Why an AAR instead of an amended return
IRC 6031(b) bars a BBA partnership from amending the Schedules K-1 it furnished after the return due date, except as the statute or IRS guidance allows. The Form 1065-X instructions put it plainly: “To make adjustments to partnership-related items, partnerships under BBA must file an AAR instead of an amended return unless there is specific guidance allowing for the filing of an amended return.” IRC 6227(a) authorizes the AAR: a partnership may request an administrative adjustment of one or more partnership-related items for any year. The exceptions and the superseding return option are covered on amended return or AAR.
Unlike an amended return, an AAR generally does not change the reviewed-year partners' returns. The adjustments are taken into account in the year the AAR is filed, either by the partnership paying an IU or by the partners in their reporting year.
When an AAR can be filed
- After an original return. The IRS's AAR page says “An AAR may be filed only after an original return is filed for the tax year.”
- Within 3 years. Not more than 3 years after the later of the date the partnership return was filed or its original due date, without extensions (IRC 6227(c)).
- Before a NAP. “In no event may a partnership file such a request after a notice of an administrative proceeding with respect to the taxable year is mailed under section 6231.” The IRS's page notes an exception for foreign tax redeterminations under Treas. Reg. 1.905-4(b)(2)(ii). If the IRS withdraws a NAP, the bar no longer applies for that year (IRM 4.31.9.8.1.2).
- Not just to change the PR. “However, a partnership may not file an AAR solely for the purpose of changing the designation of a PR.” A Form 8979 can ride along with an AAR filed for another reason, and the new PR then signs the AAR.
Letter 2205-D, the exam selection letter, gives the partnership about 30 days before the NAP is issued to file an AAR, which is the last chance to correct the return on the partnership's own terms (IRM 4.31.9.7.8). After the NAP, LB&I taxpayers can still submit informal claims within 30 days of the opening conference under the LB&I examination process (IRM 4.31.9.8.3).
Who files and signs
“Only the PR (or DI, if applicable) may sign and file an AAR on behalf of the partnership.” A partner cannot file an AAR for the partnership unless it is acting as the PR (IRM 4.31.9.7.7.1; Form 8082 instructions). The PR for this purpose is the PR for the reviewed year, designated on the original return or with a valid AAR. If no designation is in effect, an authorized person can attach Form 8979 to the AAR; the designation is treated as occurring before the AAR and is effective when the AAR is filed.
How to file: electronic and paper
| Original return filed | AAR consists of | Signature |
|---|---|---|
| Electronically | Form 1065 with box G(5) Amended return checked, plus Form 8082 with Part I, line 1(b) checked and items B through C2 completed | PR or DI signs Form 8082 item D manually; a PDF of the signature page is attached to the e-filed return |
| On paper | Form 1065-X with the BBA AAR box checked in Part I and items B through C2 completed | PR or DI signs Form 1065-X item D |
Attach Forms 8985 and 8986 when pushing out or when there are adjustments that do not result in an IU, a Form 8980 if the partnership applies permitted modifications, and supporting schedules. The IRS's AAR page instructs: “The partnership should not provide amended Schedules K-1 or K-3 with an AAR.” File where the original return was filed and in the same manner; electronically filed AARs go through Modernized e-File, not the BBA online portal (Pub. 5346). The examiner does not accept an AAR in an open exam: “An examiner MUST NOT accept an AAR (or any other subsequent filing) directly from the PR or POA.” The PR files through official channels and may give the examiner a copy (IRM 4.31.9.7.7). Form details are on Form 8082.
The imputed underpayment on an AAR
The partnership computes the IU under the same grouping and netting rules the IRS uses (see how the IRS computes the imputed underpayment), and it must show the computation every time: “A BBA partnership must always include a computation of the IU, even when the IU is zero or less than zero and even when the only adjustments are adjustments that do not result in an IU.” Documentation supporting the computation should accompany the AAR. The partnership may treat a related positive adjustment as zero solely for the IU computation, as the IRS's worked example shows.
Permitted modifications can reduce an AAR IU if Form 8980 is attached: tax-exempt partners, rate modification, PTP passive losses, grouping limitations, qualified investment entities, treaty exemptions and other modifications. Partner amended returns, the alternative procedure and closing agreements are not available on an AAR (Pub. 5346).
