Who is covered
The centralized partnership audit regime is subchapter C of chapter 63 of the Code, sections 6221 through 6241. It replaced the TEFRA partnership rules and the electing large partnership rules. The operative rule is IRC 6221(a): “Any adjustment to a partnership-related item shall be determined, and any tax attributable thereto shall be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item shall be determined, at the partnership level”.
The IRM tells examiners the regime “applies to all partnerships required to file information returns under IRC 6031(a) whose tax years begin on or after January 1, 2018”, except partnerships that elect out under IRC 6221(b) and partnerships that elect out of partnership status under IRC 761(a) (IRM 4.31.9.7.3). Partnerships could also elect in for tax years beginning after November 2, 2015 and before January 1, 2018, either within 30 days of the IRS's first written notice of selection or by filing a BBA administrative adjustment request (IRM 4.31.9.13).
The examiner must decide the regime year by year on Form 15260, because a partnership may have elected out for one year but not another. The IRM is blunt about the stakes: “The BBA partnership rules, and the deficiency procedures are mutually exclusive. Application of the wrong rules will impact and potentially bar the assessment of tax.” If the partnership filed a Form 1065 but turns out not to be a partnership at all, IRC 6241(8) still extends the BBA procedures to that entity and its items.
Small partnerships with 100 or fewer eligible partners can opt out on a timely filed return. That choice, its limits, and what happens when the IRS rejects it are covered on electing out of the BBA regime.
What gets adjusted: partnership-related items
The regime reaches partnership-related items (PRIs). Under IRC 6241(2)(B) a PRI is any item or amount with respect to the partnership that is relevant in determining any person's chapter 1 tax liability, any partner's distributive share of such an item, and the imputed underpayment itself. IRM 4.31.9.6 lists examples: the character, timing, source and amount of income, gain, loss, deduction and credit; contributions and distributions; basis in partnership assets; liabilities; section 754 items; allocations and special allocations; and the identity of a person as a partner.
Some things are not PRIs: a partner's outside basis, whether a partner is at risk under IRC 465, whether a partner materially participates under IRC 469, and a deduction that results from applying a partner-level limitation to a PRI. Those are determined in the partner's own proceeding. A particular partner's distributive share is a separate PRI from the partnership-wide total, so an error on one Schedule K-1 can be a partnership adjustment even if Schedule K is correct.
The partnership representative
Every BBA partnership must designate a partnership representative (PR) on each return. IRM 4.31.9.2 summarizes the consequence: “The PR has sole authority to act on behalf of the partnership. Partners are bound by the decisions made by the PR.” Partners who are not the PR have no participation rights in the examination. The PR signs extensions on Form 872-M, agrees or disagrees with proposed adjustments, requests modification, makes the push-out election and decides whether to petition a court.
A power of attorney cannot designate a PR, and a Form 2848 authorizes a representative only for the PR. Designation, resignation, IRS selection and substantial presence are explained on the partnership representative and designated individual.
The imputed underpayment and the partners' alternatives
When adjustments increase income or reduce deductions or credits, the IRS computes an imputed underpayment (IU) by grouping and netting the adjustments and applying the highest rate in effect for the reviewed year under IRC 1 or 11 (IRC 6225(b)). The IRM warns examiners to explain that the result can exceed what the partners would have paid: “The imputed underpayment is a partnership-level tax that is not based on the amount of tax the partners would have owed if the PRIs had been correctly reported by the partnership.” The mechanics are on how the IRS computes the imputed underpayment.
The partnership pays the IU in the adjustment year, so economically the cost can land on adjustment-year partners rather than the reviewed-year partners who benefited. Two statutory tools change that:
- Modification under IRC 6225(c): within 270 days after the notice of proposed partnership adjustment, the PR can ask to reduce the IU by showing partner amended returns, tax-exempt partners, lower rates for corporate partners or capital gains, and other factors. See modification requests on Form 8980.
- Push-out under IRC 6226: within 45 days after the notice of final partnership adjustment, the partnership can elect to have reviewed-year partners take the adjustments into account on their own returns. See the push-out election.
Adjustments that do not produce an IU (net negative adjustments, or everything when the IU computes to zero or less) are generally taken into account by the partnership in the adjustment year under IRC 6225(a)(2). Payments of an IU, penalties and interest are not deductible (IRC 6241(4)).
Interest runs differently under each route. If the partnership pays the IU, IRC 6233(a)(2) computes interest at the partnership level for the period beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year, or the date the IU is paid if earlier, at the ordinary underpayment rate of chapter 67. If the partnership pushes out, IRC 6226(c)(2) moves interest to the partner level, running from the due date of the partner's return for the year to which the increase is attributable, and prices it “at the underpayment rate under section 6621(a)(2), determined by substituting ‘5 percentage points’ for ‘3 percentage points’ in subparagraph (B) thereof.” Because the ordinary underpayment rate under IRC 6621(a)(2) is the federal short-term rate plus 3 points, the push-out rate is 2 percentage points higher than a partnership paying the IU would owe. The Form 8978 instructions tell the partner to figure that interest from the due date of the first affected year return until the additional reporting year tax is paid. That premium, running for several years, is often what decides whether a push-out is worth making.
