The New Centralized Partnership Audit Regime – Part Two

This is the second of a series of three posts on the new centralized partnership audit regime that came into effect in 2018 under the Bipartisan Budget Act, replacing the old TEFRA procedures with new partnership-level adjustments.  The first article provided an overview of the primary differences between the BBA regime and that of the old TEFRA procedures.  This second article on the new centralized partnership audit regime takes a deep dive into the Code and Treasury Regulations, explaining each new provision under the BBA.  The third article wraps everything up in a nice bow and provides guidance for partners and practitioners alike in implementing the new centralized partnership audit regime.

The Default Regime of IRC § 6221(a) and “Electing Out” under IRC § 6221(b)

Due to the sharp increase in large entities choosing to be taxed as partnerships, TEFRA’s procedure for making partnership adjustments at the individual partner level became increasingly untenable for the Service. The default rules of the BBA’s audit regime (contained in IRC § 6221(a)) represents a fundamental paradigm shift in partnership audit procedures. Under such rules, if a partnership is audited, and the Service determines an adjustment to “items of income, gain, loss, deduction, or credit of a partnership” during a partnership’s taxable year is appropriate, such adjustment will be made at the partnership level.[1]

Any tax attributable to such items, as well as additions to tax (interest and penalties), and other additional amounts are likewise assessed and collected at the partnership level.[2] As with nearly all interactions with the Service during the partnership audit, only the partnership representative may raise defenses to penalties, additions to tax, or additional amounts.[3]

Under IRC § 6221(b) and its accompanying regulations, a “small” partnership may affirmatively elect out of the new centralized partnership audit regime.[4] In another departure from TEFRA, a “small” partnership under the BBA must have 100 or fewer partners.[5] The Service determines the quantity of partners for purposes of IRC § 6221(b) by the examining the number of K-1s issued by the partnership to the individual partners.[6] If one of the partners of a partnership is an S-Corporation, the IRS includes the number of K-1s issued to the members of the S-Corporation under IRC § 6037(b) in the IRC § 6221(b)(1)(B) calculation to determine whether the partnership may elect out of the default audit regime.[7]

The New Centralized Partnership Audit Regime
Eligibility comes in many flavors.

In addition to the numerosity requirement, in order to qualify for the election out under IRC § 6221(b), all partners of the partnership must be “eligible” partners. Eligible partners, for purposes of IRC § 6221(b), includes (1) individuals; (2) C-Corporations; (3) foreign entities that would be treated as C-Corporations were they domestic; (4) S-Corporations; and (5) estates of a deceased partner.[8] The term “eligible partner” does not include (1) other partnerships, (2) trusts, (3) foreign entities (not treated as C‑Corporations), (4) disregarded entities, (5) nominees or other similar persons that hold an interest on behalf of another person, and (6) estates that are not estates of a deceased partner.[9]

The election out of the new centralized partnership audit regime under IRC § 6221(a) must be made each year on the partnership’s timely filed income tax return.[10] The election must disclose the name, TIN, and other identifying information of each partner.[11] The partnership has the responsibility of notifying the individual partners of the election out of the default regime pursuant to IRC § 6221(b).[12]

Consistency and Penalties for Inconsistency: IRC § 6222

As with TEFRA, under the the new centralized partnership audit regime of the BBA, a partnership has the duty of consistency, which means that a partner must treat each item of income, gain, loss, deduction, or credit attributable to the partnership consistently on the partner’s individual return as such item was treated on the partnership return.[13] The BBA inserts a rather draconian twist to the consistency requirement: if a partner underreports or underpays tax as a consequence of taking an position on his or her personal return inconsistent with that taken on the partnership return, such underpayment will be assessed and collected automatically (as if such underpayment were on account of a mathematical or clerical error appearing on the partner’s return pursuant to IRC § 6213(b)(1)).[14]

