4.31.4  Administrative Adjustment Request (AAR)

All Official Use Only content has been replaced with ≡.

4.31.4.1  (09-01-2006)
Introduction

  1. IRC 6227 establishes a procedure to allow a direct change to the tax liability of the partners by an Administrative Adjustment Request (AAR) at the partnership level. It also is the primary (though not exclusive) TEFRA provision on refunds or credits of overpayments attributable to partnership items. Prior to TEFRA, to correct a partnership item each partner was generally required to separately file an amended return. Under the unified partnership audit and litigation procedures, a Tax Matters Partner (TMP) may file an AAR for the entire partnership. Additionally, any partner may file an AAR on his or her own behalf. IRC 6228 provides the rules for judicial review where an AAR is not allowed in full.

    Note:

    This section applies to S-corporations for tax years beginning before January 1, 1997 or for shareholder issues involving S-corporations for tax years beginning before January 1, 1997. This section was written to reflect current law. However, S-corporation terminology may be substituted in place of partnership terminology to determine the procedures to use with S-corporations.

4.31.4.2  (09-01-2006)
Definitions

  1. The following subsections define various terms used in this IRM section. The Form 13811 Partnership Administrative Adjustment Request (AAR) Check Sheet can be used to assist the examiner in identifying the areas important to working AAR returns.

4.31.4.2.1  (02-22-2008)
TEFRA Status

  1. In order for an amended partnership or partner return to be subject to procedures for an Administrative Adjustment Request (AAR), the partnership return must be subject to the unified partnership audit and litigation procedures as set forth in IRC 6221 through IRC 6234. A small partnership not subject to the unified partnership audit procedures is not subject to AAR Procedures unless all partners elect under IRC 6231(a)(1)(B)(ii).

  2. For further information, a field agent should refer to the guidelines specified in IRM 4.31.2.1 for making a determination as to whether the return qualifies as a TEFRA entity.

  3. In general, effective for tax years ending after August 5, 1997, if a return has 10 or fewer partners, each of whom is an estate of a deceased partner, a C corporation, or a natural person who is not a non-resident alien, then the partnership will qualify as a small partnership and will not be subject to TEFRA procedures.

    Note:

    A partnership with a foreign corporation partner that otherwise qualifies as a small partnership under IRM 6231, will not be subject to the TEFRA procedures.

  4. If it is determined that the partnership does not qualify as a TEFRA partnership, then nonTEFRA claim procedures should be followed.

4.31.4.2.2  (09-01-2006)
AAR Statutes

  1. IRC 6227(a) states that an AAR must be filed within 3 years after the later of:

    1. The date on which the partnership return is filed, or

    2. The last day for filing the partnership return

  2. The period for filing an AAR is extended for the period for which a statute extension has been secured under IRC 6229(b) and for 6 months thereafter. (See TRA ’97) The AAR must be filed before the mailing of a notice of Final Partnership Administrative Adjustment (FPAA) for the applicable taxable period. Under IRC 6227(e), the filing period is extended to 7 years from the last day for filing the partnership return for the year for an AAR (or a portion of the AAR) relating to bad debts or worthless securities.

  3. If any part of the AAR is not allowed, IRC 6228 allows a Tax Matters Partner to file a petition for adjustment with the Tax Court, a district court where the key case was filed, or the Court of Federal Claims. The period for filing the petition starts 6 months from the date of filing the AAR and ends before the date that is 2 years after the date of such request.

  4. Generally a petition cannot be filed after a Notice of Beginning of Administrative Proceedings (NBAP) has been issued. If the NBAP is issued and the Service fails to issue an FPAA before the period for assessment expires, the petition period is extended until 6 months after the statute of limitations period specified in IRC 6229(a) ends (including extensions). ( IRC 6228(b)(2)(D)).

  5. The petition statute can be extended by agreement by securing a Form 9247 for a partner level AAR or a Form 9248 for a partnership AAR.

    Note:

    The extension of the petition date does not extend the assessment statute under IRC 6229. It does extend the refund statute.

  6. The statute date of an AAR should be recorded without the use of alpha codes. The actual statute date of the AAR should be entered. This is true even if the AAR is for an overassessment. What appears to be refund AAR at the partnership level, may have a different impact on the underlying investors. It is recommended that all AAR statutes are protected.

4.31.4.2.3  (09-01-2006)
Determination of Type of AAR

  1. Either a partner or a partnership can file an AAR. The field agent must follow different procedures depending on who filed the AAR.

4.31.4.2.3.1  (09-01-2006)
Partner AAR

  1. Any partner may file an AAR on his or her own behalf. In order to file an AAR, a partner must complete an amended return and Form 8082 or statements that provide the same information required by Form 8082.

  2. The partner must file the Form 8082 with the partner’s amended return and a copy of Form 8082 must also be filed with the campus that processed the partnership return.

  3. When a partner files an AAR, the service has four options for processing the request ( IRC 6227(d)):

    1. The request can be treated as a normal claim for nonpartnership items;

    2. The Service may assess an additional tax that would result from the requested adjustments;

    3. The Service can mail to the partner a notice that all partnership items of the partner for the taxable year to which it relates will be treated as nonpartnership items; or

    4. The Service may conduct a partnership proceeding.

  4. In general, if the field receives an amended TEFRA partner return, the field will follow option (d) and open the related TEFRA entity for examination and make determinations as to the validity of the request. TEFRA Procedures specified in IRM 4.31.2.2 should be followed.

    Note:

    The assumption is that if the field receives this request, classification has determined that the return should be audited. The field should receive the associated partnership return with the case file.

4.31.4.2.3.2  (09-01-2006)
Partnership TMP AAR

  1. The TMP must file an AAR for the partnership. The TMP may file either a substituted or non-substituted AAR.

4.31.4.2.3.2.1  (09-01-2006)
Substituted AAR

  1. If the TMP files a request for an administrative adjustment and asks that the treatment shown on the request be substituted for the treatment of the partnership items on the partnership return to which the request relates, the Service can treat the changes shown on the request as corrections or clerical errors appearing on the partnership return ( IRC 6227(c) ).

