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Amending U.S. partnership and S corporation returns.

Failure to follow the proper procedures in amending a U.S. partnership or S corporation return can result in the amendment being ineffective and eliminating the possibility of securing the desired adjustments. What follows is a discussion of procedures for filing amended returns for partnerships and S corporations subject to the unified audit procedures for partnerships under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) rules. (Although reference is made only to partnerships, except for the "small" partnership rules, all other rules apply equally to S corporations.) The procedures for amending partnership returns are complicated, not at all intuitive, and represent an area of substantial potential risk for taxpayers and return preparers. "Small" partnerships (non-TEFRA)

In general, all partnerships are subject to the TEFRA rules for partnership tax years beginning after Sept. 3, 1982. However, unless it elects to have the TEFRA rules apply, a "small" partnership is not subject to these rules if all the following requirements are met (Sec. 623 1(a)(1)(B)(ii)).

* The partnership has 10 or fewer partners, each of whom is a natural person or estate. For this purpose, a husband and wife and their estates are treated as one person.

* No partner is a nonresident alien.

* Each partner's share of each partnership item is the same as that partner's share of every other item.

Amending a non-TEFRA partnership return is accomplished simply by filing a new Form 1065, U.S. Partnership Return of Income, with the appropriate boxes checked on page one and the amended Schedules K-1 indicating they are amended forms. Each partner should then file a separate amended return (e.g., Form 1040X for individual partners) reflecting the changes to Schedule K-1 before the statute of limitations expires for the partner's affected tax year.

TEFRA partnerships

Amended return by TMP: In the case of a partnership not subject to the small partnership rules, if the partnership or any partner desires to change its position with respect to a partnership item, an amended partnership return may be filed by the tax matters partner (TMP) within three years after the later of the filing of the original partnership return or the last day for the filing of the return (without extensions) and before any notice of Final Partnership Administrative Adjustment (FPAA) is mailed to the TMP.

Form 8082, Notice of Inconsistent Treatment or Amended Return (Administrative Adjustment Request (AAR)), must be used to file an amended TEFRA partnership return. According to the instructions to Form 8082, the TMP should file an amended Form 1065 with no amounts on the form itself, and should enter the following words in the top margin of the amended Form 1065: "See Attached Form 8082 for AAR per Sec. 6227(b)(1)" Revised Schedules K-I should also be attached and the appropriate box should be checked indicating they are amended schedules. The amended return is filed with the IRS Service Center at which the original partnership return was filed. The TMP must sign the amended return.

In most cases, it is desirable to ensure that the Service accepts the amended return as a "substituted return" (see Sec. 6227(b)(1)). To accomplish this, the TMP must check the appropriate box on the Form 8082 (currently, line 2). Treatment as a substituted return results in the IRS treating the changes as corrections of mathematical or clerical errors, for which the Service can then automatically make appropriate adjustments to the affected partners' returns. However, if the substituted return results in additional tax to the partners, any partner who wishes to challenge the additional tax must file a request for abatement and may not file a petition in Tax Court (Sec. 62131b)(1) and (2)I.

Failure to request treatment as a substituted return can result in the IRS taking no action with respect to the amendment (Sec. 6227(b)(2)(A)(iii)). If the Service takes no action on all or any part of the requested adjustments, the effect is the same as if the IRS had not allowed that part of the APR, i.e., as if no amended return had ever been filed. Thus, the expected benefit might never be achieved. Amended return by non-TMP partner: A partner other than the TMP may also file an AAR with respect to his partnership by using generally the same procedures as the TMP. The Internal Revenue Manual indicates a non-TMP partner filing an amended partnership return should include on the Form 8089. only information showing how his tax liability should be adjusted as a result of the amendment. The return must be filed in duplicate, the original is filed with an amended income tax return for the partner (e.g., Form 1040X) and a copy is filed with the IRS Service Center at which the partnership return is filed. Thus, each partner must file his own AAR and cannot rely on benefiting from the Service's acceptance of an AAR filed by any other non-TMP partner. Requirement to monitor two-year petition period: If the IRS does not take action on any part of an AAR filed by the TMP or other partner, the TMP or other partner may file a petition in court for adjustment of the nonallowed partnership items (Sec. 6228(a)(1)). The petition may not be filed until six months after the filing of the AAR, thus giving the Service time to act. Moreover, the petition must be filed within two years after the date of filing the AAR unless extended by agreement on Form 9248 for the TMP and Form 9247 for a notice partner. However, this right of judicial review may be cut off or suspended if the IRS commences an administrative proceeding with respect to the partnership (Sec. 6228(a)(2)(B)).

As a result, in every case in which the AAR is expected to result in a net reduction in tax to the affected partners, the TMP or other partner filing the AAR should always monitor the two-year period to ensure that, if necessary to secure the desired changes in the amended return, either a petition is filed before the two-year period runs or, alternatively, an extension is executed. Note that this requirement is a significant departure from the non-TEFRA partnership audit arena, in which the taxpayer has two years from the date of IRS certified or registered mail notice of the disallowance of a claim within which to petition the Tax Court or file suit in a district court or the Claims Court (Sec. 6532(a)). Caveat

The IRS applies these complicated amended return procedures on a very literal basis. Failure to follow them can result in a loss of benefits from an amended return, resulting in substantial losses. From James M, Kendrigan, CPA, Houston, Tex.
COPYRIGHT 1992 American Institute of CPA's
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Author:Kendrigan, James M.
Publication:The Tax Adviser
Date:Nov 1, 1992
Previous Article:Dual resident taxpayers as S corporation shareholders.
Next Article:Treatment of accrued partnership property tax liabilities for basis under Sec. 752.

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