A partner’s return is considered automatically inconsistent if the partnership does not file a return, unless the partner notifies the Service of this inconsistency in writing.[15] Whether or not the partnership has filed a return, if the partner files a statement with his or her personal return notifying the Service of the inconsistency, automatic assessment and collection (as under IRC § 6213(b)(1)) will not apply.[16]

Further, if the partnership provided the partner with incorrect information that the partner reasonably relied upon (and the partner can demonstrate such reliance to the Service), the partner may elect out of the automatic assessment and collection.[17] However, such election out of automatic assessment and collection must be affirmatively made by the partner.[18]

Designation of a Partnership Representative: IRC § 6223

Unlike the tax matters partner under TEFRA, the the new centralized partnership audit regime under the BBA provides for a “partnership representative,” who may represent and bind the partnership in all matters before the Service.[19] Each partnership must designate a person or entity[20] as the partnership representative, and such partnership representative has the sole authority to act on behalf of the partnership.[21] The partnership representative, whether an individual or entity, must have a substantial presence in the United States.[22]

If a designation is not made on the partnership’s return,[23] the Service will affirmatively designate a representative on the partnership’s behalf.[24] Because the partnership and the individual partners are bound by the actions of the partnership representative, the partners have no individual appeals rights of any decisions by the Service in a proceeding in which the partnership is represented by the partnership representative.[25] A partnership representative may resign by notifying the partnership and the IRS in writing.[26] Likewise, a partnership may revoke the partnership representative designation and designate a successor.[27]

Adjustments and Imputed Underpayments: IRC § 6225

Adjustments that result in a deficiency on the partnership’s return are known under the new centralized partnership audit regime as “imputed underpayments.”[28] The partnership, not its constituent partners, is required to pay any imputed underpayments resulting from an adjustment by the IRS.[29] As noted above, an imputed underpayment is determined for the “reviewed year,”[30] but is paid in the “adjustment year.”[31] Thus, partners, who may not have been associated with the partnership in the reviewed year, may bear the ultimate resulting tax burden. Such an inequitable result may be avoided by carefully addressing this situation in the partnership agreement.

The imputed underpayment is calculated by multiplying the total netted partnership adjustment by the highest rate of federal income tax in effect for the reviewed year for individuals under IRC § 1 and corporations under IRC § 11.[32] If an adjustment reallocates the distributive share of a partner, such adjustment disregards decreases in any item of gain or income and any increase in an item of deduction, loss or credit.[33] Adjustments not resulting in imputed underpayments must be taken into account in the adjusted year as a reduction in non-separately stated income, an increase in a non‑separately stated loss, or in the case of a credit, as a separately stated item.[34]

There are three scenarios by which imputed underpayments may be modified.[35] First, partners may choose to bear the imputed underpayment personally.[36] If a partner files a return, which return includes the reviewed year and takes into account all adjustments resulting in imputed underpayments, and the partner pays the tax due on the return, then the partnership’s imputed underpayment is determined without regard to that partner’s portion of the adjustment.[37]

Alternatively, if the partnership affirmatively demonstrates that a partner is tax exempt, the partnership’s imputed underpayment is determined without regard to the portion otherwise allocated to the tax exempt partner.[38] Finally, if the imputed underpayment is allocable to a partner who is a C‑Corporation or an individual (including an S-Corporation) and is in respect to a qualified dividend or capital gain, the partnership may affirmatively demonstrate such status and apply a modified lower rate of tax.[39]

Any affirmative applications to modify the imputed underpayment amount must be submitted to the IRS no later than 270 days after the “notice of proposed partnership adjustment” is mailed, unless such period is extended.[40]

“Push Out” Election for Partners to Pay Partnership’s Taxes: IRC § 6226

In addition to seeking modification of imputed underpayments, a partnership may elect under IRC § 6226 to “push out” adjustments to its reviewed year partners rather than paying the imputed underpayment determined under IRC § 6225.[41] If a partnership makes a valid “push out” election, the partnership itself is no longer liable for the imputed underpayment.[42] A partnership may make a valid “push-out” election if both (1) an affirmative election is made under IRC § 6226, and (2) each partner takes such into account his or her portion of such adjustment on his or her own taxes.[43]

