The BBA Administrative Adjustment Request: How a Partnership Fixes a Filed Return

You found a mistake on the partnership return. Maybe income was understated. Maybe a big deduction was left off. Your instinct is to file an amended Form 1065 and move on.

For a partnership under the centralized audit regime created by the Bipartisan Budget Act (BBA), the fix runs through a different procedure: the administrative adjustment request, or AAR, under IRC Section 6227. It looks like an amended return. It does not behave like one. Who pays, which year the change lands in, and whether anyone gets a refund all work differently.

What an AAR is

IRC 6227(a) says a partnership may file a request for an administrative adjustment of one or more partnership-related items for any partnership taxable year. The BBA rules apply to returns filed for partnership tax years beginning after December 31, 2017, and the AAR rules follow the same effective date.

Treas. Reg. 301.6227-1(a) adds a few limits that matter in practice:

• Only the partnership files an AAR. A partner cannot request an adjustment of a partnership-related item except through the consistency rules of IRC 6222 or while acting as the partnership representative.
• The AAR must be signed under penalties of perjury by the partnership representative, as Treas. Reg. 301.6227-1(c)(1) requires.
• You cannot file an AAR solely to change the designation of the partnership representative.

If you are unsure who your partnership representative is, or whether that person should be signing anything, sort that out first. That signature binds the partnership.

When you can file, and when you cannot

The window is narrow and it closes hard.

• Not before the return. Under Treas. Reg. 301.6227-1(b), an AAR may only be filed after the partnership return for that year has been filed.
• Three years. IRC 6227(c) bars an AAR filed more than 3 years after the later of the date the return was filed or the original due date (determined without regard to extensions).
• Never after a notice of administrative proceeding. Once the IRS mails a notice of administrative proceeding under IRC 6231 for that year, the partnership cannot file an AAR for it. Treas. Reg. 301.6231-1(f) notes that if the IRS withdraws that notice, the bar no longer applies.

That last rule is the one that hurts. Once the audit starts, the chance to correct the return on your own terms is gone. See BBA audit notices and the timeline for how that notice arrives.

How the AAR is filed

IRM 4.31.9.7.7.1 describes the mechanics. An electronically filed AAR uses Form 1065 with the amended return box checked and Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), attached, with the BBA AAR box marked in Part I. A paper AAR uses Form 1065-X with the BBA AAR box marked. Either way it goes through official filing channels, not to an examiner. The IRM tells examiners not to accept an AAR handed to them directly.

Step one: does the AAR create an imputed underpayment?

The partnership has to run the numbers the way the IRS would in an audit. Treas. Reg. 301.6227-2(a)(1) says whether the requested adjustments produce an imputed underpayment, and how much, is determined under the IRC 6225 rules in Treas. Reg. 301.6225-1. That generally means netting the adjustments and applying the highest rate of tax in effect for the reviewed year under IRC 6225(b). If that computation is new to you, start with the imputed underpayment explained.

From there, the AAR goes down one of two roads.

Road one: the partnership pays

If the adjustments produce an imputed underpayment, the default under Treas. Reg. 301.6227-2(b)(1) is that the partnership pays it on the date it files the AAR. IRC 6232(a)(2) says the underpayment shall be paid, and may be assessed, when the request is filed. There is no waiting for a bill.

Interest runs from the day after the original due date of the reviewed year return until the AAR is filed, under Treas. Reg. 301.6227-2(b)(2). Penalties can also apply. And because IRC 6225(d)(2)(B) makes the year the AAR is filed the adjustment year, the cost lands in the current year of the partnership, not the year the mistake happened.

The partnership can shave the number down, but only a little. Treas. Reg. 301.6227-2(a)(2) allows a limited set of modifications on an AAR without advance IRS approval, including those for tax-exempt partners, lower rates for certain partners, publicly traded partnership passive losses, grouping limitations, qualified investment entities, and tax treaties. Amended return modifications by partners are not on that list. IRM 4.31.9.7.7.1 says the partnership reports these modifications on Form 8980 attached to the AAR, with an explanation and supporting documentation.