Stages and notices of a BBA exam
The IRS's BBA audit page lists the notices the partnership or PR will receive. In order:
| Stage | Notice | Who receives it | What it starts |
|---|---|---|---|
| Selection | Letter 2205-D | Partnership | About 30 days to designate a PR, file an AAR or seek revocation of an election out before the NAP |
| Start of proceeding | NAP: Letters 5893 and 5893-A | Partnership and PR | No AAR and no inconsistent partner amendments for that year after mailing |
| Preliminary results | Summary report (Letter 5895, Form 14791) | PR only | Conference request; Appeals path if at least 365 days remain on the IRC 6235 period (IRM 8.19.14.2.3) |
| Protest | 30-day letter (Letter 5891) | PR only | Formal protest to Appeals |
| Proposed adjustments | NOPPA: Letters 5892 and 5892-A, Form 14792 | Partnership and PR | 270-day modification period |
| Final adjustments | FPA: Letters 5933 and 5933-A, Form 15027 | Partnership and PR | 45-day push-out window; 90-day petition window |
Each stage, with what the examiner must do and when, is covered step by step on the BBA exam: NOAP, NOPPA and the final partnership adjustment. Appeals hears substantive issues once, before the NOPPA, and modification disputes once, after the modification determination, and it will not take a protested BBA case without time on the statute: “In general, all non-docketed BBA cases received by Appeals must have at least 365 days remaining on the statute of limitations”, with Form 872-M as the form to extend it (IRM 8.19.14.2.3); Technical Services checks the same 365 days before routing the protest. On the same-issue rule: “Appeals will hear the same issue only once for BBA cases regardless of substantive issues or modification issues.” See BBA cases in Appeals and Tax Court.
The deadlines that matter
| Deadline | Rule | Source |
|---|---|---|
| Adjustment period (general) | No adjustment after the later of: 3 years after the latest of the date the partnership return was filed, the return due date, or the date an AAR was filed for the year; 270 days (plus any extension consented to under IRC 6225(c)(7)) after everything required for a modification request is submitted; or 330 days (plus the same extensions) after the NOPPA | IRC 6235(a)(1) to (3) |
| Adjustment period (special rules) | 6 years instead of 3 for a substantial omission of gross income described in IRC 6501(e)(1)(A) or (C); no limit for a false or fraudulent return with intent to evade tax or where no return was filed (a return the IRS prepares under IRC 6020(b) does not count as the partnership's return) | IRC 6235(c)(1) to (4) |
| Adjustment period extension | By written agreement between the IRS and the partnership before the period expires (Form 872-M) | IRC 6235(b) |
| AAR filing | 3 years after the later of filing or the original due date, and never after the NAP is mailed | IRC 6227(c) |
| Modification | 270 days after the NOPPA is mailed, extendable with IRS consent (Form 8984) | IRC 6225(c)(7) |
| Earliest FPA | Not earlier than 270 days after the NOPPA unless the partnership waives (Form 8981) | IRC 6231(b)(2) |
| Push-out election | 45 days after the FPA; cannot be extended | IRC 6226(a); Treas. Reg. 301.6226-1(c)(2) |
| Petition | 90 days after the FPA is mailed, in the Tax Court, the district court for the district of the partnership's principal place of business, or the Court of Federal Claims; a district court or Court of Federal Claims petition requires a deposit of the IU, penalties, additions to tax and additional amounts on or before filing | IRC 6234(a), (b) |
| Push-out statements | 60 days after the adjustments are finally determined | Treas. Reg. 301.6226-2(b) |
The adjustment period is not an assessment statute; it limits when the IRS can make the partnership adjustment. Extensions use Form 872-M, signed by the PR. See the BBA adjustment period under IRC 6235.
On the petition, IRC 6234(b) makes the deposit jurisdictional for the two refund forums: the partnership must deposit “the amount of (as of the date of the filing of the petition) the imputed underpayment, penalties, additions to tax, and additional amounts with respect to such imputed underpayment if the partnership adjustment was made as provided by the notice of final partnership adjustment”, although the court may treat a good faith attempt with a timely corrected shortfall as sufficient. The deposit is not a payment of tax except for interest purposes (IRC 6234(b)(2)). The Tax Court requires no deposit, which is why most BBA petitions go there; see BBA cases in Appeals and Tax Court. Making a push-out election does not forfeit judicial review of the FPA (Form 8988).
