TEFRA was passed in 1982 to allow examinations and statutes to be controlled at the partnership level. This eliminated the need to control each individual partner statute. It also unified the litigation process whereby the partnership files the petition rather than each individual partner. The PCS was created to establish an electronic linkage between the partnerships and their underlying partners. This helps ensure that all partners, no matter how complex the partnership structure, are sent notices and adjusted in a timely manner. PCS linkage allows the campus to work those partners so the examiner can focus on partnership examinations. PCS also allows the campus to systemically generate notices, control statutes, and gather closing information.

For partnerships subject to the TEFRA unified partnership audit and litigation procedures, Internal Revenue Code (IRC) 6227 establishes the ability for a Tax Matters Partner (TMP) to file an AAR to change its treatment of a partnership item reported on the partnership return to the treatment requested on the AAR. Additionally, any non-pass-through partner may file an AAR on their own behalf. It is the primary (though not exclusive) TEFRA provision on refunds or credits of overpayments attributable to partnership items. Generally, any adjustments to partnership items that will result in refunds must be raised in a Final Partnership Administrative Adjustment (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). Claims under IRC 6230(c) are generally limited to computational and nonpartnership items. This leaves IRC 6227 as the exclusive method for seeking refunds based on substantive changes to partnership items in the absence of a TEFRA administrative and judicial proceeding.

Further, IRC 6227 provides that when certain criteria are met, special streamlined procedures can be used to assess deficiencies resulting from TMP filed AARs. Generally, if the TMP files a valid election for Substituted Return Treatment under IRC 6227(c)(1) and no partner objects, the Service can assess the partners without conducting a proceeding or securing an agreement. Otherwise, deficiencies resulting from TMP filed AARs must be assessed through a TEFRA proceeding.

IRC 6227(c) applies to amended TEFRA key case partnership returns filed by the TMP. Commonly termed “TMP filed AARs”, these must be filed on either:

The Form 8082 has been incorporated into Form 1065X. Currently, Form 1065X is only used in a paper format and is not yet available in the electronic system. Partnerships required to file electronically must continue to attach a Form 8082 or equivalent statement to the amended Form 1065 in the e-file system.

IRC 6227(d) applies to amended returns filed by taxable level partners (For example, Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporate Income Tax Return, for adjustments to TEFRA partnership items. These are commonly called "partner AARs" and must contain a Form 8082 or equivalent statement.

Middle tier (any pass-through entity as defined by IRC 6231(a)(9)) amended returns requesting adjustments for pass-through partnership items from a source partnership cannot bind their partners and are not considered AARs. Processing a middle tier amended return as an AAR may result in erroneous refunds or assessments. Middle tier amended returns reflecting only pass-through adjustments should not be processed or suspended and should be returned to files. The pass-through adjustments may be processed on those middle tier returns when a final determination is made on the AAR from which the adjustments originate.

The Form 13728, Partnership Administrative Adjustment Request (AAR) Check Sheet, can be used to assist the examiner in identifying the areas important to working AAR returns.

TEFRA policy was established in response to the partnership provisions of the Tax Equity and Fiscal Responsibility Act (TEFRA) of 1982.

The Director, SB/SE, Examination, Headquarters, Field and Campus Policy (SE:S:E:HQ:EFCP) is responsible for:

The SB/SE Program Manager, Examination Field and Campus Policy, Campus Exam and Field Support (SE:S:E:HQ:EFCP:CEFS) is responsible for:

Field Territory Managers, Field Area Directors, Director over LB&I Ogden and Director, Examination - Brookhaven, are responsible for ensuring that TEFRA policies and procedures are followed.

Field Examination Managers and Campus Field Support Operations managers are responsible for:

The Campus TEFRA/Pass-Through Coordinator works with:

The campus PCS Coordinator is charged with:

Following are specific Campus TEFRA/Pass-Through Coordinator responsibilities:

Program Reports: Each year a closure goal is established for the campus.

Program Effectiveness: The closure goal is monitored monthly to ensure the objectives are met. Since the campus does not control the number of partner returns closed each year, the closures are evaluated throughout the year and the goal is adjusted as needed.

The number of one-year assessment statute dates (OYD) are monitored to determine if the closure goal is attainable, or if it needs to be increased.