The partnership’s affirmative election to “push out” the imputed underpayment liability to the individual partners must be made within 45 days of date of the notice of the final partnership adjustment;[44] and (2) at the time the IRC § 6226 election is made, the partnership must notify each partner and the Service of the partner’s share of the adjustment in a written “push out” statement.[45] If both requirements are met, IRC § 6225 will not apply to the imputed underpayment (i.e., the partnership will not be liable for payment of the taxes), and each partner will take the appropriate portion of the imputed underpayment adjustment into account on his or her own tax return.[46] The election is irrevocable, but for the consent of the IRS.[47]

Pursuant to IRC § 6226(b), under the new centralized partnership audit regime, the partner’s individual tax liability for the taxable year in which the “push out” statement was provided will be increased by the aggregate of (1) the partner’s individual share of the adjustment provided in the “push out” statement; plus (2) any increase in the adjustment of any tax attributes in the reviewed year.[48] Although penalties and additions to tax are determined as under the default regime of IRC § 6221 in the reviewed year, partners are personally liable for such penalties and additions to tax if and when a “push out” election is made. Unlike penalties, interest is determined at the partner level from the due date of the return to which the adjustment is attributable.[49]

Request by Partnership for Administrative Adjustment: IRC § 6227

A partnership, through its partnership representative, may request an administrative adjustment to the amount of any item or items of income, gain, loss, deduction or credit of the partnership for any partnership taxable year.[50] Any adjustment will be determined and taken into account for the tax year in which the adjustment request is made by (1) the partnership under the rules of IRC § 6225 (no “push out” election), or (2) the partnership and the partners under the rules of IRC § 6226 (that is, if a “push out” election is made).[51] A request for such administrative adjustment may not be made more than three years after the later of the date when the partnership return was filed, or the last date on which the partnership return must have been filed—and in no event later than a notice of audit is mailed under IRC § 6231.[52]

Notice of Proceedings and Adjustment: IRC § 6231

The IRS will mail to the partnership and the partnership representative (1) a notice of audit at the partnership level; (2) a notice of proposed adjustment arising from such audit; and (3) a notice of final partnership adjustment arising from such audit.[53] The notice of final partnership adjustment may not be mailed earlier than 270 days after the notice of proposed partnership adjustment was mailed. If a partnership receives a notice of final partnership adjustment, and the partnership representative files a petition under IRC § 6234 (Judicial Review of Partnership Adjustment) with respect to such notice, the IRS may not mail another notice to the partnership with regard to the tax year in question (in the absence of fraud, malfeasance, or misrepresentation of a material fact).[54]

Assessment, Collection and Payment of Partnership Taxes: IRC § 6213

Unless an administrative adjustment is requested under IRC § 6227 (in which case the underpayment must be filed concurrently with the request), an imputed underpayment should be assessed and collected by the Service like any other income tax under Subtitle A pursuant to the new centralized partnership audit regime.[55] No assessment of an imputed underpayment may be made (and no levy or proceeding in any court for the collection of any amount resulting from such adjustment may be made, begun or prosecuted) before (1) the close of the 90th day following the mailing of a final partnership adjustment, or (2) if a petition was filed under IRC § 6234 (Judicial Review of Partnership Adjustment), at the point the decision of the court becomes final.[56]

If the adjustment is due to mathematical or clerical errors (or is deemed to be due to mathematical or clerical errors under IRC § 6222), IRC § 6213(b)’s automatic assessment and collection procedures apply.[57] A partnership may waive (in writing) the time restrictions for making an adjustment.[58]