  2. The partners have 60 days after the day on which a notice of this correction was mailed to the partners by the Service to request that the correction not be made ( IRC 6230(b)(2)). Only a taxpayer subject to an assessment may object to the proposed correction.

  3. If an objection is received from any investor, a partnership proceeding must be initiated.

  4. The TMP is required to file the following information when submitting an AAR:

    1. Form 8082 (Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR)). The TMP should check item 2, "Yes" if substituted treatment is requested and complete part II detailing the AAR items being changed.

    2. An amended Form 1065 should be completed with no entries in the line items. In the top margin of the return, the TMP should annotate "See attached Form 8082 for AAR per IRC 6227(c)(1)" .

    3. Amended Schedules K-1 should be attached showing the corrected amounts for each partner.

4.31.4.2.3.2.2  (09-01-2006)
Non-Substituted AAR

  1. Amended partnership returns which either do not ask for substituted treatment on Form 8082 or do not include Form 8082 are considered non-substituted AAR’s.

  2. All partners affected by the AAR must have a decrease to income that results in a refund to each investor if an overassessment AAR is filed and substituted return procedures have not been followed. A partnership proceeding must be initiated unless the AAR is perfected.

    Note:

    For both substituted and non-substituted cases, perfection of the AAR should be considered. See IRM 4.31.4.6.1.3. for perfecting the AAR.

4.31.4.2.4  (09-01-2006)
AAR Overassessment vs. Assessment Case

  1. An AAR is considered to be an overassessment case if all partners are due a refund or credit.

  2. An AAR is considered an assessment case if one or more partners will owe additional tax due to the adjustments proposed on the AAR.

4.31.4.2.5  (02-22-2008)
Schedule K-1 True-up

  1. The Schedule K-1 true-up issue occurs during the examination of an unlinked TEFRA investor’s return. The investor filed their return using estimates for the partnership pass-through items because they had not received their Schedule K-1 prior to filing.

  2. During the examination, the investor will disclose that their return is not consistent with the Schedule K-1 filed by a related pass-through entity. The agent should verify whether the pass-through entity in question is a TEFRA entity.

  3. If the disclosed Schedule K-1 discrepancy results in either an increase or decrease to tax to the investor, and the pass-through entity is a nonTEFRA entity, the agent should make any necessary adjustments as part of the nonTEFRA examination of the investor. IRC 6501 controls the assessment statute.

  4. If the pass-through entity is a TEFRA entity and the disclosed Schedule K-1 discrepancy would result in additional tax to the investor, the tax must be assessed before the IRC 6229 statute has expired on the pass-through entity unless a Form 872-I (or an un icted Form 872 revised 10-2009 or after) is secured from the investor.

  5. If the pass-through entity is a TEFRA entity and the disclosed Schedule K-1 discrepancy would result in a refund, the Service may issue a refund within 3 years from the date the partnership filed its return without the partner filing a claim. Alternatively, the partner may file an AAR. See IRC 6230(d)(5). To be timely, the AAR must be filed, or the refund issued, before the expiration of 3 years from the date the partnership return was filed, or within any extension of the period for assessing partnership items. The AAR should be filed using the Form 8082 . If no Form 8082 is utilized, but the information required by that form is included on the claim filed, consult with the local TEFRA coordinator to determine if the information provided is adequate to consider it an AAR for TEFRA purposes.

4.31.4.2.6  (09-01-2006)
Protective AAR's

  1. A protective AAR may be filed for the same year under TEFRA audit, but a petition may never be filed on it. If an NBAP is issued, but an FPAA has not yet been issued, a protective AAR may be filed. It cannot be petitioned unless an FPAA is not issued within the IRC 6229 period (including any extension by agreement). The petition period in this circumstance is the 6 month period after the expiration of the time period described in IRC 6229 (including any extension by agreement). The protective AAR will be suspensed by the function controlling the original return until a resolution is made.

  2. IRC 6227(a) provides that you cannot file an AAR at all for a taxable year after an FPAA is filed. That is because the FPAA (once issued) is the sole vehicle for contesting partnership items regardless of whether they result in deficiencies or refunds.

  3. An AAR can always be filed for other years not under audit - i.e., when a deduction is disallowed in an earlier year but may be allowable in the subsequent year for which the AAR is filed.

  4. A protective AAR must be filed for specific adjustments. Under the doctrine of "variance" , the taxpayer would not be able to file a petition on grounds/adjustments different from their administrative claim. Once a petition is filed, section 6228(a)(5) would give the court jurisdiction"to determine only those partnership items . . . not allowed by the Secretary" and any offsets asserted by us. Partnership items include the amount of those items. Treas. Reg. 301.6231(a)(3)-1(a)(1). Otherwise, the granting of an AAR would not be specific enough to make computational adjustments.

  5. The protective AAR will be held by the function that controls the taxpayer’s original return. If the taxpayer’s return is not controlled, the AAR should be forwarded to the appropriate campus.

4.31.4.3  (09-01-2006)
Limits on Filing an AAR

  1. Generally, any adjustments to partnership items that will result in refunds must be raised in an FPAA or petition to an FPAA or be forever barred. In the absence of such a proceeding, IRC 6511(g) prohibits refund claims except as provided under IRC 6227 and IRC 6230(c) and (d). Claims under IRC section 6230(c) and (d) are generally limited to computational and nonpartnership items. This leaves IRC 6227 as the exclusive method for seeking refunds in the absence of a TEFRA administrative and judicial proceeding.

  2. A partner must file an AAR within 3 years after the partnership return was filed or the last day for filing such return, whichever is later per IRC 6227(a)(1). (If a TEFRA statute extension agreement is entered into, that agreement also extends the statute of limitations for filing refund claims attributable to partnership items or affected item. The statute is extended until six months after the expiration of the limitations period for assessments. See IRC 6227(b).)

  3. A partner may not file an AAR after a notice of FPAA is mailed to the TMP for the same taxable year to which the AAR relates. (See IRC 6227(a)(2).)

  4. The issuance of a notice of the beginning of an administrative proceeding (NBAP) under IRC 6223(a)(1) does not prohibit the filing of an AAR. However, as explained below, the NBAP limits the filing of a petition on the AAR under IRC 6228.