There are several terms unique to TEFRA. Examples of these words:

The following IRM cross-references may be helpful:

AAR code sections and procedures are only applicable to key case partnerships subject to the unified partnership audit and litigation procedures as set forth in IRC 6221 through IRC 6234, and their taxable partners requesting adjustments from these partnerships.

In general, if a partnership 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.

A small partnership is not subject to TEFRA procedures unless all partners elect under IRC 6231(a)(1)(B)(ii). A partnership eligible to be excluded from TEFRA under the small partnership exception may elect to be covered by filing an election on Form 8893, Election of Partnership Level Tax Treatment, or by making a similar statement with the partnership return for the first taxable year for which the election is to be effective (See Treas. Reg. 301.6231(a)(1)-1(b)(2)). The election is effective for the partnership tax year to which the return relates and all subsequent partnership tax years unless revoked with the consent of the Commissioner.

The TEFRA determination must be separately made for each tax year. For further information, refer to the guidelines specified in IRM 4.31.2.1.1, Determine if a Partnership is TEFRA or NonTEFRA, for making a determination as to whether the return qualifies as a TEFRA entity. See IRM Exhibit 4.31.2-1, TEFRA Partnership Criteria Flow Chart, and the interactive TEFRA/nonTEFRA Determination Job Aidhttp://tefra.web.irs.gov/m3/3b_flow_chart1.asp

If it is determined that the key case partnership is nonTEFRA, the claim or amended return is not an AAR. Normal claim or amended return procedures should be followed, refer to IRM 4.31.5, NonTEFRA Examinations - Field Office Procedures.

TEFRA AARs have specific filing, assessment, petition and refund statutes. Further, AARs can have separate assessment and refund/petition statutes that are determined independently.

Either a partner or the TMP of a partnership can file an AAR. Different procedures must be followed depending on who filed the AAR.

The AAR and the original return should be reviewed for audit potential.

If no audit potential exists, the AAR can be accepted as filed or disallowed. If the AAR is accepted as filed, no action can be taken if the partners have already filed amended returns on their own. If the partners did not file amended returns, a determination needs to be made on whether to link and adjust the partner's returns.

If there is audit potential and the statute allows, then a proceeding must be started on the AAR or the original return.

An AAR may be verified without starting a proceeding. We can ask for substantiation without conducting a TEFRA proceeding where we will not be opening a proceeding to make additional assessments.

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.

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.

If the disclosed Schedule K-1 discrepancy results in either an increase or decrease to tax to the investor, and if 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.

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 is secured from the investor.

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 the IRC 6229 period 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 Technical Services Pass-Through Coordinator to determine if the information provided is adequate to consider it an AAR for TEFRA purposes.

Protective AARs are often labeled as "protective claims" on the front of the amended return. Unlike normal claims, AARs have closed ended statutes for processing. The Service must make all assessments within IRC 6229 or IRC 6501 statutes and is limited to a two year period in which to make a refund resulting from an AAR (See IRC 6230(d)(2)). The TMP or partner must file a petition in court within two years of filing the AAR (See IRC 6228(a) and (b)) for any portion of an AAR the Service does not allow. A suit is normally filed if the TMP or partner does not agree with the Service’s determination regarding the AAR. If the TMP or partner fails to file a timely suit or protect the suit’s statute, the AAR is barred (See IRC 6228(a)(2)(D)). Similar to a refund suit for a normal nonTEFRA claim, the IRC 6228(a) petition is limited to the adjustments requested in the AAR not allowed by the Service or any adjustments made by the Service which offset the reduction in partnership items contained in the AAR (See IRC 6228(a)(5)).

Even though partners usually file protective AARs to hold open their own statute to reduce taxable income pending the results of litigation or contingency, it is possible other partners in the partnership may be subject to a deficiency. It is prudent to analyze the related TEFRA partnership AAR, if filed, and verify whether or not the request could result in a deficiency to any partner. If there is a potential deficiency, the assessment statute must be protected. If the partnership has not filed an AAR, a determination needs to be made on the validity of the Partner AAR.

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, IRC 6228(a)(5) would give the court jurisdiction "to determine only those partnership items . . . not allowed by the Secretary" and any offsets asserted by the Secretary. 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.