Road two: push the adjustments out to the partners

Instead of paying, the partnership may elect at the time it files the AAR to have each reviewed year partner take the adjustments into account. Treas. Reg. 301.6227-2(c) says that if the election is valid, the partnership is not liable for the imputed underpayment. The catch: any modifications the partnership applied are disregarded, and every adjustment tied to that underpayment goes to the partners.

Under IRM 4.31.9.7.7.1, the partnership furnishes Form 8986 to each reviewed year partner and files those forms, along with Form 8985, with the IRS on the date the AAR is filed. Treas. Reg. 301.6227-1(d) requires the statements to be furnished on the AAR filing date.

This works much like the audit version described in the push-out election under Section 6226, with one practical difference noted later.

What if the AAR reduces tax?

This is where people get surprised. If the adjustments do not produce an imputed underpayment, for example an overlooked deduction, the last sentence of IRC 6227(b) and Treas. Reg. 301.6227-2(d) require the adjustments to be pushed to the reviewed year partners. The partnership does not get a refund check.

Each reviewed year partner takes the adjustment into account in the partner's taxable year that includes the date the statement is furnished, called the reporting year, under Treas. Reg. 301.6227-3(a). The benefit shows up as a reduction of the partner's tax for that reporting year. Treas. Reg. 301.6227-3(b)(1) says nothing in the rule entitles a partner to a refund it is not otherwise entitled to, and a partner that is itself a partnership cannot claim a refund for its share.

So the partner who left the partnership two years ago gets the statement and the benefit. The partner who joined last month does not. Plan the partner communications accordingly.

The AAR reopens the clock

Filing an AAR is not a quiet act. Under IRC 6235(a)(1)(C), the period for the IRS to make partnership adjustments runs at least 3 years from the date the AAR is filed. Treas. Reg. 301.6235-1(e) gives the example of a 2020 return filed March 1, 2021, and an AAR filed September 1, 2023. The adjustment period for 2020 then runs to September 1, 2026. More on that in the BBA statute of limitations.

The IRS can also audit the AAR year itself. Treas. Reg. 301.6227-1(f) says the IRS may adjust any partnership-related item, including items adjusted on the AAR, and may re-determine the imputed underpayment the partnership computed. IRM 4.31.9.7.7.2 adds that when the IRS adjusts an imputed underpayment previously reported on an AAR, those adjustments to that underpayment cannot be pushed out.

Tiered partnerships

If a partner that receives a Form 8986 is itself a pass-through entity, the obligation keeps moving. IRM 4.31.9.7.7.1 says the pass-through partner must furnish Form 8986 to its own partners and file those forms and Form 8985 with the IRS by the extended due date of the AAR partnership's adjustment year return, or alternatively compute and pay an imputed underpayment, without modifications.

Common mistakes

• Waiting too long. An open audit for the year shuts the door.
• Assuming a refund. A favorable AAR helps reviewed year partners in their reporting year. It does not send money back to the partnership.
• Forgetting the payment. If the partnership is paying an imputed underpayment, the payment is due with the AAR, and a failure to pay can bring its own penalties and interest under Treas. Reg. 301.6227-2(b)(2).
• Telling partners to amend on their own. Partners who report differently from the filed partnership return run into the consistency rules. See consistent reporting under Section 6222.
• Relying on the AAR for amended return modifications. IRC 6225(c)(2)(F) says an AAR is not treated as a return for purposes of the amended return modification procedure.

An AAR is the right tool when the partnership spots its own error first. Used carelessly, it is also a signed invitation for the IRS to look closer. If your partnership is weighing an AAR, the Law Offices of Darrin T. Mish, P.A. in Tampa, Florida can review the numbers and the elections with you before anything is filed. Call 813-229-7100.

The AAR lets you correct the past. It just bills the present.