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BBA Partnership Audit Regime: Partnership Representative, Election Out for 100 Partners or Fewer, and the Push-Out Election

How the centralized partnership audit regime in sections 6221 to 6241 works for partnership clients: the partnership representative, the election out for 100 or fewer partner statements, imputed underpayments, modification and push-out deadlines.

CORAA TeamUpdated November 6, 20267 min read

Under the centralized partnership audit regime in sections 6221 to 6241, the IRS examines a partnership at the entity level and generally assesses and collects the resulting tax from the partnership itself, in the year the adjustment is final. It applies to partnership tax years beginning after December 31, 2017. Three decisions fall to the firm: whether the partnership qualifies to elect out each year, who serves as partnership representative, and whether to pay an imputed underpayment or push it out to the partners. Each has a statutory test and, for the push-out, a deadline that cannot be extended.

What is the default rule?

Section 6221(a) provides that adjustments to partnership-related items are determined at the partnership level, and that any resulting tax, penalties, additions to tax and additional amounts are assessed and collected at the partnership level unless the subchapter says otherwise. Partnership-related items cover any partnership item or amount relevant to a person's chapter 1 tax, including imputed underpayments, plus each partner's distributive share (section 6241(2)(B)). The regime replaced the older TEFRA procedures, and the tax matters partner role gave way to the partnership representative.

Can a partnership elect out?

Section 6221(b) turns the regime off for a year if all of the following hold:

  1. Election. The partnership elects out for that year.
  2. Size. The partnership furnishes 100 or fewer partner statements under section 6031(b) for the year.
  3. Eligible partners. Every partner is an individual, a C corporation, a foreign entity that would be a C corporation if domestic, an S corporation, or the estate of a deceased partner.
  4. Timing and disclosure. The election is made on a timely filed return for that year and discloses the name and taxpayer identification number of each partner.
  5. Notice. The partnership notifies each partner of the election.

An S corporation partner needs extra care. The partnership meets the eligible-partner test for an S corporation partner only if it also discloses the name and TIN of each person for whom that S corporation must furnish a section 6037(b) statement, and those statements count toward the 100 limit.

Worked count. A partnership has 40 individual partners, 5 C corporations and one S corporation with 70 shareholders. The S corporation's 70 statements count, so the total is 40 + 5 + 70 = 115 statements, which exceeds 100. The partnership cannot elect out, even though it has only 46 direct partners. Remove the S corporation (or reduce the shareholder count) and the total falls to 45, which is within the limit. Any partner that is a partnership or a trust is not on the eligible list and blocks the election on its own.

The election is annual, so it belongs on the return checklist every year, not only the first. Partner changes during the year can break eligibility without anyone noticing.

Who is the partnership representative?

Section 6223(a) requires each partnership to designate a partnership representative, who should be a partner or other person with a substantial presence in the United States. The representative has sole authority to act for the partnership under the subchapter. If no one is designated, the IRS may choose any person. Under section 6223(b), the partnership and every partner are bound by the representative's actions and by any final decision in a proceeding under the subchapter.

That binding effect drives the engagement terms. Partners cannot separately contest the representative's decisions. Treat the designation as a governance matter:

  • Name a person with authority and the time to respond to IRS requests.
  • Put duties in the partnership agreement: notice to partners, consent requirements for settlements, the push-out election, and information sharing.
  • Review the choice when the person leaves the partnership.

How is the imputed underpayment computed?

Under section 6225(a), if adjustments to a reviewed year produce an imputed underpayment, the partnership pays it in the adjustment year. Section 6225(b) nets the adjustments, within each category required to be separately stated under section 702(a), and applies the highest rate of tax in effect for the reviewed year under section 1 or 11.

Worked example. Adjustments in one category total +$600,000 and -$100,000. Net is $500,000. For illustration, assume the highest rate for the reviewed year is 37 percent. The imputed underpayment before modification is 37% x $500,000 = $185,000.

How can the amount be modified?

Section 6225(c) allows the partnership to request modification, with Secretary approval, within 270 days after the notice of proposed partnership adjustment is mailed unless the IRS extends it. Grounds include:

  • Partners file amended returns, report their share of the adjustments and pay the tax, in which case the imputed underpayment is computed without those amounts.
  • The portion allocable to tax-exempt partners is excluded.
  • A lower rate applies to the portion allocable to C corporations, or to capital gains and qualified dividends allocable to individuals (S corporations are treated as individuals).
  • Partnerships and S corporations in a tiered structure can qualify if the required information is furnished.

Continuing the example, if tax-exempt partners are allocated 10 percent of the adjustment, the portion excluded is 10% x $500,000 = $50,000, leaving $450,000. At 37 percent the imputed underpayment falls to $166,500.

The IRS process page confirms the 270 day period runs from the date of the notice of proposed partnership adjustment (NOPPA). Separately, section 6231(b)(2) bars mailing the final partnership adjustment (FPA) earlier than 270 days after the NOPPA unless the partnership waives that period.

What is the push-out election?

Section 6226 lets the partnership elect, within 45 days after the FPA, to apply that section instead of paying the imputed underpayment. The partnership must furnish statements showing each reviewed-year partner's share of the adjustments to those partners and to the IRS. Once made, the election can be revoked only with the Secretary's consent, and section 6225 does not apply to that underpayment. The IRS process page adds that the 45 day period cannot be extended, that the election is made electronically on Form 8988 with a list of reviewed-year partners, and that Forms 8985 and 8986 are submitted only after the IRS returns the countersigned Form 8988. The partner statements are due within 60 days after the audit matters become final, and that period cannot be extended either. If the statements are late, the IRS invalidates the election.

Effects on partners: each partner adjusts its tax for the year it receives the statement, using correction amounts for the reviewed year and later affected years. Interest runs at the partner level from the due date of the reviewed-year return, at the underpayment rate with 5 percentage points substituted for 3. Individuals and C corporations report on Form 8978. Penalties are determined at the partnership level and the reviewed-year partners are liable for them.

Pay or push out?

A push-out removes the entity-level payment but sends the interest and the paperwork to every reviewed-year partner, including former partners. Compare it with paying: payment is simple, but current partners bear the cost of a prior year's income. The partnership agreement should say which approach applies, how costs are allocated, and how former partners are reached. See state PTET elections for partnerships and S corporations and the PTET standard summary for entity-level tax planning that interacts with these elections, and the book-tax differences standard for the reconciliation records an exam will request.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

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Part of CORAA University · Tax and compliance for CPA firms: related guides, calculators and templates.

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AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error

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