On April 8, 2020, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2020-23, which allows eligible partnerships to file amended partnership returns for taxable years beginning in 2018 and 2019 in order to take advantage of the various tax incentives provided under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

Pursuant to the Bipartisan Budget Act of 2015 (the “BBA”), all businesses classified as partnerships, including limited liability companies, limited partnerships and other, became subject to centralized audit procedures generally effective beginning with taxable year 2018 (the “BBA Rules”). Under the BBA Rules, tax liability of the partnership is generally determined, assessed and collected at the partnership level and not at the partner level. Although a partnership may elect for the BBA Rules not to apply, this election is available only for certain partnerships with 100 or fewer eligible partners.

Pursuant to Section 6031of the Internal Revenue Code (the “Code”), every partnership must file a return for its taxable year on Form 1065, including Schedules K-1, and provide a copy of Schedule K-1 to each partner. Once filed, the return may not be amended after the due date of the return unless specifically provided by the IRS. As a general rule, in the case of any needed adjustment to items of prior year’s return, a partnership may choose to file a request for an administrative adjustment (“AAR”) for any partnership taxable year under Section 6227 of the Code. However, any adjustment will be determined and taken into account for the taxable year in which the AAR is filed and not year of the return.

The CARES Act, signed into law by President Trump on March 27, 2020, provided significant relief for businesses, including partnerships, some of which is retroactive to prior taxable years. However, most partnerships already filed their tax returns for taxable years 2018 and 2019 since the due date for a calendar year partnership is March 15 of the following year (without extensions). Thus, in order to take advantage of the CARES Act benefits, a partnership would have to file an AAR and a return for the current year since any adjustments under an AAR are taken into account in the current year. This could significantly delay the relief and any immediate benefit to the partners available with respect to prior years so that the intended relief may become available only in 2021.

Given the foregoing concerns, the IRS released helpful guidance under Revenue Procedure 2020-23, which allows partnerships subject to the BBA rules an option to file an amended partnership return in lieu of an AAR. An amended return may be filed for taxable years beginning in 2018 and 2019 and may take into account the tax changes under the CARES Act and any other changes outside of the CARES Act, which provides for an added benefit. An amended return must be filed by September 30, 2020, and would replace any prior return, including any AAR, filed by the partnership for the taxable year. The partnership filing an amended return must file Form 1065 and check the Amended Return box. The partnership must also provide corresponding amended Schedules K-1 to the partners. The partnership must write on the amended return “FILED PURSUANT TO REV PROC 2020-23” at the top of the amended return and attach a statement with each Schedule K-1 sent to the partners with the same notation. The return may be filed electronically or by mail. The Revenue Procedure also provides that a partnership currently under examination with respect to taxable years beginning in 2018 and 2019 may only file an amended return if the partnership sends a written notice to the examining agent stating that the partnership seeks to use the amended return option under the Revenue Procedure and provides the agent with a copy of the amended return upon filing.

If you have any questions about the information in this alert, please contact Robert Nelson (210-554-5266 or [email protected]), Asel Lindsey (210-554-5298 or [email protected]), or your Dykema relationship attorney.

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