The Bipartisan Budget Act of 2015 created the Centralized Partnership Audit Regime (CPAR). This created a new process for amending or making changes to certain federal partnership tax returns for effective years beginning after December 31, 2017.
As a result, most partnerships (including those owning LIHTC projects) are no longer allowed to amend a tax return after its extended due date. Instead, a partnership will do an Administrative Adjustment Request (AAR).
In the past, if 8609s were delayed, tax returns were amended and credit was claimed in the applicable tax year. Under CPAR, the investor will have to claim the credit on the tax return for the year in which the AAR is filed. For example, a partnership placed buildings in service during the 2018 tax year and intended to claim credits in 2018. However, the state did not issue 8609s until January 2020 and the extended due date for the 2018 return was September 15, 2019. Under prior law, an amended 2018 return would have been filed to offset 2018 taxes. Under CPAR, the credit is claimed on the 2020 return, delaying the tax benefit by two years.
The investor response in these cases may be to impose a penalty on the general partner (GP) and reduce equity. Issuing an 8609 even one day after the return due date will have this effect.
Because of this new rule, some investors are examining the risk of claiming credit before issuance of the project 8609s. There is most definitely risk associated with claiming credit before credit has been allocated (the 8609 is the Allocation Form). However, there may be circumstances where the claiming of credit before receipt of an 8609 may be possible.
There are several problems with claiming credit without an 8609, beginning with the preparation of the 8609-A. Line C of this form asks whether the taxpayer has the original 8609 in his or her records. If answered “no,” the IRS may follow up for clarification, with the assumption that the property is subject to credit disallowance.
IRS Chief Counsel Advisory 200137004 stated that once a Form 8609 is issued by an HFA, taxpayers may file amended returns to claim credit for taxable years prior to the year in which the Form 8609 was issued. However, the ability to do this has been impacted by the current tax rules. This same CCA includes two examples of when the credits may be disallowed due to the lack of an 8609.
Unless it is shown that claiming credit without the first-year certification is due to “reasonable cause” and not to willful neglect, no credit is allowable for any year before the issuance of the 8609. The Code does not provide examples of “reasonable cause,” but in United States v. Boyle, the court said that the taxpayer bears the heavy burden of proving both (1)that the failure did not result from ‘willful neglect,’ and (2) that the failure was ‘due to reasonable cause…Congress intended to make the absence of fault a prerequisite to avoidance of the late filing penalty. A taxpayer…must, therefore, prove that his failure to file on time was the result neither of carelessness, reckless indifference, nor intentional failure.”
Treasury Regulation §301.6651-1(c)(1) provides that, to demonstrate “reasonable cause,” a taxpayer filing a late return must show that he “exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time.” In the context of claiming credit without an 8609, the taxpayer would be expected to show that they exercised ordinary business care and prudence in determining its tax obligations but is unable to comply with those obligations.
Guidance from the IRS regarding claiming credits without an 8609 indicates that the following questions would be asked:
1. How long after the end of the first year of the credit period did the taxpayer receive the Forms 8609 from the HFA?
2. How many years has the taxpayer claimed credit without completing the 8609?
3. How did the taxpayer answer question C on the Form 8609-A filed with the tax returns?
4. Did the taxpayer encounter other difficulties while noncompliant with §42(1)(1) certification requirement, and how were the problems resolved?
5. What reason did the taxpayer give for the delay?
To show reasonable cause, the dates and explanations should clearly reflect efforts to timely resolve the problems and expeditiously obtain the Forms 8609 from the HFA.
6. Did the taxpayer know or make reasonable attempts to determine the Code certification requirements?
7. Is the GP a professional specializing in the development and management of §42 properties?
8. Did the taxpayer make a mistake that delayed issuance of the 8609s? Generally, errors do not provide a basis for reasonable cause, but additional facts and circumstances may support such a determination. Forgetfulness, oversight, or reliance upon another person does not support a determination of reasonable cause.
9. Death, serious illness, or unavoidable absence of the taxpayer may establish reasonable cause. Consider the relationship of the responsible party to the partnership; the dates, duration of the illness or absence; how the even prevented compliance; whether other business obligations were impaired; and whether the noncompliance was remedied within a reasonable period after a death or absence.
The taxpayer bears the burden of demonstrating that the failure did not result from willful neglect and that there was a reasonable cause for failing to complete the 8609 before the due date of the first tax return on which credit was claimed.
A taxpayer may argue that delays were caused by the state agency responsible for completing the 8609s. A taxpayer is not subject to credit disallowance or recapture because an HFA failed to timely provide executed Forms 8609 (see IRS Audit Technique Guide, page 4-7). The evaluation should be made based on the individual facts and circumstances of the case and the taxpayer’s actions. The issue is whether there is a “reasonable cause” for any delays caused by the taxpayer and whether the taxpayer’s failure resulted from willful neglect.
So, while a taxpayer may decide to claim the credit without a signed and filed 8609, they should be prepared to affirmatively defend the decision if challenged by the IRS. It would seem that if the taxpayer can show that the HFA unreasonably delayed issuance of the 8609 – through no fault of the taxpayer – the affirmative defense test would be met. However, this is by no means an absolute, and if it is determined that the taxpayer could not establish a reasonable cause for the failure to provide the first year certification (i.e., 8609) prior to claiming credit, the IRS will disallow prior credit and consider the imposition of penalties under IRC §6701. A better option is to work closely with the HFA to ensure timely provision of the 8609s.