4.31.4.4  (02-04-2010)
Selection and Classification of AAR's

  1. An AAR may be processed at the Campus.

  2. If an AAR is screened by the Campus Classification Function, it may be sent to the area Centralized Workload Selection and Delivery (CWSD) for consideration. An AAR will be sent to the area CWSD only when the following criteria are met:

    1. The partnership return being amended is TEFRA;

    2. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    3. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. The partners have not filed amended returns, or the AAR date is subsequent to the filing date of the original partner returns.

    Note:

    If there are material issues, and less than 90 days remain on the AAR statute of limitations, the CTF must issue an FPAA.

4.31.4.5  (09-01-2006)
Area Centralized Workload Selection and Delivery (CWSD) Formerly Planning and Special Programs (PSP) Responsibilities

  1. The following subsections explain the processing procedures for the field.

4.31.4.5.1  (09-01-2006)
Receipt of AAR

  1. Upon receipt of the AAR from the campus, the CWSD will determine the AAR statute of limitations pursuant to IRC 6229.

  2. Verify that the AAR meets the selection criteria as outlined in IRM 4.31.4.4.

  3. The CWSD AAR coordinator must verify that the AAR is timely filed in accordance with IRC 6227 and IRC 6229.

  4. Determine the type of AAR. ( See IRM 4.31.4.2.3. ):

    1. TMP Partnership AAR or Partner AAR;

    2. Substituted (a Form 8082) or Non-Substituted AAR; or

    3. Assessment or Overassessment AAR.

    Note:

    The CWSD AAR coordinator may issue a perfection letter to secure a Form 8082 for an assessment AAR to streamline procedures.

  5. Prepare a reconciliation of the Schedules K-1 to the original return and the amended Schedules K-1 to the AAR (or review the reconciliation prepared by the CTF).

  6. The CWSD AAR coordinator can take the following actions on a TMP filed partnership AAR:

    1. Take no action on the AAR;

    2. Accept the AAR;

    3. Fully/partially disallow the AAR, or

    4. Apply risk assessment and materiality to evaluate the audit potential of the original return and the AAR. (See IRM 4.10.2.4.1 ).

  7. All TMP filed AARs must include revised schedules showing the effect of such request on the distributive shares of the partners and such other information as may be required under the Regulations. ( IRM 6227(c)(3).) (See Treas. Reg. Sections 301.6227(c)-1 and 301.6227(d)-1 for the form and manner of filing all AARs.)

4.31.4.5.1.1  (09-01-2006)
Take No Action on the TMP Partnership AAR

  1. CWSD may take no action on the TMP Partnership AAR. ( IRC 6227(c)(2)(A)(iii).)

    Note:

    The CWSD AAR coordinator will conduct research to establish if all partners reflect all revised pass-through items correctly on the partners’ returns.

  2. Normally, the partner will:

    1. File a nonTEFRA amended return to align all pass-through items with those of the AAR, or

    2. File the original partner income tax return with the amended Schedule K-1 included with the AAR.

    Note:

    It is prudent to compare the filing date of the original partnership return to the filing date of the TMP partnership AAR. If there is a minimal lapse of time between these two filings, the possibility is greater that the partner returns are correct.

4.31.4.5.1.2  (02-22-2008)
Accept the TMP Partnership AAR as Filed

  1. CWSD may accept the TMP partnership AAR as filed. If accepted, the CWSD AAR coordinator will:

    1. Prepare and forward PCS linkage package to the CTF. (See IRM 4.31.2.2.9.2)

      Caution:

      No NBAP will be issued.

    2. Prepare modified workpapers which include:

      (i) Form 13811 AAR Linkage Package Check Sheet;
      (ii) A modified Form 4318 Form (limited to the AAR issues);
      (iii) An RAR, Form 4605-A reflecting all changes from the original partnership return to the AAR;
      (iv) Form 886-Z with the revised distributive shares (amended Schedules K-1 may be used in lieu of Form 886-Z);
      (v) Form 3198 indicating TEFRA AAR Mandatory Review; and
      (vi) TSUMY print showing all partners are linked.

      Note:

      Send the completed AAR file to Case Processing for forwarding to the area Technical Support (TS).

4.31.4.5.1.3  (02-22-2008)
Fully/Partially Disallow the TMP Partnership AAR

  1. CWSD may fully/partially disallow the TMP partnership AAR. The CWSD AAR coordinator will:

    1. Initiate the PCS linkage; (See IRM 4.31.2.2.9.2 .)

    2. Prepare modified workpapers that include:

      (i) Form 13811 AAR Linkage Package Check Sheet;

      (ii) A modified Form 4318 (limited to the AAR issues);

      (iii) An RAR, Form 4605-A reflecting the disallowance of all changes from the original partnership return to the AAR;

      (iv) Form 886-Z with the corrected distributive shares;

      (v) Form 3198 indicating TEFRA AAR Mandatory Review; and

      (vi) TSUMYP print showing all investors are linked.

      Note:

      Send the completed AAR file to Case Processing for forwarding to the area Technical Support Staff.

4.31.4.5.1.4  (09-01-2006)
Apply Risk Assessment and Materiality to the TMP Partnership AAR

  1. After applying risk assessment and materiality, the CWSD AAR coordinator may assign the TMP Partnership AAR to Field Examination.

4.31.4.5.2  (02-22-2008)
Partner Filed AAR

  1. If a partner files an AAR, the CWSD AAR coordinator may:

    1. Process the AAR in the same manner as a claim for credit refund with respect to items which are not partnership items. (See IRC 6227(d)(1) .)

    2. Assess any additional tax that would result from the requested adjustment (See IRC 6227(d)(2).)

    3. Mail to the partner a notice that all partnership items of the partner for the year to which such request relates shall be treated as nonpartnership items. (See IRC6231(b)(1) and IRC 6227(d)(3)

      Note:

      The CWSD AAR coordinator will forward any request to have partnership items converted to nonpartnership items to local Counsel for consideration. The authority for granting this conversion is in Delegation Order 4-19.

