Most partners assume that if the IRS audits their partnership, the IRS will eventually send each partner a bill for his or her share. Under the current rules, that is often wrong. The default rule is that the partnership itself pays the tax, and the partnership pays it in the year the audit ends, not the year the mistake was made.
That shift came from the Bipartisan Budget Act of 2015, which created what the IRS calls the centralized partnership audit regime. Most practitioners just call it BBA. If you own an interest in an LLC or partnership that files Form 1065, these rules decide who controls the audit, who pays, and how much.
What the BBA regime replaced
The BBA rules live in IRC Sections 6221 through 6241. They apply to returns filed for partnership taxable years beginning after December 31, 2017. The old TEFRA partnership audit provisions were repealed for those years.
The core rule is in IRC 6221(a). Any adjustment to a "partnership-related item" is determined at the partnership level. Any tax attributable to that adjustment is assessed and collected at the partnership level. Penalties tied to those adjustments are also determined at the partnership level.
"Partnership-related item" is broad. Under IRC 6241(2), it includes any item or amount with respect to the partnership that is relevant to anyone's income tax liability, whether or not it appears on the return, including items relating to transactions with, basis in, or liabilities of the partnership. It also includes each partner's distributive share of those items.
Which partnerships are covered
IRC 6241(1) defines a partnership for these purposes as any partnership required to file a return under IRC 6031(a). That includes multi-member LLCs taxed as partnerships. Size does not matter. A two-person LLC is covered unless it makes a valid election out.
Eligible partnerships with 100 or fewer partners, all of a permitted type, can elect out under IRC 6221(b). The election is made annually on a timely filed return. We cover the details in our guide to electing out of the BBA audit regime. If the partnership does not elect out, BBA applies by default.
The partnership representative runs the show
Every BBA partnership must designate a partnership representative. Under IRC 6223(a), that person has the sole authority to act on behalf of the partnership in the audit. The representative does not need to be a partner, but must have a substantial presence in the United States.
Under IRC 6223(b), the partnership and all partners are bound by actions the partnership takes under these rules and by any final decision in a BBA proceeding. Treas. Reg. 301.6223-2(d) adds that a failure by the representative to follow state law or the partnership agreement has no effect on the representative's authority. Read that twice if you are a minority partner.
If no designation is in effect, IRC 6223(a) allows the IRS to select any person as the partnership representative. Our guide to the partnership representative role and its risks goes deeper.
How a BBA audit unfolds
IRC 6231(a) requires the IRS to mail three notices to both the partnership and the partnership representative:
- Notice of administrative proceeding (NAP). This tells the partnership the audit has formally begun. According to the IRS's audit process page, the NAP is issued about 30 days after the initial contact letter, Letter 2205-D.
- Notice of proposed partnership adjustment (NOPPA). This sets out the proposed changes and the proposed imputed underpayment.
- Notice of final partnership adjustment (FPA). Under IRC 6231(b)(2), the FPA generally cannot be mailed earlier than 270 days after the NOPPA unless the partnership waives that waiting period.
The 270 days after the NOPPA matter because that is the window to request modification of the imputed underpayment under IRC 6225(c)(7), unless the IRS consents to an extension. The IRS says the request is made on Form 8980, Partnership Request for Modification of Imputed Underpayment. For the full sequence of letters and deadlines, see our guide to BBA audit notices and timeline.
The imputed underpayment
When the adjustments increase tax, IRC 6225(a)(1) requires the partnership to pay an "imputed underpayment" in the adjustment year. Under IRC 6225(b)(1), the IRS computes it by netting the partnership adjustments for the reviewed year and applying the highest rate of tax in effect for that year under IRC Section 1 or 11.
Two definitions in IRC 6225(d) drive everything:
- Reviewed year: the partnership taxable year to which the adjusted item relates.
- Adjustment year: generally the year the FPA is mailed, or, if the case goes to court, the year the court decision becomes final.
The practical consequence is uncomfortable. Whoever owns the partnership in the adjustment year bears the economic cost of the payment, even if they were not partners in the reviewed year. And IRC 6241(4) says no deduction is allowed for any payment a partnership is required to make under these rules.
The rate matters too. Using the top rate assumes every dollar of adjustment would have been taxed at the highest bracket, which is rarely true. That is why modification exists. Our article on the imputed underpayment walks through the calculation.
Interest and penalties
IRC 6233(a) computes interest on the imputed underpayment from the day after the reviewed year's return due date through the adjustment year's return due date (or the payment date, if earlier). Penalties are determined at the partnership level as if the partnership were an individual and the imputed underpayment were an actual underpayment for the reviewed year.
