The April 15th Tax Filing Deadline has come and gone. But if you filed an extension or are looking to submit return amendments, you’re on the hot seat to comply with the next set of looming deadlines.
And this brings up an issue many small business owners face concerning the Bipartisan Budget Act of 2015 (BBA), which pared-down existing rules for auditing partnerships (legislation that first took effect in 2018).
These revised rules could potentially impact a significant number of small businesses, given that they apply to companies organized under partnership agreements like LLC + LPs.
While smaller partnerships (with less than 100 members not organized under a formal partnership) can opt out of the revised BBA rules, those organized as partnerships can still take advantage of BBA tenets, including the regulations governing filing amended returns.
And this includes filing amended returns to recover overpayments on partnership tax returns.
Background on This Evolving Issue
Under the Tax Cuts and Jobs Act (TCJA), initially passed in 2017, the depreciation period for income-producing property and business enterprises was reduced from 40 year span to 30 years.
These changes forced changes in tax filings for partnerships holding such investments, and in some cases, partnerships wound up overpaying on their tax returns.
Filing An Administrative Adjustment Request (AAR) Under BBA
Partnerships can file an Administrative Adjustment Request (AAR) to reclaim overpayment.
Filing this request, however, has prompted the IRS to reach a troubling interpretation of overpayment adjustment requests under the BBA.
An interpretation that’s come to be known as the…
Standard Overpayment Problem
The intention of filing an adjustment is to reduce the partnership’s reported year Chapter 1 tax liability to zero. A status change making the partnership eligible for a tax refund against an overpayment.
But the IRS contends that an overpayment does automatically generate a refund. And in turn, the IRS is not issuing a refund for overpayment noted on AARs filed under the BBA. These circumstances result in a “stranded overpayment” essentially being codified as standard practice.
The IRS is allowing (certain) BBA partnerships to file an amended return to recapture tax overpayment rather than filing an AAR, which is ultimately an ineffective approach.
The amended return filing option is a tremendous boon to partnerships struggling with the Standard Overpayment problem with AAR filings under the BBA.
What’s The Future of the Standard Overpayment Problem?
Unfortunately, it’s unclear how long the IRS will honor this amended filing option. And more importantly, the IRS shows no sign of revising its approach to processing AAR filings as a means of recapturing tax overpayments generated by the rules governing the BBA and TCJA.
Questions About BBA Amended Filing Rules
If you overplayed on your partnership tax return, filing an adjustment request is probably not in your best interest. To discuss the best strategy moving forward, get in touch for a FREE consultation