    4. Conduct a partnership proceeding. See IRC 6227(d)(4). If a partnership proceeding is to be conducted, the CWSD AAR coordinator will secure the related partnership return and assign to field examination.

4.31.4.6  (09-01-2006)
Field AAR Procedures Overview

  1. If the field receives an AAR for examination, determinations need to be made regarding the following items:

    1. Whether the partnership is a TEFRA Partnership. (TEFRA S-Corporations for tax years beginning before January 1, 1997);

    2. Whether the AAR is timely and the time to petition is still open;

    3. Type of AAR that was filed;

    4. Whether the AAR is an overassessment or assessment case; and

    5. Whether there is audit potential on either the original return or the AAR.

  2. Once the field has determined all of the above items, the field must decide whether to:

    1. Take no action on the case;

    2. Allow, partially allow or disallow the AAR; or

    3. Conduct a partnership proceeding.

4.31.4.6.1  (09-01-2006)
Field Procedures

  1. The following subsections explain the field procedures for working AAR ’s.

4.31.4.6.1.1  (09-01-2006)
Take No Action

  1. The take no action option can be used in the following situations:

    1. When the field makes a determination that the AAR should be allowed and all partners have incorporated the AAR adjustments either on their original or amended tax return, or

    2. When the field makes a determination that the AAR should be allowed and the tax adjustment is minimal.

    Note:

    Audit potential of other issues should be considered prior to making a determination to take no action.

4.31.4.6.1.2  (09-01-2006)
Allow, Disallow or Partially Allow AAR

  1. In order to allow, disallow or partially allow an AAR, the following procedures must be followed. The procedures differ slightly depending on the type of AAR filed. (substituted vs. non-substituted.)

    Note:

    If the field determines that the partnership return has additional issues that warrant examination, a TEFRA partnership proceeding should be initiated.

4.31.4.6.1.2.1  (02-22-2008)
Substituted AAR Procedures

  1. If a TEFRA proceeding does not need to be initiated, streamlined procedures can be followed on substituted returns where no investors respond with objection to the amended treatment of partnership items requested by the TMP. A letter specifying that each partner will have 60 days to object to the AAR request must be sent to all notice partners subject to additional tax. This includes notice partners that are tiers. The tier is required to inform the indirect partners of the objection letter and proposed adjustments. In the alternative, the letter can be sent directly to the indirect partners. Linkage of the partners must be accomplished in order to ensure that the campus forwards the Letter 3904, AAR 60-Day Objection Letter, and makes all necessary adjustments. The procedures to be followed by the field are detailed next.

    Note:

    Prior to following these procedures, the field should determine the petition date under IRC 6228(a)(2)(A) and the statute expiration date under IRC 6229.

  2. Prepare a package to be forwarded to the local PCS coordinator to link affected investors. The package must include the following items:

    1. Copies of both original and amended returns (1st three pages);

    2. Copies of affected Schedules K-1 (separate originals from amended);

    3. Form 8341 - Complete box 1 through 12. Line 1 through 5 and line 12 are self-explanatory. Fill in the following box(es) as shown:

      • Box 5: 5000EX
      • Box 6: 35
      • Box 7: 06
      • Box 8: 015
      • Box 9: T
      • Box 10: 5800

      Note:

      A Form 886-Z will not be generated using a Form 8341. If an Form 886-Z is needed, the appropriate campus can generate one using TSNOTZ. The local field TEFRA coordinator can make this request of the campus.

    4. Letter 3904, AAR 60-Day Objection Letter: Complete the key case portion only. (The campus completes information for the investors.)

    5. Copy of Form 8082: item 2 checked "yes" .

    6. Form 13811, Administrative Adjustment Request (AAR) Field Examination Linkage Check Sheet.

    7. Form 3210: Annotate, the AAR petition date ( IRC 6228(a)(2)(A)) and the statute expiration date under IRC 6229(a).

  3. If no objections are received then the field should:

    1. Allow, disallow or partially allow the AAR. This determination should be based upon return information or contact with the taxpayer. Contact with the taxpayer should be limited to AAR adjustments and those adjustments that can be used to offset AAR overassessment adjustments.

    2. If other issues warrant examination that will result in an increase to tax to one or more partners, a partnership proceeding should be initiated.

      Note:

      Practically, an agent will not be disallowing an increase AAR. The agent will either allow the AAR, or will conduct a partnership proceeding for additional issues identified in the pre-planning stage.

    3. If any partner objects to the AAR, the field must conduct a TEFRA partnership proceeding and follow the procedures within IRM 4.31.2.

4.31.4.6.1.2.2  (09-01-2006)
Non-Substituted Return AAR'S

  1. Streamlined procedures can also be followed on non-substituted returns that request a refund. Every affected partner must have a tax decrease as a result of the AAR. This type of AAR is referred to as an overassessment AAR.

  2. The procedures for substituted AAR’ s should be followed with the exception that an objection letter will not be issued. The agent does not need to wait 60 days to determine whether the AAR should be allowed or disallowed.

  3. If even one partner has a tax increase, this option will not apply and the field should either:

    1. Initiate a TEFRA Partnership proceeding, or

    2. Contact the TMP and perfect the AAR for substituted treatment. See IRM 4.31.4.2.3.2.1 above. (The time frame for filing an AAR must be open)

  4. In practice, the field should only receive those AAR’s which classification has determined warrant field consideration. In most instances, the AAR will be requesting a decrease in tax for all investors.

4.31.4.6.1.3  (09-01-2006)
Perfecting an AAR

  1. In order to perfect a non-substituted assessment AAR, the field should issue a letter to the TMP requesting that the TMP elect substituted treatment. A new Form 8082 should be sent to the TMP for completion. If other information, such as a schedule showing the effect to each partner is missing, the field should secure this information as well.

  2. The time frame for filing an AAR must still be open ( IRC 6227(a)). The completion of a new Form 8082 will create a new petition date under IRC 6228(a)(2)(A).

4.31.4.6.2  (02-22-2008)
Closing an AAR From the Field

  1. All AAR’s closing from the field need to be routed through the Case Processing Area to the SB/SE area Technical Support. At the time of closure, at least one year should remain on the statute. The area Technical Support will issue all necessary letters and will coordinate final closing with the Campus.