Interest and Penalties: IRC § 6233

In the case of a partnership adjustment for a reviewed year, interest is determined under Chapter 67 beginning on the day after the return due date for the reviewed year and ending on the return due date for the adjustment year (unless the partnership makes a payment of the imputed underpayment).[59] Penalties and additions to tax are determined at the partnership level as if the partnership were an individual taxed under Chapter 1 for the reviewed year, and as if the imputed underpayment were an actual underpayment (or understatement) for the reviewed year.[60]

If a partnership fails to pay an imputed underpayment on the date such payment is due, the partnership is liable for additional interest and penalties on this failed payment by treating the imputed underpayment as an underpayment of tax in the adjustment year.[61] Penalties, additions to tax, and additional amounts are determined (for the adjustment year) as if they were a failure to pay tax penalty under IRC § 6651, and by treating the imputed underpayment as an underpayment of tax subject to an accuracy related penalty under IRC § 6662.[62]

Judicial Review of Partnership Adjustment: IRC § 6234

A partnership may file a petition for readjustment of a final partnership adjustment 90 days after such adjustment is mailed with the Tax Court, the district court in which the partnership’s principal place of business is located, or the Court of Federal Claims.[63] The court in which the petition is filed has jurisdiction to review the adjustment, allocation between partners, and partnership liability.[64] The decision of the court is reviewable.[65] A dismissal of the petition is considered to be a decision by the court that the final partnership adjustment is correct.[66]

Period of Limitations on Making Adjustments: IRC § 6235

Generally, no adjustment for any partnership taxable year may be made after the later of 3 years after the latest of (1) the date the partnership return was filed; (2) the return due date for such year; or (3) the date the partnership filed an administrative adjustment request with respect to such year.[67] There are separate periods of limitation for modifications of an imputed underpayment under IRC § 6225(c) (270 days) and for a proposed partnership adjustment under IRC § 6231(a)(2) (330 days).[68]

Such periods may be extended by agreement of the partnership representative and the IRS. In the case of a false or fraudulent partnership return with intent to evade tax, the adjustment may be made at any time.[69] In the case of a substantial understatement of income, the period is extended to 6 years.[70] If no return was filed, there is no limitation on making an adjustment. Such periods under the new centralized partnership audit regime are tolled when the IRS mails the final partnership adjustment under IRC § 6231 for the period during which a petition may be filed under IRC § 6234 (and until the decision of the reviewing court is final) and for 1 year thereafter. Such periods are likewise tolled by bankruptcy.[71]

Definitions and Special Rules: IRC § 6241

If a partnership ceases to exist before a partnership adjustment under the the new centralized partnership audit regime of the BBA takes effect, such adjustment shall be taken into account by the former partners of such partnership.[72] No deduction is allowed for any payment required to be made by a partnership.[73]


[1] Treas. Reg. § 301.6221(a)–1(b)(1).

[2] § 6221(a); Treas. Reg. § 301.6221(a)-1(a); Treas. Reg. § 301.6221(a)–1(b)(2).

[3] Treas. Reg. § 301.6221(a)–1(c).

[4] § 6221(b); § 6221(b)(1)(A); Treas. Reg. § 301.6221(b)–1(c). The definition of small partnership is different under the BBA than TEFRA. See Treas. Reg. § 301.6221(b)–1(b).

[5] § 6221(b)(1)(B).

[6] § 6031(b); Treas. Reg. § 301.6221(b)–1(b)(2).

[7] Treas. Reg. § 301.6221(b)–1(b)(2)(ii).

[8] Treas. Reg. § 301.6221(b)–1(b)(3)(i).

[9] Treas. Reg. § 301.6221(b)–1(b)(3)(ii).

[10] § 6221(b)(1)(D)(i); Treas. Reg. § 301.6221(b)–1(c)(1).

[11] § 6221(b)(1)(D)(ii); Treas. Reg. Reg. § 301.6221(b)–1(c)(2).

[12] § 6221(b)(1)(E); Treas. Reg. § 301.6221(b)– 1(c)(3).

[13] § 6222(a); Treas. Reg. § 301.6222–1(a)(1); Treas. Reg. § 301.6222–1(a)(4).

