Statements Furnished to Partners and Filed with the IRS
Statements Furnished to Partners and Filed with the IRS
The BBA regime requires a partnership to furnish statements to “each partner of the partnership for the reviewed year.”
There are several issues raised with respect to statements that are required to be furnished to taxpayers and filed with the IRS, including: (1) the partners to whom the statements are furnished; (2) the timing of when the statements are furnished; (3) reasonable diligence in identifying correct addresses; (4) the effect of failing to properly furnish statements; and (5) the content of the statements.
The Push-Out Election, Generally.
The push out regime is a collection mechanism in lieu of collecting the imputed underpayment from the audited partnership.
The benefit to the audited partnership by making a push out election is that the partnership is no longer liable for the imputed underpayment to which the election relates. One of the requirements to obtain this benefit is that the partnership must furnish correct statements to all of the partnership’s reviewed year partners. The additional reporting year tax for each partner may differ greatly, ranging from an increase in tax, a decrease in tax, or no liability at all.
Under section 6226(a) and §-1, there are only two requirements for a partnership to make an election under section 6226. One, the partnership must make an election under section 6226(a)(1) and §301.6226-1 within 45 days of the date the FPA is mailed by the IRS. Two, the partnership must furnish statements to each partner from the reviewed year in the time and manner prescribed by §301.6226-2.
Partners to Whom the Statements are Furnished.
Section 6226(a)(2) requires a partnership to furnish statements to “each partner of the partnership for the reviewed year.” The statute does not impose any qualifications or limitations on which partners from the reviewed year must be furnished push out statements. The statute mandates that the partnership furnish a statement “to each partner of the partnership for the reviewed year.” Section 6226(a)(2).
Likewise, Treasury Regulation §301.6226-2(a) provides that a partnership that makes an election under §301.6226-1 must furnish to each reviewed year partner a statement reflecting the partner’s share of partnership adjustments associated with the imputed underpayment for which the election under §301.6226-1 was made. A “reviewed year partner” is any person who held an interest in the partnership at any time during the reviewed year.
Section 6226’s collection mechanism is similar to tax reporting with respect to Schedules K-1, in that the partnership furnishes statements to the partners, and the partners are solely responsible for determining and self-reporting any tax due.
The rule requires the partnership to furnish a statement to each reviewed year partner, regardless of whether that partner might owe tax as a result of the pushed out adjustments.
Persons who were reviewed year partners, but who are not partners during the adjustment year or some or all of the intervening years, retain their status as reviewed year partners regardless of when they disposed of their interest. The partnership is, therefore, required to furnish statements to the reviewed year partners in accordance with §301.6226-2.
Timing of When the Statements are Furnished.
Under §301.6226-2(b)(1), a partnership that makes an election under §301.6226-1 must furnish statements to its reviewed year partners (and file those statements with the IRS) no later than 60 days after the date all of the partnership adjustments to which the statement relates are finally determined.
Partnership adjustments become finally determined upon the later of the expiration of the time to file a petition under section 6234 or, if a petition under section 6234 is filed, the date when the court’s decision becomes final. §301.6226-2(b)(1)(i), (ii).
Once the time to file a petition has expired, or if a petition is filed, the court’s decision has become final, the partnership has exhausted its ability to challenge the partnership adjustments through administrative and judicial avenues.
Under section 6226(a) and (b), each reviewed year partner that is furnished a statement takes into account the partnership adjustments reflected on that statement by adjusting the partner’s chapter 1 tax for the taxable year which includes the date the statement was furnished by the partnership (the reporting year).
Therefore, the date the statement is furnished by the audited partnership determines which taxable year a partner (either direct or indirect) will pay tax as a result of taking into account the partnership adjustments (the additional reporting year tax).
For example, if a reviewed year partner is furnished a push out statement on March 15, 2022 with respect to reviewed year 2020, the partner must report and pay its additional reporting year tax on the partner’s return for the 2022 taxable year, which, for individuals, would be considered timely filed on April 17, 2023 (April 15, 2023 is a Saturday). In contrast, when a partner receives a Schedule K-1, the partner is required to report the items on that Schedule K-1 on the tax return for the taxable year that has just ended. For example, if a partner receives a Schedule K-1 on March 15, 2022 for the 2021 taxable year, the partner must report the items on that Schedule K-1 on the partner’s return for the 2021 taxable year, which, for individuals, would be due on April 15, 2022.
