Transcript Available of IRS Centralized Partnership Audit Regime Hearing

UNITED STATES DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE

PUBLIC HEARING ON PROPOSED REGULATIONS

PART 31 OF 26 CFR
"CENTRALIZED PARTNERSHIP AUDIT REGIME"
[REG-136118-15, REG-119337-17, REG-118067-17
REG-120232-17, REG-120233-17]

Washington, D.C.
Tuesday, October 9, 2018

PARTICIPANTS:

For IRS:

JENNIFER M. BLACK
Senior Counsel
(Procedure and Administration)

KATHRYN A. ZUBA
Associate Chief Counsel
(Procedure and Administration)

EMILY M. LESNIAK
Special Counsel
(Procedure and Administration)

GREGORY T. ARMSTRONG
Senior Technician Review
(Procedure and Administration)

For U.S. Department of Treasury:

BRENDAN O'DELL
Attorney-Advisor
Office of Tax Policy

Speaker:

MICHAEL GREENWALD
Friedman LLP
On behalf of American Institute of Certified Public Accountants

* * * * *

PROCEEDINGS

(10:00 a. m.)

MS. BLACK: Good morning. We're going to go ahead and get started. It is 10 o'clock. Good morning, everyone. I'd like to thank you for coming here today. We're here today for the public hearing regarding the proposed regulations under part 31 of 26 CFR. The proposed regulations concern the regulations implementing the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 and as amended by the Protecting Americans from Tax Hikes Act of 2015 and a Technical Corrections Act of 2018.

The regulation project numbers are REG-136118-15, REG-119337-17, REG-118067-17, REG-120232-17, REG-120233-17. I want to first start off by having the panel members gathered here today introduce themselves. To start off, I'm Jenny Black. I'm a Senior Counsel in the office of Associate Chief Counsel for Procedure and Administration. And to my left?

MS. ZUBA: I'm Kathryn Zuba. I'm the Associate Chief Counsel, Procedure and Administration.

MS. LESNIAK: I'm Emily Lesniak. I'm a Special Counselor in Procedure and Administration.

MR. ARMSTRONG: Hi. I'm Greg Armstrong. I'm a Senior Technician Reviewer in Procedure and Administration.

MR. O'DELL: Brendan O'Dell, Attorney Advisor in the Office of Tax Policy, Department of the Treasury.

MS. BLACK: Thank you. Our schedule today includes one speaker. The speaker will have 10 minutes to present. There's a timer at the podium that will count down from 10 minutes to alert the speaker of how much time remains. The panel members may then pose questions to the speaker. To the extent time permits, additional persons here today will be permitted to present oral comments, provided they provide notification at or before the commencement of this hearing to the IRS employees located at the entrance of the room behind you. So, let's move forward to the presentation by the speaker. We'll go first with Michael Greenwald of the American Institute of Certified Public Accountants.

MR. GREENWALD: Good morning. My name is Michael Greenwald and I'm a partner at Friedman LLP. I am testifying today on the behalf of the American Institute of Certified Public Accountants. I am currently the chair of the AICPA Partnership Tax Technical Resource Panel. The AICPA has submitted a series of comments to the IRS on the Centralized Partnership Audit Regime and the proposed regulations, including our latest letter issued this morning. My testimony will focus on the proposed regulations on partner level penalty defenses as well as two areas not covered by any guidance issued to date: an audited partnership's access to the Office of Appeals and the impact of the provisions under the Tax Cuts and Jobs Act, commonly referred to as TCJA, on the regime.

The regime significantly changes the way adjustments made by the IRS during an exam are assessed and paid. By default, a partnership is liable for any imputed underpayment. The underpayment is potentially reduced through requested modifications, such as the filing of amended returns by partners. Alternatively, a partnership may elect to push out an adjustment to its partners, who must then prepare and file adjustment statements for the audited and effective tax years. First, let's talk about penalties and the process for raising a defense to a penalty. Under the regime, the IRS determines and assesses penalties at the partnership level. However, the actual calculation and ability to raise a defense occurs at the partner level.

We have suggestions on how to reconcile and streamline this process. Under the proposed regulations, a partner can only assert a penalty defense, such as reasonable cause or good faith, if the partner first pays the tax and penalty due and then files a claim for refund of the penalty. This process will result in the needless expenditure of additional resources by the tax payer and the IRS while further extending the length of time until final resolution of the case.