[14] § 6222(b); Treas. Reg. § 301.6222– 1(b); § 6213(b)(1).

[15] Treas. Reg. § 301.6222– 1(a)(3); Treas. Reg. § 301.6222–1(c).

[16] § 6222(c).

[17] § 6222(c)(2)(B); Treas. Reg. § 301.6222(b)–1(a), –(2) .

[18] Id.

[19] § 6223(b)(1); Treas. Reg. § 301.6223–2(a).

[20] Treas. Reg. § 301.6223–1(b)(1).

[21] Treas. Reg. § 301.6223–2(a).

[22] Treas. Reg. § 301.6223–1(b)(2).

[23] Treas. Reg. § 301.6223–1(c); Treas. Reg. § 301.6223–2(c)(1).

[24] § 6223(a); Treas. Reg. § 301.6223–1(a); Treas. Reg. § 301.6223–1(f)(1).

[25] § 6223(b)(2).

[26] Treas. Reg. § 301.6223–1(d).

[27] Treas. Reg. § 301.6223–1(e).

[28] § 6225(a).

[29] § 6225(a)(1).

[30] “Reviewed year” means the partnership taxable year to which the item being adjusted relates. See § 6225(d)(1).

[31] “Adjustment year” means the partnership taxable year in which (A) an adjustment pursuant to a court decision becomes final; (B) when an administrative adjustment is requested under § 6227; or (C) when the notice of final partnership adjustment is mailed under § 6231. See Treas. Reg. § 301.6225–1(a).

[32] § 6225(b); Treas. Reg. § 301.6225–1(c).

[33] § 6225(b)(2).

[34] § 6225(a)(2); Treas. Reg. § 301.6225–1(a)(2); Treas. Reg. § 301.6225–3.

[35] Treas. Reg. § 301.6225–2(a); Treas. Reg. § 301.6225–2(c).

[36] § 6225(c)(2)(A); Treas. Reg. § 301.6225–2(d).

[37] § 6225(c)(2)(A)(i)-(iii); Treas. Reg. § 301.6225–2(d).

[38] § 6225(c)(3); Treas. Reg. § 301.6225–2(d).

[39] § 6225(c)(4).

[40] § 6225(c)(7).

[41] §6226(a); Treas. Reg. § 301.6226–1(a).

[42] Id.

[43] § 6226(a)-(b).

[44] Treas. Reg. § 301.6226–1(c)(3).

[45] Treas. Reg. § 301.6226–1(b)(1); Treas. Reg. § 301.6226–1(c); Treas. Reg. § 301.6226– 1(c)(4)(i); Treas. Reg. § 301.6226–2(a).

[46] Treas. Reg. § 301.6226–1(b)(2).

[47] § 6226(a).

[48] § 6226(b)(3) (referencing § 6226(b)(2)(A)); see also Treas. Reg. § 301.6226–2(f); Treas. Reg. § 301.6226–3(b).

[49] § 6226(c)(2) (at a rate of 3% above prime).

[50] § 6227(a); Treas. Reg. § 301.6227-1(a).

[51] §6227(b); Treas. Reg. § 301.6227-1(c)(2).

[52] § 6227(c); Treas. Reg. § 301.6227-1(b).

[53] § 6231(a)(1)-(3); Treas. Reg. § 301.6231-1.

[54] § 6231(b).

[55] § 6232(a).

[56] § 6232(b)(1)-(2).

[57] § 6232(d)(1)(A).

[58] § 6232(d)(2).

[59] § 6233(a)(2).

[60] Id.

[61] § 6233(a), (b)(2).

[62] Id.

[63] § 6234(a).

[64] § 6234(b)-(c).

[65] § 6234(d).

[66] § 6234(e).

[67] § 6235(a)

[68] Id.

[69] § 6235(c).

[70] Id.

[71] § 6241(6); Treas. Reg. § 301.6241-2(a).

[72] § 6241(7).

[73] § 6241(6).

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