The BBA forms
| Form | Who files it | What it does | Timing |
|---|---|---|---|
| Form 8979, Partnership Representative Revocation/Resignation and Designation | Partnership, PR or designated individual | Designates a PR (and a DI if the PR is an entity) when no valid PR is in place, revokes a prior designation, or records a resignation; a new designation revokes the old one | Only after Letter 2205-D or the NAP (to the IRS point of contact), with an AAR filed for some other reason, or with a Form 8985 submitted by a pass-through partner (Form 8979 instructions) |
| Form 8980, Partnership Request for Modification of Imputed Underpayments | PR | Requests modification of the IU under IRC 6225(c) | Within 270 days after the NOPPA, extendable on Form 8984 |
| Form 8988, Election for Alternative to Payment of the Imputed Underpayment | PR or DI | Makes the IRC 6226 push-out election for each IU in the FPA; submitted electronically | “The election must be submitted within 45 days of the date the FPA is mailed by the IRS. The time for submitting such an election may not be extended.” (Form 8988 instructions) |
| Form 8985, Pass-Through Statement, Transmittal/Partnership Adjustment Tracking Report | Audited partnership, AAR partnership or pass-through partner | Summarizes and transmits the Forms 8986 and, for a pass-through partner, reports its payment | Filed with the Forms 8986; see Forms 8985 and 8986 |
| Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s) | BBA partnership or pass-through partner | Furnishes each partner's share of the adjustments pushed out or reported on an AAR | Within 60 days after the adjustments become finally determined (Treas. Reg. 301.6226-2(b)) |
| Form 8978, Partner's Additional Reporting Year Tax | Every non-pass-through partner that receives a Form 8986 | Computes the partner's additional reporting year tax and reports it on the partner's return for the reporting year; interest runs from the first affected year | With the partner's return for the year the Form 8986 is received; see the push-out election |
What stays outside the regime
The regime covers chapter 1 income tax only. IRM 4.31.9.6.1 lists what it does not apply to: self-employment tax (chapter 2), net investment income tax (chapter 2A), and withholding under chapters 3 and 4. Those taxes are assessed in partner-level or withholding proceedings, but partnership adjustments made under BBA carry over into them (IRC 6241(9)). IRC 6501(c)(12) keeps the partners' assessment period open for chapter 2 and 2A tax attributable to a partnership adjustment until one year after the BBA case concludes.
Partner-level matters (outside basis, at-risk, passive activity) are handled in the partner's own exam. Under the special enforcement rules of IRC 6241(11) and Treas. Reg. 301.6241-7, the IRS can also adjust a PRI directly in a partner-level proceeding in limited situations, such as criminal investigations, termination and jeopardy assessments, indirect methods of proving income, and a partner with an open period who is related to the partnership or extends its own statute.
The late filing penalty for partnership returns under IRC 6698 is not part of the BBA computation; see the IRC 6698 penalty. Penalties tied to adjustments are covered on penalties in a BBA examination.
How it differs from TEFRA
The IRS's own comparison lists the differences that change practice most: the tax matters partner is replaced by a PR; partners lose their right to participate and challenge adjustments; TEFRA's NBAP and FPAA become the NAP, NOPPA and FPA; and assessment moves from the partners to the partnership. There is no TEFRA equivalent to the modification and push-out phases. Partnership years beginning before 2018 remain under TEFRA or the small partnership rules unless the partnership elected in; see TEFRA partnership procedures for pre-2018 years.
Questions practitioners ask
Does the BBA regime apply to an LLC taxed as a partnership?
Yes. It applies to any entity required to file a partnership return under IRC 6031(a) for tax years beginning after 2017, unless the entity validly elects out under IRC 6221(b). The IRM tells examiners to determine the regime for each year on Form 15260.
Can individual partners negotiate with the examiner?
Not as of right. Only the partnership representative acts for the partnership in the proceeding, and partners other than the PR have no participation rights during the examination. Partners are bound by the PR's actions and by any final decision under IRC 6223(b).
Who pays the imputed underpayment?
The partnership pays it in the adjustment year under IRC 6225(a)(1), unless it elects to push out the adjustments under IRC 6226, in which case the reviewed-year partners pay the resulting tax on their own returns. If the partnership does not pay, IRC 6232(f) allows the IRS to assess adjustment-year partners their proportionate share.
Is the imputed underpayment deductible by the partnership?
No. IRC 6241(4) disallows any deduction for a payment required under the subchapter, and IRM 4.31.9.2 says the payment is treated as an expenditure described in IRC 705(a)(2)(B).
Can a BBA partnership still file an amended Form 1065?
Generally no. A BBA partnership corrects a filed return with an administrative adjustment request under IRC 6227, unless specific guidance allows an amended return. See amended return or AAR on this site for the exceptions.