Paying the IU or pushing out
| Result of the IU computation | What the partnership must do |
|---|---|
| Greater than zero, no push-out election | Pay the IU, plus interest and penalties, when the AAR is filed, and push out the adjustments that do not result in an IU on Forms 8986 |
| Greater than zero, push-out election under IRC 6227(b)(2) | Push out all adjustments; no IU is owed; modifications are disregarded |
| Zero or less, or no IU at all | Push out all adjustments to reviewed-year partners |
IRC 6232(a)(2) provides that an AAR IU “shall be paid and may be assessed when the request is filed.” Payment uses EFTPS, card or check with the designation BBA AAR Imputed Underpayment; Direct Pay is not available (IRS AAR page; IRM 5.19.27.2). Forms 8986 for a push-out must be furnished to partners on the date the AAR is filed and filed with the AAR along with Form 8985. If an AAR push-out election is later found invalid, the partnership remains liable for the IU, and any Form 8980 modifications it filed are considered in determining it.
An AAR is the one place where adjustments that do not result in an IU always go to the reviewed-year partners. IRM 4.31.9.9.2.10 says partnerships that file an AAR “must push out all adjustments that do not result in an IU”, and the IRS's page adds that the partnership may not place those adjustments on its adjustment-year return.
What partners do with an AAR
Individuals, C corporations and other non-pass-through partners report the Form 8986 amounts on Form 8978 with the return for the year that includes the date the partnership furnished the statement. Pass-through partners must, by the extended due date of the AAR partnership's adjustment-year return, either pay an IU computed on the Form 8986 amounts (without modifications) and file Form 8985, or push everything out to their own partners; adjustments that do not result in an IU must be pushed out either way. Pass-through partners of an AAR partnership send Forms 8985 and 8986 by fax to 888-981-6982 if the package is 100 pages or less, or mail them to Ogden if larger.
Unlike push-out statements from an audit, a partner who disagrees with a Form 8986 from an AAR can file Form 8082 as a notice of inconsistent treatment with the reporting-year return, which avoids math error assessment of the identified items (IRM 4.31.9.8.2.2). Interest on an AAR push-out does not use the extra 2 percentage points that apply to audit push-outs; IRC 6227(b)(2) applies section 6226 without that substitution.
How the IRS processes and examines AARs
The campus screens AARs for timeliness, completeness, purpose and in some cases materiality, and some are selected for exam (IRM 8.19.14.3.2.3). An AAR extends the adjustment period: “The filing of a valid AAR will extend the IRC 6235(a)(1) statute date to the date which is 3 years from the date the AAR was filed.” A subsequent filing that is not a valid AAR does not, which is why examiners must refer every subsequent filing to a BBA point of contact before changing the statute (IRM 4.31.9.7.2 and 4.31.9.7.7).
A timely AAR becomes the starting point for the exam report (IRM 8.19.14.3.2.2). The examiner may readjust items the AAR changed and redetermine the partnership's IU, grouping, netting and modifications. One limit protects the partnership's choice to pay: “If adjusting an IU previously reported on an AAR for the reviewed year, the adjustments to that IU are not permitted to be pushed out.” Examination of an AAR follows the full NAP, NOPPA and FPA process, and an AAR in Appeals is subject to the same judicial review as the original return.
For years beginning after November 2, 2015 and before 2018, a partnership could also elect into BBA by filing a BBA AAR with an “Election under Section 1101(g)(4)” statement (IRM 4.31.9.13.3).
Questions practitioners ask
Can a BBA partnership file an AAR after the IRS opens an exam?
Only before the notice of administrative proceeding is mailed. The partnership generally has about 30 days after Letter 2205-D. After the NAP, IRC 6227(c) bars an AAR for that year, except in specified cases such as foreign tax redeterminations.
Do we send amended K-1s with an AAR?
No. The IRS says the partnership should not provide amended Schedules K-1 or K-3. Partners receive Forms 8986 for any adjustments they must take into account.
If the AAR reduces income, do partners get refunds for the reviewed year?
Not directly. Adjustments that do not result in an IU are pushed out, and partners take their shares into account on Form 8978 for the reporting year, which is the year that includes the date the Form 8986 was furnished.
Can a partner file an AAR?
No, unless the partner is the PR or DI acting for the partnership. A partner who disagrees with the partnership's reporting files Form 8082 as a notice of inconsistent treatment with its own return.
Does filing an AAR extend the IRS's time to audit?
Yes. A valid AAR extends the IRC 6235(a)(1) date to 3 years after the AAR is filed.