  2. When closing out a case where AAR procedures have been followed the case file must include the following information:

    1. Copy of the Form 13811 AAR Closing Check Sheet.

    2. Form 886-A providing the facts, law and conclusions for each issue as well as a narrative stating the reason(s) for allowing, partially allowing or disallowing an AAR.

    3. Form 4605-A from the perspective of the original return. The adjustment will be that shown on the AAR if the AAR is allowed in full. If the AAR is partially allowed, the adjustment will be reduced by the amount disallowed. If the AAR is disallowed; the report will reflect no change to the partnership return. The remarks section of the RAR should reflect whether the AAR is allowed, partially allowed or disallowed.

    4. Form 886-Z or Form 886-X. This form should reflect the new distributable share of income or loss. Amended Schedules K-1 may be used in lieu of Form 886-Z for allowed AAR packages only.

    5. The case jacket should clearly identify the type of AAR, statute date, petition date and whether the AAR is allowed, partially allowed, or disallowed. The case is to be closed "Management Identified, Mandatory Review through Case Processing."

4.31.4.6.3  (09-01-2006)
Petitioned AAR's

  1. Pursuant to IRC 6228(a), if any part of an AAR filed by the TMP (pursuant to IRC 6227(b) ) is not allowed by the Service, the TMP may file a petition for an adjustment with respect to the partnership items not allowed with:

    1. The United States Tax Court;

    2. The District Court of the United States for the area in which the principal place of business of the partnership is located; or

    3. The United States Court of Federal Claims.

  2. The petition for adjustment of the AAR with respect to partnership (or subchapter S items if the tax year began prior to January 1, 1997) items for the partnership taxable year, may be filed only:

    1. After the expiration of 6 months (See IRC 6228(a)(2)(A)(i) ) from the date of filing of the AAR (under IRC 6227), and

    2. Before the date which is 2 years (See IRC 6228(a)(2)(A)(ii) ) after the date of filing of the AAR.

  3. No petition may be filed under IRC 6228(a) after the day the Service mails to the partnership a Notice of Beginning of Administrative Proceeding (NBAP) with respect to the partnership taxable year to which such request relates. Unless the Service fails to issue an FPAA as described below. ( IRC 6228(a)(2)(C) )

  4. Mailing of NBAP:

    If And Then
    The Service mails the Notice of Beginning of Administrative Proceeding (NBAP) before the expiration of the two-year period following the filing of the TMP’s AAR. Fails to mail an FPAA with respect to the partnership taxable year to which the AAR relates, before the expiration of the statutory period of limitations (including any extensions by agreement) for the partnership taxable year. The TMP will have at least 6 months after the expiration of the statute within which to file a petition for review of the items in the AAR that were not allowed. See IRC 6228(a)(2)(C) .

  5. Mailing of FPAA:

    If Then
    The FPAA is timely mailed to the TMP with respect to the partnership taxable year covered by the AAR. The bar becomes permanent and the TMP may not thereafter petition for review of the AAR. The disallowed issues may then be raised in an action for review of the FPAA.
    The TMP files an action for review of the disallowed AAR before the Service begins a partnership proceeding, but an FPAA is timely issued before the hearing on the AAR petition. The action is transformed to a suit for review of the FPAA. See IRC 6228(a)(3)(B).

  6. Technical Support will serve as liaison between the area and campus examination functions and Area Counsel. The required time frames for processing the AAR pursuant to IRC 6228(a)(2)(A) should be closely monitored by Technical Support.

  7. AAR filed by a partner, other than as a TMP:

    If Then
    A partner’s (other than the TMP) AAR produced a notice from the Service converting all partnership items of the partner for the taxable year to nonpartnership items The AAR is treated as a claim for refund of nonpartnership items). ( IRC 6228(b)(1)(A))
      The partner may then bring a traditional refund action under IRC 7422 to pursue the issues raised in the AAR which were not allowed. This action must be filed within two years from the mailing of the notice of conversion ( IRC 6228(b)(1)(b)), subject to the availability of an extension under IRC 6532.
    If the partnership items of a partner filing an AAR in an individual capacity have not previously converted They will convert by operation of law when, and if, the partner files a suit pursuant to IRC 6228(b)(2)

4.31.4.7  (09-01-2006)
Real Estate Mortgage Investment Conduit (REMIC) and AAR's

  1. The following procedures cover REMIC procedures.

4.31.4.7.1  (09-01-2006)
Application of TEFRA Rules

  1. A REMIC is a TEFRA entity and is treated as a partnership subject to the TEFRA statutes, Subchapter C of Chapter 63. (See IRC 860F(e).) Any holder of a residual interest in the REMIC is treated as a partner. (See IRC 860F(e).)

  2. The TEFRA rules do not apply to a REMIC entity if there is at no time during the taxable year more than one holder of a residual interest in the REMIC. (See Treas. Reg. section 1.860F-4(a).)

4.31.4.7.2  (09-01-2006)
REMIC AAR's

  1. An AAR filed by a REMIC must be carefully analyzed. Form 8082 and a comparison of the REMIC original and amended Form 1066 may give the overall appearance of an AAR with no additional tax assessment consequences for the residual interest holders. For residual interest holders who file a calendar year income tax return, this may very well be the case. However, a comparison of the original and amended Schedules Q for residual interest holders filing a fiscal year income tax return may reveal that AAR adjustments, on a quarterly basis, result in tax overassessment consequences for one or more quarters, while the other quarters may contain additional tax assessment consequences for the residual interest holders.

  2. When applied to the residual interest holders’ two fiscal years affected by the REMIC calendar year, the above situation could produce an assessment for one year and an overassessment for the other year. In this instance, the IRC section 6229 statute of the REMIC must be protected. Additionally, Form 8082 must indicate that the AAR requests substituted return treatment ( IRC 6227(b)) or a REMIC proceeding must be initiated in order to allow the Service to eventually assess the residual interest holders ( IRC 6225) and issue NBAPs to all residual interest holders ( IRC 6223).

