The Bipartisan Budget Act of 2015 created a centralized partnership audit regime that generally applies to partnership tax years beginning in 2018 and replaced the prior TEFRA-style framework for most partnerships. Under this regime, the IRS generally determines adjustments at the partnership level and assesses and collects any resulting understatement of tax as an “imputed underpayment” (IU) at the partnership level, rather than assessing tax separately against each reviewed-year partner by default. This structural shift changes the economics and the defense posture of audits. The partnership, acting through a single partnership representative, becomes the IRS’s counterparty, and partners generally do not have the same participation rights they had under TEFRA.
Who Falls Under the Regime and When a Partnership Can Elect Out
The default rule applies to most partnerships, placing them in the BBA regime unless an eligible partnership makes a timely election out. The IRS states that an eligible partnership generally must have 100 or fewer partners and only “eligible partners,” which the IRS lists as individuals, C corporations, eligible foreign entities treated as C corporations if domestic, S corporations, and estates of deceased partners. The partnership must make the election on a timely filed return for the year. This election-out screen now sits at the front of taxpayer risk management because it determines whether the IRS will audit and assess at the partnership level or push audits back down to partners under other rules.
The Partnership Representative and the New Control Point
The BBA regime requires the partnership to designate a partnership representative (PR) on a timely filed return, and the IRS uses the PR as the sole point of contact for the examination. The IRS’s high-level comparison of TEFRA versus BBA makes the practical consequence explicit: under BBA, partners have no participation right to challenge partnership adjustments, and the IRS directs key notices and packages to the partnership and PR, often only to the PR at interim stages. This changes the meaning of “taxpayer” in a partnership audit. The partnership agreement and governance mechanics now control who can bind everyone else, who decides whether to settle, and who decides whether to push adjustments out to reviewed-year partners.
How the BBA Audit Pipeline Works and Why Timing Controls Outcomes
The IRS lays out the audit sequence and the documents that matter. The IRS issues a Notice of Administrative Proceeding (NAP) using Letters 5893 and 5893-A, and it issues the NAP about 30 days after it sends Letter 2205-D. After the IRS develops issues, it sends a summary report package to the PR that includes the preliminary audit results and a preliminary IU computation (Form 14791). If the PR requests Appeals and meets timing conditions, the PR proceeds through a 30-day package and protest process. The IRS then issues a Notice of Proposed Partnership Adjustments (NOPPA) with an IU computation (Form 14792) and opens the “modification” phase, during which the PR may request a modification of the IU. The IRS states that the PR generally has 270 days from the NOPPA date to submit a modification request (Form 8980), and missing that window can result in the forfeiture of modification rights.
After the IRS issues the Notice of Final Partnership Adjustment (FPA), the clock matters. The FPA establishes a 45-day window to make the push-out election (an alternative to paying the IU) and a 90-day window to petition the court. Treasury regulations also state that a partnership must file the § 6226 election within 45 days of the date the IRS mails the FPA, and the IRS cannot extend that deadline. The IRS emphasizes a second timing trap: once it issues the NAP, the partnership may not file an administrative adjustment request (AAR) for that year, and partners may not amend returns to file inconsistently with the partnership for the examined year after the NAP letters are issued.
Payment shifts represent the core substantive change for taxpayers. If the PR does not make a push-out election, the partnership pays the IU at the partnership level. If the PR makes a valid push-out election, reviewed-year partners take the adjustments into account, and the partnership is no longer liable for the IU to which the election applies. Congress also imposed a cost on push-outs. The Code sets partner-level interest for push-out amounts at the underpayment rate determined by substituting “5 percentage points” for “3 percentage points” in the usual underpayment-rate formula, which generally increases interest relative to many individual underpayment cases.
AARs and “Fixing” Partnership Returns Under the BBA
Partnerships under the BBA must generally use an administrative adjustment request (AAR) rather than an amended partnership return to correct partnership-related items. This rule applies to BBA years beginning after 2017 and to partnerships that elected into the BBA regime for certain earlier years. This matters for taxpayers because it changes the remediation strategy. The partnership cannot simply “clean up” a filed return the way many taxpayers assume, and the partnership must manage downstream partner impacts through the AAR framework and any statements required by IRS procedures.