The Regulations require the push out statements to be furnished expeditiously for all adjustments that are finally determined more than 60 days from the end of the calendar year—this is due to the fact that the additional reporting year tax is required to be paid with the return for the year in which the statement is furnished.
Tiered Structures.
Section 6226(b)(4) provides that a partnership or S corporation that receives a statement under section 6226(a)(2) must file a partnership adjustment tracking report with the IRS and furnish statements under rules similar to the rules of section 6226(a)(2). If the partnership or S corporation fails to furnish such statements, the partnership or S corporation must compute and pay an imputed underpayment under rules similar to the rules of section 6225.
In the case of a tiered structure, under §301.6226-3(e)(3)(ii), pass-through partners are required to furnish statements to their affected partners no later than the extended due date for the return for the adjustment year of the audited partnership.
§301.6226-3(e)(1) provides that each pass-through partner that is furnished a statement described in §301.6226-2 with respect to adjustments of an audited partnership must file and furnish statements to its affected partners. Affected partners are persons that held an interest in the pass-through partner at any time during the taxable year of the pass-through partner to which the adjustments in the statement relate. Consistent with section 6226(b)(4)(B), §301.6226-3(e)(3)(ii) provides that a pass-through partner must furnish such statements no later than the extended due date for the return for the adjustment year of the audited partnership.
Section 6226(b)(4)(B) expressly provides that statements under section 6226(b)(4)(A) “shall be furnished by not later than the due date for the return for the adjustment year of the audited partnership.” The statute does not provide for an extension beyond the extended due date of the adjustment year return. Under §301.6226-3(e)(3)(ii), the adjustment year return due date is the extended due date under section 6081 regardless of whether the audited partnership is required to file a return for the adjustment year or timely files a request for an extension under section 6081 and the regulations thereunder. The regulations do not provide for discretionary extensions of the time period set forth in §301.6226-3(e)(3)(ii).
Under §301.6226-3(e)(3)(iii), each statement furnished by a pass-through partner must include correct information concerning certain enumerated items. These items include the name and TIN of the affected partner to whom the statement is being furnished as well as any other information required by forms, instructions, and other guidance prescribed by the IRS.
The regulations require that a push out statement furnished under §301.6226-3(e) include the partner’s TIN “or alternative form of identification as prescribed by forms, instructions, or other guidance.” See also §301.6226-2(e) (imposing the same requirement for push out statements furnished to reviewed year partners). In addition, the election under §301.6226-1 by the audited partnership must include the TIN “or alternative form of identification as prescribed by forms, instructions, or other guidance” for each reviewed year partner of the partnership. See §301.6226-1(c)(3)(ii).
§301.6226-3(e)(3)(iii)(M) provide that the information required to be included in statements furnished to affected partners regarding the applicability of penalties, additions to tax, or additional amounts are the determinations made at the audited partnership level pertaining to the applicability of penalties, additions to tax, or additional amounts. This is consistent with the concept that the applicability of penalties is determined at the audited partnership level and that penalties attach to adjustments as they are pushed out through the tiers. An affected partner that pays an imputed underpayment or additional reporting year tax independently determines the amount of any penalty applicable to adjustments that are taken into account by the affected partner. §301.6226-3(e)(4)(iv)(B) provides that when determining interest on an imputed underpayment paid by a pass-through partner, the imputed underpayment is treated as if it were a correction amount for the first affected year. This conforms §301.6226-3(e)(4)(iv)(B) with the language in §301.6226-3(c) regarding interest on correction amounts.
Reasonable Diligence in Identifying Correct Address of Reviewed Year Partner.
Under §301.6226-2(b)(2), a partnership must furnish statements to each reviewed year partner in accordance with the forms, instructions, and other guidance prescribed by the IRS. If the partnership mails the statement, the partnership must mail the statement to the current or last address of the reviewed year partner that is known to the partnership. If a statement is returned as undeliverable, the partnership must undertake reasonable diligence to identify a correct address for the reviewed year partner to which the statement relates. §301.6226-2(b)(2).
In addition, the final regulations under §301.6226-2(b)(2) clarify that if after undertaking reasonable diligence the partnership identifies a correct address for the reviewed year partner, the partnership must mail the statement to the reviewed year partner at that correct address.