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 field group controlling the original return until a resolution is made.

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.

A protective 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. However, if the subsequent year original return was filed, the field should make the subsequent year adjustments during the examination. A protective AAR filed for prior or subsequent years will be suspensed by the field group controlling the original return until a resolution is made.

TMP filed AARs will be classified by GS-12, or above, RAs.

The classifier will screen the AAR for:

If the AAR is timely filed and is not allowable or questionable and has material issues (assessment or overassessment) select for examination.

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A TC 971 Action Code 013 should be input if there is not one already on the case.

A TC 290 needs to be input on all cases when action is complete.

Select per local procedures.

Input an H freeze on all AARs selected for field exam.

If the AAR is not timely filed, the No Consideration Letter may be issued.

Cases classified by the Campus Classification Function in Ogden or Cincinnati need to be processed in Brookhaven CPF (SB/SE) or Ogden PTE (LB&I). Those should be forwarded to the appropriate campus.

A partnership may file an AAR and ask to pay the tax on behalf of their partners.

The classifier or AAR coordinator must select these cases for the field.

This is necessary because Counsel must be involved in the creation of a Form 906 settlement agreement. A Form 906 must be used to allow a partnership to agree and pay the deficiency.

The field will need to work with their Technical Services Pass-through Coordinator on assessment procedures.

Is it a TMP filed AAR for the key case or an AAR for a middle tier?

Is there potential for an assessment. If yes, may want to secure an Form 872-P.

Open exam in current or subsequent year the AAR should be sent to the field.

If key case, was a Form 9248 filed. If yes, execute Form 9248, select if warranted or suspend. If no Form 9248 refile or select if warranted.

If middle tier, are all adjustments pass-through items. If yes, refile. If no, select or refile.

The CPF can take the following actions on a TMP filed AAR:

If a partner files an AAR, the CPF may:

Determine whether the amended return is a valid AAR. See IRM 4.31.4.7.1, Determine if AAR is Valid.

Research IDRS to determine whether the Key Case generating the initial AAR changes has filed an amended return, look for a TC 290 or 976. Order the return if necessary.

If the Key Case partnership is open on AIMS in Status 34 or greater, use a IRC 3210 and transmittal the partner AAR to the appropriate CPF. If the Key Case partnership is in a Status between 09 and 33 contact the controlling group and coordinate the appropriate action.

Normally partner filed AARs will be allowed unless there are large, unusual or questionable (LUQ) issues.

If LUQs are present, request the Key Case partnership original and amended returns and send to the field together.

If the partner filed AAR is allowable follow procedures for processing in IRM 4.31.4.5.2, Partner Filed AAR - CPF.

If the partner AAR is filed by a partnership, contact your Technical Services Pass-through Coordinator for guidance.

Field will submit a linkage package including Form 13811.

The CPF will issue 60 day objection letters, if needed.

The CPF will review the field's estimate of the partnership structure and explore tolerances.

Establish linkages as necessary.

Wait 60 days. If no objections - notify the field to close the AAR case to Technical Services.

Receive closing package from Technical Services. Process partner adjustments.

The CPF will follow partner amended return procedures (See IRM 4.31.4.5.2.3, Process the AAR as a Claim - CPF) or process the AAR.

Field will submit a linkage package through the normal TEFRA process. Form 14090 or Form 14091 using AAR source, project and promoter codes.

CPF will follow IRM 4.31.3 linkage procedures.

A determination needs to be made regarding the following items:

If the AAR is not timely filed, not properly filed (Treas. Reg. 301.6227(c)-1 or 301.6227(d)-1), statutes for processing have expired, or is invalid for any other reason, the Technical Services Pass-through Coordinator can issue the No Consideration letter once the case is closed.

Is it a TMP filed AAR for the key case or an AAR for a middle tier?

Is there potential for an assessment. If yes, may want to secure an 872-P.

Open exam in current or subsequent year the AAR should be sent to the field.

If key case, was a Form 9248 filed. If yes, execute Form 9248, select if warranted or suspend. If no Form 9248 refile or select if warranted.

If middle tier, are all adjustments pass-through items. If yes, refile. If no, select or refile.

If a partner from a taxable entity files protective AAR then verify statutes for processing.

