Why states should adopt the MTC model for federal partnership audits.

• Author: Sherr, Eileen Reichenberg

As states have begun to address changes in the federal partnership audit rules, this column has considered the federal and state procedures for partnership audits at the federal level (see Jensen, Sherr, and Stanton, "Developing a Uniform State Approach to the New Federal Partnership Audit Regime," 48 The Tax Adviser 888 (December 2017), available at tinyurl.com/y98nu22y) and the Multistate Tax Commission's (MTC's) Model Uniform Statute and Regulation for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments (MTC model statute) (see Stanton and Sherr, "A Uniform State Approach to the New Federal Partnership Audit Regime," 49 The Tax Adviser 836 (December 2018), available at tinyurl.com/u2qno9s). The MTC formally adopted the MTC model statute (available at tinyurl.com/wj8bw53) in January 2019. This column covers federal and state developments in 2019, AICPA tax advocacy efforts, the helpful provisions of the MTC model statute and why states should adopt it, and what is expected to happen in 2020 in the states with partnership audit legislation and guidance.

Background

Important changes in the federal income tax treatment of partnership audits began to apply for tax years beginning Jan. 1,2018, for many partnerships (enacted as part of the Bipartisan Budget Act of 2015, PL. 114-74). With extended 2018 partnership returns timely filed by Sept. 15,2019, the IRS is expected to begin to conduct audits using the new partnership audit regime in 2020. In anticipation of increased partnership audit activity by the IRS, states are starting to react and enact (or at least consider) legislation regarding the new federal partnership audit process.

Federal guidance issued and expected

The IRS has issued the following guidance on the new partnership audit regime (see the AICPA webpage "Partnership Audit and Adjustment Rules," available at tinyurl.com/yaer8wnl):

* July 25,2019: Extension for superseding Form 1065, U.S. Return of Partnership Income (Rev. Proc. 2019-32);

* Feb. 27,2019: Final regulations on revisions to Chapter 63 for Technical Corrections 2018 (T.D. 9844,255page preamble) (finalized reproposed regulations on general rules and procedures (REG-136118-15), reissued for proposed regulations on:

(1) Tax attributes (REG-118067-17);

(2) push-out election by tiered structures/administrative and judicial review rules (REG-120232-17 and REG-120233-17); (3) international provisions (REG-119337-17); and (4) election out of regime (REG-136118-15));

* Dec. 20,2018: Guidance on special enforcement (Notice 2019-06);

* Aug. 6,2018: Final regulations on partnership representatives (T.D. 9839, finalizes proposed regulations (REG-136118-15));

* Jan. 2,2018: Final regulations on election out of the new partnership audit regime (T.D. 9829, finalizes proposed regulations (REG-136118-15)); and

* Aug. 5,2016: Temporary and proposed regulations on procedures and early election (T.D. 9780 and REG-105005-16).

Treasury and the IRS are expected to issue more guidance by June 30,2020, in these areas:

* Final regulations on adjustments to tax bases and capital accounts (to finalize proposed regulations (REG-118067-17));

* Regulations on failure to pay imputed underpayment (under Sec. 6232(f)); and

* Regulations on definitions and special rules (under Sec. 6241).

AICPA tax advocacy at the federal level

The AICPA submitted comments to Treasury and the IRS on the following matters:

* Comments, available at tinyurl.com/yb6unhv5, and testimony, available at tinyurl.com/yaqssmbu, from Oct. 9,2018, on proposed regulations issued by the IRS on Aug. 17,2018 (REG-136118-15);

* Comments on May 16,2018, available at tinyurl.com/y71vak4e, on adjusting tax attributes (REG-118067-17);

* Comments on Aug. 14,2017, available at tinyurl.com/ycmmtpwt, and testimony on Sept. 18,2017, available at tinyurl.com/ybjgc2gv, on general rules; and

* Comments on Oct. 7,2016, available at tinyurl.com/ycw4qcqr, on general issues.

The AICPA submitted the following comments to Congress:

* Jan. 4,2018: Request to delay the effective date, available at tinyurl.com/ydar2pl9; and

* Nov. 17,2016: Proposed technical corrections, available at...