Penalty Penalties

Partner-Level Defenses.

§301.6226-3(d)(3) defines partner-level defenses as those defenses that are personal to the reviewed year partner and based on the facts and circumstances applicable to that partner (for example, a reasonable cause and good faith defense under section 6664(c) based on facts specific to a particular partner). Partners will have an opportunity to raise defenses specific to their facts and circumstances. The centralized partnership audit regime does not alter the existing law under the Code, regulations, or applicable case law relating to reasonable cause and good faith determinations. Any defense that is based on the conduct or actions of the partnership is a partnership-level defense that must be raised by the partnership during the partnership proceeding. See §301.6233(a)-1(c)(2)(v).

Treasury Regulation §301.6225-2(d)(2)(viii) allows a partner to raise a partner-level defense by first paying the penalty, addition to tax, or additional amount with an amended return that is filed under §301.6225- 2(d)(2) and then filing a claim for refund.

The IRS does not, however, allow an audited partnership to submit partner-level defenses for direct or indirect partners as part of the modification process.

Rather, whether a specific partner is entitled to a refund of penalties after taking adjustments into account is determined outside of the modification procedures.

The regulations, therefore, provide that a partner must first pay any penalty due with the amended return filed during modification and then afterward file a claim for refund of the penalty in order to raise a partner-level defense. However, the regulations under §301.6225-2(d)(2)(viii) give the IRS flexibility to develop (through future guidance) alternative procedures for raising partner-level defenses.

Under §301.6233(a)-1(c)(1), a partner-level defense may not be raised in a proceeding of the partnership, including a partnership that makes an election under section 6226, except as otherwise provided in guidance prescribed by the IRS.

Push Out Elections.

Under the centralized partnership audit regime, the applicability of penalties, additions to tax, and additional amounts that relate to partnership adjustments are determined at the partnership level. Section 6221(a). A push-out statement furnished to a partner under §301.6226-2 will include any penalties, additions to tax, or additional amounts determined at the partnership level that is applicable to the adjustments pushed out to that partner. The applicability of such penalties, additions to tax, and additional amounts as set forth in the push-out statement furnished to the partner are binding on the partner pursuant to section 6223. See §301.6226-1(e).

§301.6226-3(i) provides that the calculation of a partner’s penalty amount in the case of a push-out election is based on the characteristics of, and facts and circumstances applicable to, the reviewed year partner. In addition, a reviewed-year partner claiming that a penalty, addition to tax, or additional amount is not due because of a partner-level defense may raise that defense, but must first pay the penalty and file a claim for a refund for the reporting year. See §301.6226-3(d)(3).