Instead, we recommend allowing partnerships to submit defenses on behalf of the partners, both direct and indirect, during the modification period. In the case of a partnership electing the push-out procedures, the IRS should allow the direct and indirect partners to submit a statement supporting a partner-level defense. They could submit it with their reporting year return. It is both fair and more efficient for the IRS to consider the validity of any partner-level defense early in the process. Otherwise, the agency would force some partners to unnecessarily pay the proposed penalties. Penalties can represent a sizable dollar amount, and the requirement that tax payers must provide advanced payment of penalties, even in cases where they have a valid penalty defense, has the potential of posing a significant economic burden.

Partners no longer have the ability to participate in the actual exam or challenge IRS determinations regarding items reported on the partnership return. They have lost all ability to challenge the actual assessment of additional tax determined by the IRS. To impose additional unreasonable restrictions on their ability to timely raise legitimate penalty defenses is contrary to the goal of a fair, equitable, and transparent tax system.

It is also important to note that requiring prepayment of penalties and then having to file a claim for refund is inconsistent with the procedures in place for other scenarios involving amended returns and audit adjustments.

Next, I would like to address our concern that there is no reference in the preamble, the proposed regulations, or any other guidance related to the regime to an audited partnership's right to challenge with appeals. The appeals process is a vital option for tax payers to resolve an issue without having to go to tax court. The regime creates a significant number of new elections which apply to partnerships under examination. Further, the regime establishes new procedures and stringent statutory deadlines.

Together, these changes will create issues for taxpayers wishing to challenge IRS decisions under the regime. In our comment letter submitted this morning, we have identified eight specific actions or determinations by the IRS that taxpayers should at a minimum be able to challenge. For example, taxpayers need the ability to appeal a decision on the validity of an opt-out election, the denial of a requested modification or the proposed audit adjustment, among other issues. In general, they should have the right to appeal any decision by the IRS which directly affects the proposed audit adjustments, the calculation of the imputed underpayment, or the ability of the partnership to make any valid election under the regime.

It is also important that the appeals process is both fair and equitable. For example, a partnership should have the right to appeal the determinations under section 6221 and 6241 within 60 days of receiving a determination. Next, it is important that the IRS establish a single unified appeals process for a partnership to challenge both the underlying adjustments and any denial of requested modifications. We recommend that if a partnership has not submitted a request for modification, then it should have 270 days after issuance of NOPA to challenge with appeals.

If a partnership has filed a request for modification, then its right to challenge IRS decisions should extend until the later of 270 days after the NOPA or 45 days after the IRS has responded. The IRS should not have the ability to issue a final partnership adjustment until at least 30 days after a final decision is made by appeals, an important step that we need to preserve. Under the regime, the IRS has the authority to invalidate partnership elections, refuse requested modifications to the adjustments, and overrule partnership decisions without explanation. The stringent statutory deadlines established for certain actions will not provide sufficient time for a partnership to properly review and challenge the decisions made by the IRS.

Such absolute authority, mainly invested in one IRS employee — the examiner assigned to the audit — is contrary to good tax policy. It violates the IRS's own taxpayer bill of rights. In the interest of fairness, the IRS should explicitly identify those decisions which a taxpayer may challenge with appeals, the timeframes for taking such actions, and the effect of such challenges on the various new deadlines.

Finally, taxpayers and their tax preparers need guidance on the impact of the new partnership-related provisions of the TCJA to the regime. The TCJA contains several new provisions which impact partnerships and the distributive shares of income and expenses to their partners. In particular, section 163J concerning interest expense limitations, section 199A for the qualified business income deduction, and section 954A on GILTI, all contain substantial new partnership recording and calculation elements.

These new recording and calculation procedures for partnerships will prevent significant challenges for taxpayers. A key issue is that in some cases, partnership items are now treated under both the entity and the aggregate concepts at the same time. As an example, questions have been raised as to whether the 199A QBI deduction might be allowed as a modification item. The treatment of partner-level expense for disallowed interest under 163J is another example.

The challenge of integrating these new TCJA provisions into adjustments under the regime exist regardless of whether a partnership elects to pay an imputed underpayment, both with and without new modification requests, or issues push-out statements. We need guidance as soon as possible, including examples of how the regime's adjustments to partnership items and tax attributes specific to these new provisions are treated under section 6225 and 6226 by partnerships and their partners.

The AICPA appreciates the opportunity to testify today. We hope Treasury and the IRS will consider these thoughts and our comment letters as you move forward in developing the final regulations, forms, and procedures necessary to implement the Centralized Partnership Audit Regime. Thank you.

MS. BLACK: Thank you. Now, if there's any of the panelists that have questions?

