New Reporting Requirement on Partnership Basis Could Trap Partnership and Partners

William Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business

There is a new and little-noticed requirement for the analysis of partner’s capital accounts that can bring stiff penalties on the partnership for failure to comply and can bring problems for individual partners if the partnership does comply. In the analysis of partner’s capital accounts, if the partnership reports to its partners on other than the tax basis (e.g., GAAP, Section 704(b) book or other), and that report shows a negative beginning or ending balance, then this must be disclosed on the Schedule K-1. Specifically, line 20 of the K-1 must include code AH and report the partner’s beginning and ending capital account on the tax basis. 

Failure to comply can result in a large fine for the partnership. The penalty is $195 per partner per month for up to a year (that is up to $2,340 per partner for whom the negative basis is not reported). This seems particularly harsh in that the new requirement is buried on page 30 of the new 2018 Form 1065 instructions that many partnerships may have missed in preparing the K-1s.  

Compliance may result in further IRS inquiry into the partner’s tax situation, because the IRS may suspect that the negative basis resulted from an artificial inflating of the basis of property or other contributions to the partnership or may reflect other abusive tax shelter schemes. 

The instructions describe the term “tax basis capital” account to distinguish when there is a GAAP or other report that requires the disclosure.

Practitioners should review this requirement with their partnership clients to allow them to file amended K-1s and reduce the partnership’s penalty exposure and to allow them to advise partners of possible increased IRS scrutiny.  

https://www.irs.gov/pub/irs-pdf/i1065.pdf

 

 

Opting Out of CPAR, But Naming a Partnership Representative

By David Donnelly, CPA-Houston

 

There is an apparent inconsistency between Form 1065 and IRC Section 6223 regarding electing out of the centralized partnership audit regime (CPAR) and designating a partnership representative (PR). 

 

The form is clear that if the partnership elects out of the CPAR, no PR can be designated. Most software will not allow this without an override and some software does not even allow an override.

 

Section 6223(a) clearly states that, “Each partnership shall designate (in the manner prescribed by the Secretary) a partner (or other person) with a substantial presence in the United States as the partnership representative who shall have the sole authority to act on behalf of the partnership under this subchapter.”

 

However, Section 6221(b)(1)(A) states that, “This subchapter shall not apply with respect to any partnership for any taxable year if…the partnership elects the application of this subsection for such taxable year.”

 

The election is an election out of all of Subtitle F, Subchapter C “Tax Treatment of Partnership Items,” which includes Section 6223; so, if 6223 does not apply, no PR can be, nor needs to be, designated.

 

If the partnership then elects out of the CPAR, the pre-TEFRA (Tax Equity and Fiscal Responsibility Act of 1982) or non-TEFRA audit rules apply. Pre-TEFRA, there was no designation of a “tax matters partner” (TMP) or PR. Presumably, in the case of a partnership audit, the IRS will contact the partnership itself and begin audit proceedings with respect to its partners. Alternately, the IRS could audit partners individually regarding the partnership items on the partners’ returns. In a conversation with Treasury personnel, it was stated that ”it depends on the facts and circumstances.” 

 

Evidently, naming a PR when electing out of the CPAR is like naming a TMP for a non-TEFRA partnership. The IRS has historically ignored the named TMP in a non-TEFRA partnership audit.

 

Since the election out of the CPAR is made annually and a partnership could become ineligible for the election, it is still a good practice for the partnership agreement to include procedures for designating a PR.

 

Some Individual Taxpayers May be Eligible for Underpayment Penalty Relief

The IRS has issued Notice 2019-11, which provides for a waiver of the estimated tax penalty for individual taxpayers who paid in at least 85 percent of their 2018 tax liability on or before Jan. 15, 2019. This waiver can be requested on Form 2210 by checking Box A in Part II and including the statement “85% waiver” with the return.

https://www.journalofaccountancy.com/news/2019/jan/tax-underpayment-relief-201920465.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=15Jan2019

https://www.irs.gov/pub/irs-drop/n-19-11.pdf

On Jan. 28, AICPA sent a letter to Treasury Secretary Mnuchin and Commissioner Rettig requesting additional relief for taxpayers from penalties for underpayment or late payments of 2018 taxes:

https://www.aicpa.org/content/dam/aicpa/advocacy/tax/downloadabledocuments/20190128-underpayment-late-penalty-relief-comment-letter.pdf

Shutdown Impact on Tax Court Cases

Tax professionals and taxpayers with pending U.S. Tax Court cases should be aware of the following:

• Mail or packages sent to the Tax Court during the shutdown may have been returned as undeliverable. If so, resend the filing with a copy of the proof of original mailing (i.e., a copy of the returned envelope) and retain the original as proof of mailing.
• Petitions to the Tax Court were not processed, so the IRS may prematurely assess liabilities and send automated notices demanding payment.
• As always, taxpayers have the option to make payments to slow the accrual of interest since interest has continued to accrue during the shutdown. 

https://www.irs.gov/newsroom/irs-update-on-shutdown-impact-on-tax-court-cases-important-information-for-taxpayers-tax-professionals-with-pending-cases

 

IRS Shutdown—Good News/Bad News

By William R. Stromsem, CPA, JD

Assistant Professor, George Washington University School of Business

 

The good news is the headlines that the tax season will start on time and that refunds will be issued. Originally, the IRS had planned to suspend issuing refunds during the government shutdown, but this was overturned to limit taxpayer frustration over the shutdown and to get refund dollars into the economy sooner.    

But the bad news is the uncertainty about other IRS services. Currently, only about 10,000 of the 80,000 IRS employees are working (without pay), and most of them were assigned to essential tasks like maintaining computers and investigating crimes. The IRS may bring back more employees to get the filing season started, but has not indicated what other functions might be staffed as “essential.”