If the partnership fails to pay on time, IRC 6233(b) adds interest and failure-to-pay penalties measured from the adjustment year. IRC 6233(c) points to IRC 6603, which allows deposits to stop interest from running.
Your alternatives to the partnership paying
BBA does not force the partnership to absorb the bill in every case. The main tools are:
- Modification under IRC 6225(c). The imputed underpayment can be reduced, for example where reviewed year partners file amended returns and pay, where partners are tax-exempt, or where a lower rate applies to C corporation partners or to capital gains and qualified dividends allocable to individuals.
- The push-out election under IRC 6226. Within 45 days after the FPA, the partnership can elect to push the adjustments out to the reviewed year partners, who then pay the tax themselves. See our guide to the push-out election.
- Court review under IRC 6234. Within 90 days after the FPA is mailed, the partnership can petition the Tax Court, the federal district court for its principal place of business, or the Court of Federal Claims. The district court and Court of Federal Claims require a deposit of the imputed underpayment, penalties, and additions first.
Partners still have obligations
Centralizing the audit does not take partners out of the picture. Under IRC 6222(a), each partner must report partnership-related items consistently with the partnership return. An inconsistent position can be assessed like a math error unless the partner files a statement identifying the inconsistency.
And if the partnership never pays, IRC 6232(f) allows the IRS, after notice and demand goes unpaid for 10 days, to assess each adjustment-year partner for a proportionate share of the unpaid amount, including interest and penalties. That assessment generally must be made within 2 years after the notice and demand.
The clock: IRC 6235
Under IRC 6235(a), the IRS generally cannot make a BBA adjustment after the later of three years from the latest of the return filing date, the return due date, or the date an administrative adjustment request was filed, or the extended periods tied to modification and the NOPPA. The partnership can extend the period by agreement under IRC 6235(b). If no partnership return is filed, IRC 6235(c)(3) allows an adjustment at any time.
Fixing your own return first
The partnership itself can correct a filed return by filing an administrative adjustment request under IRC 6227. Under IRC 6227(c), the request generally must be filed within three years after the later of the filing date or the original due date, and it cannot be filed once a NAP has been mailed for that year. If you spot an error before the IRS does, that window is worth using.
What to do if a BBA audit letter arrives
- Confirm whether BBA applies to the year, or whether a valid election out was made.
- Identify who the partnership representative is for that specific year. Each designation covers one year only.
- Review the partnership agreement for any provisions governing the representative, payment of imputed underpayments, and push-out elections.
- Calendar the 270-day modification window and the 45-day push-out and 90-day court windows that open with the FPA.
- Gather reviewed year partner names, TINs, and addresses now. You will need them for modification or push-out.
The IRS's own guidance for examiners on these audits is in IRM 4.31.9, Centralized Partnership Audit Regime (BBA) Field Examination Procedures. If you want a broader look at how business audits work, our main site has an overview of IRS audit representation.
BBA rewards partnerships that plan before the audit and punishes the ones that read the rules after the FPA. The deadlines are short, several cannot be extended, and the default outcome is the most expensive one. If your partnership has received a BBA notice, call the Law Offices of Darrin T. Mish, P.A. in Tampa, Florida at 813-229-7100.
Frequently asked questions
Does the BBA audit regime apply to small LLCs?
Yes, unless the LLC validly elects out. BBA applies to any partnership required to file a return under IRC 6031(a), including multi-member LLCs taxed as partnerships. An LLC with 100 or fewer eligible partners can elect out each year on a timely filed Form 1065, but if it has even one ineligible partner, such as another partnership, a trust, or a disregarded entity, it cannot elect out for that year.
Who pays the tax in a BBA audit?
By default, the partnership pays an imputed underpayment in the adjustment year under IRC 6225(a). That means the people who own the partnership when the audit ends may bear the cost of an earlier year's error. The partnership can instead elect under IRC 6226 to push the adjustments out to the reviewed year partners, or ask to reduce the amount through modification under IRC 6225(c).
Can the partnership deduct an imputed underpayment payment?
No. IRC 6241(4) provides that no deduction is allowed under subtitle A for any payment a partnership is required to make under the BBA subchapter. That includes the imputed underpayment itself. Partners should take this into account when the partnership agreement is deciding who economically bears an audit payment.
Can a partner participate in the BBA audit?
Only with IRS permission. Treas. Reg. 301.6223-2(d) gives the partnership representative sole authority to act for the partnership, and provides that no partner, other than the representative or designated individual, may participate in the administrative proceeding without IRS permission. Partners who want a voice usually need to secure it through the partnership agreement before an audit starts.
This guide is general information about federal tax law, not legal advice for your situation. Reading it does not create an attorney-client relationship.