4.31.4.8  (09-01-2006)
Area Technical Service (TS) Responsibilities

  1. The key case area Technical Service (TS) receives the Administrative Adjustment Request as a management identified mandatory review item from Case Processing.

  2. Upon receipt of the case file, in conjunction with this section, IRM 4.8 procedures are applicable.

  3. The TS will ensure that the TEFRA determination is correct in accordance with IRC 6231 and Treas. Reg. section 301.6231(a)(1)-1. (See IRM 4.31.2.1)

  4. The following key cases are exempt from the TEFRA procedures and are nonTEFRA cases:

    1. All S Corporation returns for tax years beginning after December 31, 1996 (See the Small Business Job Protection Act of 1996).

    2. For tax years ending after August 5, 1997, all partnerships with ten or fewer partners that are natural individuals (other than non-resident aliens), an estate (of a deceased partner) or a C corporation. (See the Tax Relief Act of 1997).

    Note:

    A partnership with a foreign corporation partner, that otherwise qualifies as a small partnership under IRC 6231, will not be subject to the TEFRA procedures. A small partnership that does not qualify as a TEFRA entity may elect to be treated as a TEFRA partnership. (See IRC 6231(a)(1)(B) ). A partnership may make this election on Form 8893. For partnership tax years prior to August 6, 1997, see IRC 6231.

  5. Determine the key case statute of limitation according to IRC 6229. The assessment statute does not expire before 3 years after the later of:

    1. the date the partnership return was filed, or

    2. the last day for filing the partnership return, including extensions.

    Note:

    The IRC 6229 statute may be extended by having the TMP sign a Form 872-P or Form 872-O.

  6. The reviewer must verify that the AAR is timely filed pursuant to IRC 6227 and IRC 6229.

    1. A partner may file a partnership AAR within 3 years of:

      • the date the partnership return is filed, or
      • the last day for filing the partnership return, without regard to extensions.

    2. A timely filed overassessment AAR has a 2 year statute in accordance with IRC 6227 and IRC 6228 .

    3. The 2 year period in which to petition may be extended with Form 9248. This also extends the time for making the refund, but not for making an assessment.

    4. It is strongly recommended that the TEFRA IRC 6229 assessment statute be protected on all AAR’s. If an AAR appears to be for an overassessment, it may actually result in an assessment once the pass-through adjustment is computed at the partner level. Thus protecting IRC 6229 on an overassessment AAR may prevent a barred statute. An overassessment AAR may be updated to an alpha " AA" statute of limitation, but that is not recommended. The preferred practice is to protect the statute and use the actual statute date.

  7. Determine that the PCS linkage is fully established and correct. A TSUMYP must be included in the case file.

  8. Establish that the designation of the Tax Matters Partner, Person or Member is valid pursuant to IRC 6231.

    Note:

    If the TMP designation on the original return is different than that on the AAR, successor TMP procedures may be applicable. (See Treas. Reg. section 301.6231(a)(7)-1).)

  9. A review of the examiner’s workpapers is necessary to ascertain the issuance of an NBAP.

    Note:

    If an NBAP is issued, regular TEFRA procedures are applicable in accordance with IRC 6231. If an NBAP is not issued, AAR procedures are applicable pursuant to IRC 6227, IRC 6228 and IRC 6229.

4.31.4.8.1  (09-01-2006)
Review of AAR

  1. Establish whether this is a Partnership AAR filed by the TMP or a Partner AAR.

    Note:

    See IRM 4.31.4.2.3.1 for Partner AAR procedures .

  2. Determine whether the TMP Partnership AAR is a Substituted or a Non-Substituted AAR.

    Note:

    A substituted AAR includes Form 8082 with the "substituted" block checked. A non-substituted AAR is an amended return for partnership items.

  3. Determine whether the TMP Partnership AAR is an assessment or an overassessment AAR by analyzing the examiner or CWSD AAR coordinator’s reconciliation of the Schedules K-1.

4.31.4.8.2  (09-01-2006)
AAR Processing

  1. For a TMP partnership substituted AAR (assessment or overassessment), the reviewer must:

    1. Verify the issuance of a 60-day objection letter to all partners subject to an assessment;

    2. Determine if any partner objected to the Letter 3904, AAR 60-Day Objection Letter; and

    3. Verify case file is complete with Form 4605-A, Form 886-A and Form 886-Z (or amended Schedules K-1).

  2. If any partner objects, a key case TEFRA partnership examination is required. (See IRM 4.31.2 for field procedures.)

  3. If no partner objects, the reviewer will allow the AAR, and:

    1. Mail Letter 3906, AAR Acceptance Letter, to the TMP; and

    2. Review and mail closing package to the Campus TEFRA Function. ( See IRM 4.31.4.6.2.)

  4. An Allowance AAR Closing Package must include:

    1. A dated copy of the Letter 3906, AAR Acceptance Letter, to the TMP;

    2. A completed Form 4605-A annotated with the type of AAR and one-year assessment date;

    3. A Form 886-A, Explanation of Items;

    4. A Form 886-Z with the revised distributive shares for each adjusted item (amended Schedules K-1 may be used in lieu of Form 886-Z on an Allowance AAR only); and

    5. A Form 3210 annotated with " AAR Acceptance Package."

  5. For a Full/Partial Disallowance AAR

    1. Mail a Disallowance Letter to the TMP ( Letter 1831(DO) and Letter 1831(SC) are used for disallowances related to partnerships, and Letter1833(DO) and Letter 1833(SC) are used for a disallowance related to S corporations.); and

    2. Review and mail closing package to the CTF. (See IRM 4.31.2.2.9.2)

  6. A Full/Partial Disallowance AAR Closing Package must include:

    1. Dated copy of the AAR Disallowance Letter to the TMP.

    2. Completed Form 4605-A annotated with the type of AAR and one-year assessment date.

    3. Form 886-A, Explanation of Items.

    4. Form 886-Z with the revised distributive share for each adjusted item.

    5. Form 3210 annotated as a " Partial Disallowance Package" or "Full Disallowance Package. "

  7. If any part of an AAR filed by the TMP on behalf of the partnership under IRC 6227 is not allowed, the TMP may file a petition for an adjustment with respect to the partnership items to which such part of the request relates with the Tax Court, the Claims Court, or the appropriate district court. Such a petition must be filed in the 18-month period beginning 6 months after the AAR is filed and ending 2 years after such filing in accordance with IRC 6228(a)(2)(A) . The two year date to petition may be extended on Form 9248.