Currently, there are no taxpayer information phone lines working and, in general, there is no one answering phones at the IRS (except for a recorded message that they are not available). Amended tax returns are not being processed. Audits have stopped, as have collections, other than those that are automated, and the loss of work days will either mean fewer audits or more superficial ones, with little time for much give and take with taxpayers or practitioners. Offers in compromise, processing of collections, 30- and 90-day letter deadlines and frozen bank accounts and liens—all not being addressed. General counsel has suspended operations, so no new rulings or regs. EINs are being issued online, but not for paper applications. Powers of Attorney forms apparently are not being processed. Transcript services are suspended.

It is tough to find out the status of services without anyone in the office or answering the phone—I called the Practitioner’s Priority Service hotline and was placed on hold, which was better than getting a recorded message; the hold was so long that I gave up, so it wasn’t much better.

The IRS contingency plan for a government shutdown assumed resumption of services by Dec. 31, and we are now weeks after that, with some adjustments from the plan being made, but no end in sight. The contingency plan gives some indication of problems and the IRS’ priorities as staffing is restored. 

Please join this blog to share your IRS shutdown experiences with other members and with our Relations with the IRS Committee currently scheduled to meet with the IRS and other tax professional organizations on Jan. 18.

https://home.treasury.gov/system/files/266/IRS-Lapse-in-Appropriations-Contingency-Plan_Nonfiling-Season_2018-12-03.pdf

Section 163(j) Real Property Safe Harbor

 

A safe harbor is provided in Rev. Proc. 2018-59 that allows taxpayers to treat infrastructure trades or businesses as an electing real property trade or business not subject to the business interest deduction limit of Section 163(j), but they must then use the alternative depreciation system for assets specified in the Tax Cuts and Jobs Act (TCJA).
https://www.irs.gov/pub/irs-drop/rp-18-59.pdf

 

 

Proposed Rules on New Business Interest Expense Guidance

 

The IRS issued proposed regulations for a provision of the Tax Cuts and Jobs Act (TCJA) that limits the business interest expense deduction for certain taxpayers. It incorporates new Form 8990, Limitation on Business Interest Expense Under Section 163(j), to calculate and report the deduction and amount of disallowed business interest expense to carry forward to the next tax year.

https://www.irs.gov/pub/irs-drop/REG-106089-18-NPRM.pdf

The Other Home Mortgage Interest Deduction Limit

 

With higher credit card interest rates and the end of deductible home equity loan interest, Fannie Mae just reported that in the last quarter 80 percent of mortgage refinancings were cash out transactions. Some taxpayers may be using the net proceeds to pay down credit cards, pay college bills, buy a car, or for other purposes unrelated to the acquisition or substantial improvement of a residence. Clients may believe that because it is just one payment and it is all secured by the residence, the interest is all deductible. However, the interest on cash taken out for non-home related expenses is not deductible. In effect, the refinancing is treated like two different loans, one for the original acquisition or for the substantial improvement of the residence and the other for debt that is not qualified for the deduction. 

The 2018 Schedule A will include a new box to check if not all proceeds from a home mortgage were used to buy, build or substantially improve a home. In order to be prepared to answer this question, it should be included in your organizer to the taxpayer. This may be bad news to clients who have already refinanced without knowing the consequences.    

 

 

IRPAC Recommends Practitioner Authentication Changes

 

In its October 2018 report, the IRS Information Reporting Advisory Committee (IRPAC) made these recommendations to the IRS:

• The IRS should immediately withdraw the requirement of the practitioner to verbally provide his/her personal tax identification number (TIN) and date of birth (DOB) when calling on behalf of a client. Given security concerns, effective January 2018, the IRS required tax practitioners to verbally provide personal TINs and DOBs instead of using centralized authorization file (CAF) numbers or employer identification numbers (EINs). While IRPAC understands that the change in procedure is due to valid security concerns, the requirement to verbally provide a practitioner's TIN or DOB exposes the practitioner to information security risk and identity fraud if overheard or recorded by third parties despite the best efforts of the practitioner to prevent any compromises.

• In the interim, the IRS should return to the prior procedure of requiring CAF numbers and EINs until they can implement a method that does not compromise the practitioner’s personal information.

• The following alternative requirements should be considered to address the IRS' security concerns with using CAF numbers and EINs:
  • Create a PIN associated with the CAF number to enhance security;
  • Request verbal statement of only the last four digits of the practitioner's TIN or first four digits of the practitioner's DOB;
  • Create the ability for the practitioner to enter the last four digits of the TIN or first four digits of the DOB by using the telephone keypad; or
  • Create an online account for use by the tax practitioner.

 https://www.irs.gov/pub/irs-pdf/p5315.pdf

 

Proposed Rules Expand HRA Options

 

In REG-136724-17, the Departments of the Treasury, Labor, and Health and Human Services issued proposed regulations on health reimbursement arrangements (HRAs). These regulations would relax the conditions to increase eligibility and accessibility to employer HRAs, especially small businesses.

 

The proposed rules would remove the prohibition on integrating an HRA with individual health insurance coverage, if certain conditions are met, and propose requirements that an HRA must meet to be integrated with individual health insurance coverage.

 

They also provide how employees whose employers have HRAs that may or may not be integrated with individual health insurance coverage may quality for the premium tax credit.

 

https://www.journalofaccountancy.com/news/2018/oct/health-reimbursement-arrangement-rules-201819968.html?utm_source=mnl:cpald&utm_medium=email&utm_campaign=26Oct2018

https://s3.amazonaws.com/public-inspection.federalregister.gov/2018-23183.pdf