Collecting a BBA imputed underpayment, and when partners become liable

When the IU is assessed

IRC 6232(a) sets the framework: “Any imputed underpayment shall be assessed and collected in the same manner as if it were a tax imposed for the adjustment year by subtitle A”, except that deficiency procedures do not apply and an AAR IU is paid and may be assessed when the AAR is filed. IRC 6232(b) bars assessment, levy or court collection until the close of the 90th day after the FPA is mailed and, if a petition is filed, until the decision becomes final. A premature action can be enjoined, including by the Tax Court for adjustments in a timely petition (IRC 6232(c)).

The FPA also caps the liability if no case is filed: “the amount for which the partnership is liable under section 6225 shall not exceed the amount determined in accordance with such notice.” (IRC 6232(e)). The partnership may waive the restrictions at any time by signed written notice (IRC 6232(d)(2)), which is what signing Form 14792 or Form 14726 does in an agreed case.

On IRS systems the IU posts to the reviewed-year module even though it is a tax for the adjustment year. IRM 4.31.13.5.1 explains: “Due to current IRS system limitations, imputed underpayment assessments will be posted to the reviewed year.” A cross-reference to the adjustment year posts as TC 971 AC 817. An IU on an audited partnership is assessed as TC 300 with reason code 187; an AAR IU as TC 290 reason code 185; pass-through partner IUs as reason codes 186 (AAR) and 189 (exam) (IRM 4.31.13.12.5; IRM 5.19.27.3.1). Practitioners reading a transcript should look at the reviewed-year module and the TC 971 cross-references; see reading an account transcript.

How to pay

Payments are designated by type, and IRM 5.19.27.2 lists each with its designated payment code:

The IRS's audit page says partnerships pay by EFTPS, debit or credit card, or check payable to United States Treasury; Direct Pay is not available for partnership IU payments. Before assessment, a check can be sent to the IRS employee handling the exam with the partnership's name, EIN, Form 1065, tax year and “Advance BBA Exam Imputed Underpayment”. After an assessment letter, payment goes to the address on the letter. Paying before assessment stops interest on the amount paid.

The payment is not deductible: “No deduction shall be allowed under subtitle A for any payment required to be made by a partnership under this subchapter.” (IRC 6241(4)). Examiners look for IU, penalty and interest payments deducted on later returns and disallow them (IRM 4.31.9.7.1). Partners of a partnership in dispute can stop interest on their own potential liabilities with an IRC 6603 deposit (IRM 4.31.13.13.8).

If the partnership does not pay

IRC 6233(b) applies when the IU is not paid by the date prescribed: interest as if the IU were an underpayment of tax for the adjustment year, plus the IRC 6651(a)(2) failure-to-pay addition and the accuracy-related penalty rules of part II of subchapter A of chapter 68. IRC 6232(f)(1) then adds two consequences if any IU, or interest or penalty on it, is unpaid 10 days after notice and demand:

• interest on that amount uses the IRC 6621(a)(2) underpayment rate with 5 percentage points substituted for 3; and
• the IRS may assess each partner a tax equal to its proportionate share of the amount, including interest and penalties.

Failure-to-pay rules generally are on the failure-to-pay penalty.

Assessing partners under IRC 6232(f)

The partners assessed are those as of the close of the adjustment year or, if the partnership has ceased to exist by then, the former partners determined under IRC 6241(7). Proportionate shares are percentages the IRS determines from distributive shares, totaling 100 percent (IRC 6232(f)(3)). An S corporation and its shareholders are treated the same way (IRC 6232(f)(5)). Deficiency procedures do not apply to these assessments, and there is a time limit: “no assessment may be made (or proceeding in court begun without assessment) with respect to any partner with respect to an amount under paragraph (1) after the date which is 2 years after the date on which the Secretary provides the notice and demand referred to in paragraph (1) with respect to such amount.”

BBA Operations tracks this date as the partnership statute expiration date, researches whether the partnership paid, finds the partners and capital percentages for the adjustment year (or the last filed or final year if no adjustment-year return was filed), and assesses each partner on Form 3870 with Letter 6547. Individual partner assessments post to MFT 31 as TC 298 reason code 194 (IRM 4.31.13.13.5; IRM 5.19.27.3.1). Payments by partners are cross-referenced back to the partnership's account, and IRC 6232(f)(4) reduces the partnership's liability as partners pay. Once the partnership pays an amount, partners cannot be assessed for it.

Partnerships that cease to exist

IRC 6241(7) provides that if a partnership ceases to exist before an adjustment takes effect, the former partners take it into account. Under Treas. Reg. 301.6241-3(b), a partnership ceases to exist if the IRS determines it terminated under IRC 708(b)(1) or does not have the ability to pay in full any amount it is or may become liable for under the regime, and “a partnership does not have the ability to pay if the IRS determines that the partnership's account is currently not collectible based on the information the IRS has at the time of such determination.” BBA Operations makes the determination (IRM 4.31.9.5), notifies the partnership and former partners in writing within 30 days, and also notifies the reviewed-year PR of an audited partnership.

The effect: “A partnership that ceases to exist is no longer liable for any unpaid amounts resulting from a partnership adjustment required to be taken into account by a former partner under this section.” Former partners are generally the adjustment-year partners. The IRS cannot make the determination after the collection period on the partnership's assessment expires, and a determination is not effective if the partnership made a valid push-out election or paid everything within 10 days of notice and demand. A partnership found to have ceased to exist can still request modification. Currently not collectible status generally is covered on currently not collectible.

Bankruptcy

A partnership in bankruptcy can still be examined and receive the NAP, NOPPA and FPA, and the IRS can assess and issue notice and demand (IRM 4.31.9.5). IRC 6241(6) suspends the adjustment, assessment and collection periods while the IRS is barred by the title 11 case, plus 60 days for adjustment or assessment and 6 months for collection, and suspends the petition period while the partnership is barred, plus 60 days. See bankruptcy and tax debts.

Pass-through partners and AAR partnerships

A pass-through partner that neither pushes out nor pays by the extended due date can be assessed the IU on the adjustments it received, as a specified similar amount under IRC 6232(f)(2), and the same 10-day and 2-year rules then reach its partners. Form 8985 is treated as a return, so a tier that never files it has no limitation period for its share (IRM 4.31.13.5.1). See tiered partnerships. For an AAR, the IU is due with the AAR and may be assessed when filed (IRC 6232(a)(2)).

Ordinary collection tools

Because the IU is collected in the same manner as a subtitle A tax, the general collection process applies once it is assessed: notice and demand, liens, levies, and collection alternatives. Those topics are covered in the collection section, including installment agreements and federal tax liens. The partner-assessment and cease-to-exist rules above are what make BBA collection different: the IRS has a statutory route to the partners that it does not have for an ordinary entity-level tax.

Questions practitioners ask