Effect of Failing to Properly Furnish Statements.
Pursuant to section 6226(a)(1), an election under section 6226 is made “with respect to an imputed underpayment.” Section 6226(a)(2) requires a partnership to furnish statements to “each partner” of the partnership for the reviewed year. Accordingly, the IRS may invalidate an election under section 6226(
failure to meet the requirements of §301.6226-1, regarding how an election must be made, or §301.6226-2, regarding the manner in which statements must be furnished.
Because an election under section 6226(a) is “with respect to an imputed underpayment” and not with respect to each specific partnership adjustment that resulted in that imputed underpayment, an election under section 6226 is either valid or invalid with respect to the entire imputed underpayment for which the election was purportedly made.
Nothing in the regulations, however, requires the IRS to determine that a purported election under section 6226 is invalid in situations where the partnership fails to fully comply with §301.6226-1 or §301.6226-2. To the contrary, pursuant to §301.6226-1(c)(1), a push-out election is valid unless and until the IRS determines that the election is invalid. Accordingly, if a partnership makes an election under §301.6226- 1 and furnishes statements to 99 out of 100 reviewed-year partners, the partnership’s push-out election is valid unless and until the IRS determines the election is invalid.
Compliance with the regulations does not require actual delivery, which is illustrated by §301.6226-2(b)(3), Example 1.
Under §301.6226-2(b)(2) a partnership must send a push-out statement to the current or last address of the partner that is known to the partnership. Doing so is generally sufficient for purposes of satisfying the address requirements of §301.6226-2. Additionally, the general versus specific imputed underpayment rules also mitigate concerns about being unable to properly furnish a statement to a particular partner or group of partners.
The partnership may request that the IRS designate a specific imputed underpayment with respect to the adjustments allocable to a partner or group of partners if the partnership has concerns about furnishing a statement to that partner or group of partners. See §301.6225-2(d)(6). For example, if the partnership lacks current address information for a specific partner, the partnership may request a specific imputed underpayment for that partner’s share of the adjustments, pay the specific imputed underpayment, and make a push out election for the general imputed underpayment.
Nothing in the statute or the regulations provides that the partnership or any remaining partners are liable for any amounts that are allocable to reviewed-year partners who are no longer in existence or are deceased.
The plain language of §301.6226-1(c)(1) makes clear that if a valid election is made under §301.6226-1, the partnership is not liable for the imputed underpayment to which the election applies.
Only if the statements are returned as undeliverable is the partnership required to undertake reasonable diligence to ascertain a current address.
Corrections of Errors in Statements.
§301.6226-2(e) provides that the partnership must provide the correct information in the statements it furnishes to its partners and files with the IRS. §301.6226- 2(d)(2)(i) provides that if a partnership discovers an error in a statement within 60 days of the statement due date, the partnership must correct that error, and may do so without IRS consent. If a partnership discovers an error more than 60 days after the statement due date, the partnership may only correct the error after receiving IRS consent. §301.6226-2(d)(2)(ii). Additionally, when the IRS discovers an error in a statement, the IRS may require the partnership to correct that error or to provide additional information. §301.6226-2(d)(3).
The correction rules under §301.6226-2(d) were designed to require a partnership that identifies an error in a statement to correct that error expeditiously.
§301.6226-1(d) clarifies that the IRS may not invalidate an election based on errors that are timely corrected by the partnership in accordance with §301.6226-2(d). However, any errors in any statements furnished by the partnership are subject to penalty under section 6722 and the regulations thereunder. See §301.6226-2(a). In the case of errors discovered by the IRS, the IRS is under no obligation to require the partnership to provide additional information or to correct any errors discovered or brought to the IRS’s attention at any time. The IRS may, instead, invalidate the election.
Contents of the Statements.
Under §301.6226-2(e), each statement described in §301.6226-2 must include an enumerated list of items, including the partner’s name and taxpayer identification number (TIN) and any other information required by forms, instructions, and other guidance prescribed by the IRS.
Additionally, under §301.6226-2(f), only a partner’s allocable share of the partnership adjustments are included on the statement furnished to that reviewed year partner. Pursuant to §301.6226-3, only the adjustments reflected on the statement furnished to the reviewed year partner must be taken into account by that partner.
