Refund claims stemming from TEFRA partnerships.

• Author: Wiles, Daniel J.
• Position: Tax Equity and Fiscal Responsibility Act of 1982

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) enacted Secs. 6221-6232, providing procedures for all partnerships with more than 10 partners or with a flowthrough entity as a partner; see Sec. 6231(a)(1)(B). In general, these rules provide that although a partnership is a nontaxpaying entity, all adjustments to an originally filed partnership return--whether by examination or amendment--must be made at the partnership level; see Sec. 6221. These adjustments then flow mechanically to the ultimate partners.

Because adjustments are made at the nontaxpayer level, the normal refund processes and limitations periods either may not apply or apply in a unique way. The TEFRA partnership procedures' many nuances require special attention, to avoid unintended consequences. This item discusses four often-overlooked issues in refund claims stemming from adjustments to TEFRA partnership items.

Differing Treatment of Refund Claims

While a refund claim generally can be initiated only by a taxpayer, under the TEFRA rules it can be initiated by either the partnership or a partner; see Sec. 6230. Taxpayer-initiated adjustments to filed partnership returns use Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), with an essentially blank Form 1065, Return of Partnership Income, attached. The AAR may be filed by the partnership (i.e., by the tax matters partner (TMP)) for all partners, or by any partner claiming adjustments to its own return due to partnership items; see Secs. 6227(c) and (d) and 6231(a)(7).

Filed by partnership: If the partnership files the AAR, Sec. 6227(c) (3) requires attaching amended Schedules K-1 for all partners. Although it is common for the partnership also to send copies of the K-1s to the partners, this is not required; further, the Code does not mandate partners to amend their own returns if they receive amended K-1s. In general, IRS Service Centers process TMP-filed AARs. Depending on that review, the IRS might initiate an examination of the partnership, take no action or accept the AAR and process the effects as applied to the partners (i.e., as set forth in the amended K-1s). In such case, the partners will receive a "Notice of Beginning of Administrative Proceedings"; see Internal Revenue Manual (IRM) 4.31.4.2.3.2.

Filed by partner: A partner may also file an AAR for changes to partnership items affecting the partner's return. Because a refund claim filed by the partner...