What Changes for Taxpayers in Practice and Where Criminal Risk Can Hide Behind a Civil Posture
The BBA regime changes who pays, who controls, and who bears the economic burden. The default IU can shift tax to current-year partners even though the adjustment relates to a reviewed year, unless the partnership agreement requires a push-out, requires partner indemnification, or uses tax distribution provisions and capital account adjustments to allocate the burden back to reviewed-year owners. The regime also changes defense sequencing. The PR must build the record for modification, evaluate the push-out election within hard deadlines, and manage partner communications and data gathering in a way that survives IRS verification. The IRS expressly designs the process around partnership-level notices (NAP, NOPPA, FPA) and centralized action, thereby increasing the risk that a poorly controlled response creates system-wide exposure across all partners.
Taxpayers should treat certain fact patterns as eggshell or reverse-eggshell risk in BBA audits even when the IRS labels the matter “civil.” The IU framework does not insulate individuals from criminal tax investigation risk when the underlying facts involve intentional income suppression, fabricated books, false partner allocations, or false statements during the exam. The PR’s decisions and submissions can create or destroy credibility for the entire partnership. You should not “repair” the file by creating documents that did not exist during the reviewed year, and you should not let multiple partners provide inconsistent narratives to the IRS. During a BBA audit, partners generally may not amend returns to file inconsistently with the partnership for the examined year after the NAP letters issue; and if the partnership makes a push-out election and issues Forms 8986, partners are bound by the adjustments and cannot use Form 8082 to report inconsistent treatment with the audit results. The partnership and partners should route sensitive factual development through counsel when willfulness risk exists, because communications with non-attorney preparers and accountants generally do not carry attorney-client privilege.
California State Tax Consequences After a Federal BBA Adjustment
California state does not simply “run the BBA audit” as the IRS does; California law requires partnerships and partners to address the consequences of federal partnership-level adjustments. California’s SB 274 analysis explains that California generally conducts partnership adjustments through partner-level proceedings, but SB 274 prescribes how California determines tax based on federal partnership-level adjustments and clarifies reporting requirements and elections for California purposes. California also requires reporting of federal changes to the Franchise Tax Board within six months after the final federal determination in many cases, and California can treat a partnership’s federal audit elections as binding for state purposes unless the FTB approves a separate election. Taxpayers should treat a federal BBA outcome as a federal-and California project, particularly when the IU or push-out mechanics change who pays and when.
Contact the Tax Law Offices of David W. Klasing if You Need to Protect the Partnership From PR-Driven Audit Mistakes and Partner-Level Exposure
A BBA partnership audit can turn into a firmwide problem because one partnership representative controls the record, the deadlines, and the elections that determine who ultimately pays. At the Tax Law Offices of David W. Klasing, we help partnerships and partners avoid the two failures that cause the most damage: (1) building an incomplete record that collapses during the modification phase, and (2) making an election choice that shifts liability to the wrong people, at the wrong time, and becomes difficult to unwind once statutory deadlines pass. Our dual-licensed Tax Attorneys and CPAs manage these matters as governance-and-evidence projects. We align the partnership’s factual file with what the IRS can verify, we control communications, so partners do not create inconsistent narratives, and we structure submissions to prevent scope expansion into other years, entities, or issues.
Hire an attorney-led, dual-licensed team when you need one coordinated strategy across the technical tax mechanics and the exposure management that follows. We can evaluate election-out eligibility, defend imputed underpayment computations and modification requests, and assess whether a push-out election fits the partnership’s economics and the partnership agreement’s allocation provisions. We also coordinate federal strategy with California reporting and election consequences, so you do not win a federal procedural point and lose the state fallout. Call 800-681-1295 for a confidential, reduced-rate initial consultation HERE.
