includes a number of new tax deductions, particularly involving the ability to immediately write-off the cost of Qualified Improvement Property (QIP), retroactively to 2018. The problem created for partnerships was the manner in which the tax refunds related to a prior year deduction could be received.
Under the Bipartisan Budget Act of 2015, partnerships became subject to Centralized Partnership Audit Regime (CPAR) rules. These rules are intended to permit the IRS to audit a partnership at the entity level and to avoid having to address individual partners. While certain small partnerships can elect out of these rules, other partnerships or trusts with certain types of partners or those with more than 100 partners are not allowed this option.
The CPAR rules provide that a covered partnership (BBA partnership) cannot file an amended return for a prior period but must file an Administrative Adjustment Request (AAR). If the AAR reflects a reduction of income for such prior year, this reduction remains a partnership item and carries forward as a deduction to a later year of the entity. This rule would effectively cause the deduction to carry over to the 2020 tax year in many situations, delaying the benefit of the deduction until its partners filed their separate 2020 tax returns in 2021. This rule frustrates the purpose of the CARES Act to get the benefit of cash refunds to taxpayers expeditiously.
The Revenue Procedure provides that an “eligible BBA partnership” that has filed its partnership income tax return and furnished all required Schedules K-1 to its partners for taxable years beginning in 2018 or 2019 (prior to the issuance of this Revenue Procedure) has the option of filing amended returns and providing corrected Schedules K-1 to its partners before September 30, 2020. The amended returns are not limited to the changes under the CARES Act but can include any other tax attributes to which the partnership is entitled.
The partnership should file a Form 1065 Partnership Income Tax Return with the Amended Box checked. The BBA partnership must clearly indicate that this relief provision is being followed by writing “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return, and a similar statement must be attached with each Schedule K-1 sent to partners.
The procedure also considers the situation where a BBA partnership has previously filed an AAR for the tax year. It permits an amended return to be filed using as a starting point the information as adjusted in the AAR.
A BBA partnership under examination is also permitted to use this procedure. However, the IRS says that written notice that the partnership seeks to use this amended return option must be given to the revenue agent coordinating the examination. Additionally, the revenue agent must also be provided with a copy of the amended return.
This is a significant relief provision which will assist partners in obtaining the benefit of CARES Act deductions more quickly while we are waiting for more information on the implementation.