MR. O'DELL: I have a question. If you mind, just to clarify something on the penalty defense comment you made. If the partnership is not electing the push-out regime, could you describe what your recommendation is or your comment is on raising penalty defenses? Is that of the partner? I guess I didn't quite understand that.

MR. GREENWALD: The partnership should be able to raise any partner-level defenses during that process so that the partners or the partnership itself isn't in the position of having to pay the penalty first before raising a defense. Because if there's no push-out, it would be the partnership paying the penalties and then raising the defense at that point.

MR. O'DELL: Is that also in the context of without modification?

MR. GREENWALD: Well, there might be other things that give rise to a penalty, even without a modification. Yeah.

MS. BLACK: I also had a question about the penalty defenses, but mine is in the context of push-out. So, in the context of push-out, you recommended that the partner be able to submit a statement supporting a partner-level defense to its reporting year return. Is that in the context of then raising that defense prior to paying the penalty or just in addition to paying the penalty?

MR. GREENWALD: Prior to paying the penalty.

MS. BLACK: So, if they are able to do that, is your suggestion for the IRS for the process to challenge those partner-level defenses at that point? Because then at that point, we'd have all these partners submitting statements saying that they have a reasonable cause defense. What would your suggestion be for the IRS's process to then review and challenge those defenses?

MR. GREENWALD: The likelihood is that in most cases, those partner-level defenses are going to be the same or similar, in many cases. I think they would be reviewed in a group and there would have to be some time period for evaluating it and then responding.

MS. BLACK: Why would you say that the partner-level defenses are similar, given that they have to be unique to that particular partner?

MR. GREENWALD: They might have to be unique to that particular partner. I'm trying to think of a particular example at the moment where you might have a situation where all the partners — for example, the penalty relates to a late filing. They might all have the same reasonable cause for a late filing. But it would be particular to each partner. It wouldn't be a partnership-level defense.

MS. BLACK: But what about penalties that are determined at the partnership level, like, for example, an accuracy-related penalty?

MR. GREENWALD: Why would an accuracy-related penalty be determined at the partnership level?

MS. BLACK: Because under the ability of penalties —

MR. GREENWALD: But that's not a partner-level defense. That would be a partnership-level defense.

MS. BLACK: Right. But a partner may have his or her own reasonable cause defense related to the accuracy penalty. For example, they may have gone out and got their own tax opinion on that issue. So, in that context, are you talking about then being able to raise that prior to?

MR. GREENWALD: They should be able to raise that prior to paying the penalty because if it's a valid defense, the penalty would not be owed in those circumstances. So, we're going to have to come up with a mechanism where the IRS has a certain amount of time to review those penalty defenses and then respond to it. Otherwise, you're going to have the same thing except the taxpayers are going to have laid out the money first and then you're going to be reviewing those same defenses. It's just a question of the timing if you pay the penalty first and then have the defense reviewed or do you have the defense reviewed and then if it's not valid, then you wind up paying the penalty and presumably additional interest.

MS. BLACK: This process exists under TEFRA today. Is there any concern about that, the way it works under TEFRA?

MR. GREENWALD: Is there any concern about the way it currently works?

MS. BLACK: Right. Has this become a problem for taxpayers under TEFRA?

MR. GREENWALD: Yeah. It's consistently been a problem for taxpayers under TEFRA. But everything has been a problem for taxpayers and the IRS under TEFRA, which is why we're here.

MS. LESNIAK: Are you proposing that the penalty defenses would have to be brought up during the exam or that they could be brought up but they could also be brought up later in a post-payment form?

MR. GREENWALD: I would think that you'd always have to write in a post-payment form to pay the penalty and then go to tax court and apply for a penalty abatement and a refund on those circumstances. But I would think that the problem right now is that there's no opportunity to raise the defense before the penalty is paid.

MS. LESNIAK: So you're proposing there would be two opportunities to raise defenses?

MR. GREENWALD: Yeah. I don't think we'd want taxpayers to give up rights that they currently have. We just want to avail them the opportunity and the IRS at the same time to deal with the situation up front and then not have to go through the more costly process if we can possibly avoid it.

MS. LESNIAK: Thank you.

MR. GREENWALD: I think it's beneficial to both parties.

MS. BLACK: Does anybody have any other questions? Thank you so much.

MR. GREENWALD: Thank you.

MS. BLACK: Has anybody here spoken with the employees at the back of the room who would like to present oral comments who have not previously said so? Seeing that there is nobody, I will conclude our hearing today. I would like to thank everyone for attending, especially our speaker who took the time to make his presentation today. Thank you all.

(Whereupon, at 10: 17 a.m., the HEARING was adjourned.)