A mandatory referral is required for Administrative Adjustment Requests.

Referrals are made using the SRS. The SRS link is https://srs.web.irs.gov/.

The AAR and the original return should be reviewed for audit potential and have a risk analysis completed.

If no audit potential exists, the AAR can be accepted as filed. Or, no action can be taken if the partners have already filed amended returns on their own. If the partners did not file amended returns, a determination needs to be made on whether to link and adjust the partner's returns.

If there is audit potential and the statute allows, then a proceeding must be started on the AAR or the original return. See IRM 4.31.2.

A refund AAR may be verified without starting a proceeding. We can ask for substantiation without conducting a TEFRA proceeding where we will not be opening a proceeding to make additional assessments.

If linkage is required, one of the two methods below will be used. Streamline linkage is used when a partnership proceeding is not required. A proceeding would not be required if we have sufficient time on the statute for processing, are accepting the AAR as filed and simply need to pass the information through to the partners. Normal linkage procedures will be followed if a proceeding is required.

For either linkage process, there must be 12 months remaining on the statute. At closing there will also need to be a year remaining on the IRC 6229 or IRC 6230(d)(2) statutes to allow sufficient time for processing. If there are less than 12 months on the IRC 6229, a proceeding is a good alternative to securing statute extensions. A proceeding will generate additional time for processing at the conclusion because either the IRC 6229 statute of limitations will be suspended or will generate an additional one year period for processing. By using streamlined procedures, statute extensions must be secured to provide sufficient time on either the IRC 6229 or IRC 6230(d)(2) for linking and processing.

The field should review the AAR return for audit potential:

To use streamline procedures for AARs that may result in an assessment, the field should determine whether the TMP has requested substituted return treatment. See IRM 4.31.4.2.3.2.1 and IRM 4.31.4.7.6.2.1. If the TMP has not requested substituted treatment and it is an assessment AAR then the agent should attempt to perfect the AAR. 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 AAR package should be requested from the TMP with the Form 8082 completed correctly.

If a partner files an AAR in the field, the assigned agent may:

Determine whether the amended return is a valid AAR. See IRM 4.31.4.3, Limits on Filing.

Research IDRS to determine whether the Key Case generating the initial AAR changes has filed an amended return, look for a TC 290 or 976. Order the return only if necessary.

If the Key Case partnership is open on AIMS contact the controlling group and coordinate the appropriate action.

If LUQs are present, request the Key Case partnership original and amended returns.

If the partner filed AAR is allowable follow procedures for processing Substituted or Non-Substituted Returns in IRM 4.31.4.7.6.2.1.2, Substitute Return Processing.

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

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

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

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

Determine whether the TMP filed AAR is an assessment or an overassessment AAR by analyzing the examiner's reconciliation of the Schedules K-1.

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

Proper processing will depend upon whether substituted or nonsubstituted procedures are followed.

For a partner AAR the Technical Services TEFRA/Pass-Through Coordinator must:

Determine whether the amended return is a valid AAR. See IRM 4.31.4.3, Limits on Filing an AAR.

Research IDRS to determine whether the Key Case generating the initial AAR changes has filed an amended return, look for a TC 290 or 976. Order the return only if necessary.

If the Key Case partnership is open on AIMS contact the controlling group and coordinate the appropriate action.

If LUQs are present, request the Key Case partnership original and amended returns.

If the partner filed AAR is allowable follow procedures for processing Substituted or Non-Substituted Returns in IRM 4.31.4.5.1.2.1, Substituted Return Treatment - CPF, or IRM 4.31.4.5.1.2.2, Non-substituted Return Treatment - CPF.

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).)

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. 1.860F-4(a).)

Until the Form 1065X is made available electronically, REMICs required to file electronically must continue to attach a Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), or equivalent to the amended Form 1065. REMICs filing a paper return should use Form 1065 with item F, checked "AAR" and item H, checked "REMIC" .

A paper 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.

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 6229 statute of the REMIC must be protected. Additionally, Form 8082 must indicate that the AAR requests substituted return treatment (IRC 6227(c)(1)) 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).

All REMIC returns should be sent to LB&I Tax Shelter Team, M/S 4914, Ogden UT, 84404 for processing.