  8. A Full/Partial Disallowance AAR must be suspensed until after the expiration of the IRC 6228 two year date in which to petition. The "H" freeze remains on the account until the TS verifies that a petition has not been filed within two years. The two year date to petition may be extended on Form 9248 .

  9. For a TMP Partnership Non-Substituted AAR (Overassessment) the reviewer must allow the AAR and:

    1. Mail Letter 3906, AAR Acceptance Letter, to the TMP; and

    2. Review and mail a closing package to the CTF. (See IRM 4.31.2.2.9.2)

    The closing package must include the same items as a Substituted AAR Allowance Closing Package. See IRM 4.31.4.8.2. (1)).

  10. For a Full/Partial Disallowance AAR

    1. Mail a Disallowance Letter to the TMP ( Letter 1831(DO) for partnerships and Letter 1833(DO) for S corporations); and

    2. Review and mail a closing package to the CTF. (See IRM 4.31.2.2.9.2)

    Note:

    The closing package must include the same items as a Substituted AAR Full/Partial Disallowance Package. ( See IRM 4.31.4.8.2.(1)).

  11. AAR Procedures pursuant to IRC 6227, IRC 6228 and IRC 6229 are not applicable to a Non-Substituted AAR (Assessment). TEFRA Procedures in accordance with IRC 6221 are applicable. The reviewer should assure that the examiner applies all TEFRA procedures timely and properly. (See IRM 4.31.2).

  12. If a partner files an AAR not on behalf of the partnership, the reviewer should ensure that the examiner applies one of the following actions:

    1. Processes the AAR in the same manner as a claim for credit or refund with respect to items which are not partnership items. (See IRC 6227(d)(1)).

    2. Assesses any additional tax that would result from the requested adjustment. (See IRC 6227(d)(2)).

    3. Mails to the partner a notice that all partnership items of the partner for the year to which such request relates shall be treated as nonpartnership items. (See IRC 6231(b)(1) and IRC 6227(d)(3)).

      Note:

      The reviewer will forward any request to have partnership items converted to nonpartnership items to local Counsel for consideration. The authority for granting this conversion is not delegated below the Commissioner.

    4. Conduct a partnership proceeding. (See IRC 6227(d)(4) .)

4.31.4.9  (09-01-2006)
Campus TEFRA Function (CTF) Processing of Administrative Adjustment Requests (AAR)

  1. AARs that are filed are for the pass-through entity or for an investor in the pass-through entity.

  2. Different procedures exist for processing each kind of AAR.

4.31.4.9.1  (09-01-2006)
Definition of a Partner Filed AAR

  1. The filing of an amended return to report amended Schedule K-1 amounts is not necessarily an AAR even if that amended return is filed with a Form 8082.

  2. A Form 8082, with box 1(b) checked as an AAR, is only valid as an AAR if the partnership is subject to TEFRA.

  3. The partner must file an AAR to report changes to TEFRA partnership items on their return.

4.31.4.9.1.1  (09-01-2006)
Processing of Partner Filed AAR's

  1. The following actions should be taken on AARs submitted by a partner in an individual capacity.

  2. The partner campus should:

    1. Determine whether the amended return is a valid AAR.

    2. The classifier will screen the TMP filed AAR for timeliness, completeness, purpose, and in some cases, materiality:

      • Timeliness—to ensure the AAR was filed within the statutory time frames AND that there is sufficient time remaining on the statute to properly process the AAR;
      • Completeness—to ensure the necessary information is included to enable the Service to act on the AAR;
      • Purpose—to determine if the AAR is a "Substituted Return," if there is an entity type change, if there is a request for a tax change, etc. The classifier determines whether the AAR is a TMP filed AAR for the pass-through entity or an AAR for just one partner considering:

      If Then
      The AAR includes the separate schedules showing the effect on other partners Assume the AAR is a TMP filed AAR for the pass-through entity.
      ( See IRM 4.31.4.9.2.)
      On a TMP filed AAR, the schedules showing the impact on all partners are NOT attached. Assume the AAR is for the TMP only in the individual capacity of a partner.


      • Materiality and Reallocations—to ensure proposed changes warrant the Service’s cost of controlling and recomputing the investors’ returns

    3. Screen the return to determine if the AAR is allowable.

    4. Determine if the partnership return on which the AAR is filed is already open on AIMS. If the return is open, the AAR must be sent immediately to the partnership campus using Form 3210.

    5. If not already on AIMS, the partner campus should request the partnership return.

    6. Determine if the partnership has filed an amended partnership return. This can be verified by looking for a TC 290 or TC 976 on the partnership account.

    7. Research is important to determining whether or not the partner AAR can be allowed at the campus level. Many times original partner returns are filed before the actual partnership return. The partners subsequently file an AAR to report the correct Schedule K-1 amounts. These AAR’s should normally be allowed unless some unusual issues are identified.

    8. Generally, any partner reporting changes from an amended partnership Schedule K-1 should be allowed the change unless unusual issues are present.

    9. If an amended partner return is not allowable at the campus level, then prepare a reconciliation of the Schedule K-1 of the original return and the amended Schedule K-1 of the AAR.

    10. Requisition the partnership return and forward it with the partner AAR and Form 8150 to the CWSD manager in the controlling area.

    11. The CWSD manager or their designee should screen the AAR and partnership return.

  3. When the partnership campus receives an AAR from the partner campus, they should complete items in paragraph 2(e) through 2(k) above.

4.31.4.9.2  (09-01-2006)
Processing of TMP Filed AARs

  1. TMP filed AAR’s received in the campus Examination function will be classified by GS-12 Revenue Agents.

  2. The classifier will screen the TMP filed AAR for timeliness, completeness, purpose, and in some cases, materiality:

    1. Timeliness—to ensure the AAR was filed within the statutory time frames AND that there is sufficient time remaining on the statute to properly process the AAR.

    2. Completeness—to ensure the necessary information is included to enable the Service to act on the AAR.

    3. Purpose—to determine if the AAR is a "Substituted Return," if there is an entity type change, if there is a request for a tax change, etc. The classifier determines whether the AAR is a TMP filed AAR for the pass-through entity or an AAR for just one partner considering:

      If Then
      The AAR includes the separate schedules showing the effect on other partners. Assume the AAR is a TMP filed AAR for the pass-through entity.
      On a TMP filed AAR, the schedules showing the impact on all partners are NOT attached. Assume the AAR is for the TMP only in the individual capacity of a partner. ( See IRM 4.31.4.9.1.)

    4. Materiality and Reallocations—to ensure proposed changes warrant the Service’s cost of controlling and recomputing the investors’ returns.

    5. The term "whipsaw" used in the table below means to use alternative positions in each affected investor ’s return allowing and disallowing the treatment requested in the AAR to the investor receiving the benefit, and disallowing and allowing the treatment requested in the AAR to the investor giving up the benefit. This will adequately address the issue(s) for the Government at the least cost, and save all partners who are not part of the transaction from any expense related to an examination of the entity.

      If Then
      Materiality only applies to additional tax Overpayments must be worked without regard to materiality
      There are reallocations between partners It may be beneficial to convert the items that are material to the two or more partners to nonpartnership items for the affected partners and "whipsaw" the issue, if appropriate
      There are reallocations among many partners It may be appropriate to accept the reallocations by doing nothing with the AAR, since the overall tax consequences among the partners may be negligible, and not significant to any one partner
      Materiality determinations may only be considered where the total number of investors, including investors in all tiers, is apparent from the AAR Local guidelines (within area) will not be used for screening where the geographic impact of the business structure is not limited to local ownership (within area); the business structure may be regional, national, or international
       

    6. If the partnership return on which the AAR is filed is already open on AIMS, the AAR must be sent immediately to the examining office using controlled correspondence, Form 3210.

      Exception:

      If the partnership return is under Appeals jurisdiction, the AAR should be sent to the appeals office controlling the partnership return for review by the appeals officer. The appeals officer will send the AAR to Examination for comment, and Examination will return it to Appeals. Normally, jurisdiction will remain with Appeals.

4.31.4.9.3  (09-01-2006)
AAR Closing Packages

  1. There are four types of AAR packages that the CTF will receive from the CWSD AAR Coordinator:

    1. Substituted Increase;

    2. Substituted Decrease;

    3. Non-substituted Increase; and

    4. Non-substituted Decrease.

  2. All packages must be forwarded with a Form 3210 which is annotated with the following:

    1. Type of AAR Package enclosed;

    2. Statute date; and

    3. If applicable, the TEFRA one-year assessment date.

    Note:

    If a closing package/mail-out (i.e. Letter 3904, AAR 60-Day Objection Letter) is being transmitted with the original linkage package, the Form 3210 should clearly identify the fact that two action items are to be completed with the package.

  3. All linkage packages will contain the following:

    1. A copy of the original partnership return including all Schedules K-1;

    2. A copy of the amended partnership return including all Schedules K-1;

    3. A completed Form 8340 when an NBAP (Notice of Beginning of Administrative Proceedings) must be issued (reallocation, increase non-substituted AAR, and selected or protested substituted AARs);

    4. A completed Form 8341 when no NBAP is required to be issued;

      Note:

      Either a Form 8340 or a Form 8341 is needed, but not both.

    5. A completed Form 8082;

    6. AMDISA print to show the partnership is on AIMS; and

    7. A copy of the TMP NBAP when applicable.

4.31.4.9.4  (02-22-2008)
Substituted Administrative Adjustment Requests

  1. Increase or Reallocation

    • The statute date is governed by IRC 6229, and is the later of three years from the date the partnership return was filed or the last day for filing the return for the taxable year without regard to extensions.

    Note:

    Increase/Reallocation substituted AARs must have a Letter 3904, AAR 60-Day Objection Letter, issued if the AAR is accepted as filed.

  2. Decrease

    • The statute date is governed by IRC 6228, which is two years from the date a timely filed claim was received

    • Refunds must be issued by the two year date

    • If the two year date is within one year of the statute, the field must secure Form 9248, Agreement to Extend the Time to file a Petition for Adjustment by the Tax Matters Partner (person) with Respect to Partnership or Subchapter S Items. This form also extends the period of time for issuing a refund. It does not extend the assessment statute, however.

4.31.4.9.5  (02-22-2008)
Non-Substituted Administrative Adjustment Requests

  1. Increase or Reallocation.

    • The statute is governed by IRC 6229, and is the later of three years from the date the partnership return was filed or the last day for filing the return for the taxable year without regard to extensions.

  2. Decrease.

    • The statute date is governed by IRC 6228, which is two years from the date a timely filed claim was received.

    • Refunds must be issued by the two year date.

    • If the two year date is within one year of the statute, the field must secure Form 9248, Agreement to Extend the Time to file a Petition for Adjustment by the Tax Matters Partner (Person) with Respect to Partnership or Subchapter S Items. This form also extends the period of time for issuing a refund. It does not extend the assessment statute, however.

4.31.4.9.6  (09-01-2006)
Letter 3904, AAR 60-Day Objection Letter Package Requirements

  1. A Form 3210 must accompany the package annotated with the following:

    1. The key case name, MFT and tax year;

    2. The type of package; and

    3. The TEFRA one-year assessment date.

  2. The package must contain the following:

    1. A copy of the Form 8082; and

    2. A copy of the Letter 3904, 60-Day Objection Letter, with a field contact name, phone number and time to contact.

  3. The CTF will notify the field that the package has been processed by returning a copy of the Letter 3904, 60-Day Objection Letter, transmitted by a Form 3210.

  4. The field will monitor for objections by the investors.

  5. If an objection is received, the field will send a Form 8340 linkage package to the CTF. (See IRM 4.31.2) The CTF will follow their normal procedures for a new case linkage request.


More Internal Revenue Manual