BBA Partnership Audit Rules: A CPA's Guide to the Centralized Audit Regime
Under the Bipartisan Budget Act of 2015 (BBA), partnerships with tax years beginning after December 31, 2017 are subject to a centralized audit regime (IRC §§6221–6241) that fundamentally changes how the IRS examines partnership returns and collects resulting adjustments. The default rule requires the partnership itself — not individual partners — to pay any tax arising from an audit, assessed at the highest individual rate (37%) regardless of each partner's actual tax situation. Without proactive planning, a partnership can face a large underpayment liability attributable to partners who are no longer in the entity. This guide covers what CPAs need to know to advise partnerships under the BBA regime.
From TEFRA to BBA: What Changed
Before 2018, most multi-partner partnerships operated under the Tax Equity and Fiscal Responsibility Act (TEFRA) rules, which coordinated audit adjustments through a Tax Matters Partner and then flowed those adjustments out to individual partners for collection. That approach was largely abandoned because the IRS had difficulty collecting taxes at the partner level — particularly when the composition of partners had changed between the reviewed year and the adjustment year.
The BBA regime resolves this collection problem by assessing and collecting the imputed underpayment (IU) at the entity level in the adjustment year (the year the audit concludes), not the reviewed year (the year being audited). This creates significant timing and equity issues for partnerships whose partner mix has changed.
Key BBA structural features, as codified in Treas. Reg. §§301.6221(b)-1 through 301.6241-1:
- Entity-level default: The partnership pays any resulting underpayment in the adjustment year.
- Highest-rate default: The IU is computed at the highest individual tax rate (currently 37%), even for partnerships with corporate or tax-exempt partners who would face lower or no taxes.
- Partnership Representative: A single designated representative replaces the Tax Matters Partner and has binding authority over all audit decisions.
- Opt-out election: Eligible smaller partnerships can elect out of the regime entirely.
Which Partnerships Are Subject to the BBA Regime
The centralized audit regime applies to all partnerships required to file Form 1065, unless they affirmatively elect out. This includes LLCs taxed as partnerships, limited partnerships, and general partnerships.
Single-member LLCs classified as disregarded entities are not subject to the BBA regime — they are not separate taxpayers for partnership purposes.
Grantor trusts holding partnership interests present complications: each grantor counts as a separate partner for opt-out eligibility purposes.
The Small Partnership Opt-Out Election (§6221(b))
Partnerships with 100 or fewer eligible partners may elect out of the centralized regime on a timely filed Form 1065, including extensions. When a partnership elects out, the IRS audits each partner individually under normal deficiency procedures.
Eligible partners for opt-out purposes are limited to:
- U.S. individuals
- C corporations (including S corporations treated as C corporations for this purpose)
- Foreign entities eligible to be C corporations if domestic
- Estates of deceased partners
Ineligible partner types that disqualify the opt-out election:
- Partnerships (a partnership-as-partner blocks opt-out regardless of the tier structure)
- Trusts (other than grantor trusts where all grantors are eligible)
- S corporations (a single S-corp partner disqualifies the entire opt-out)
- Nominees or disregarded entities
Practical implication: A partnership with 50 individual partners can elect out; a partnership with 40 individuals and one trust partner cannot. CPAs should identify partner-type composition each year before filing, since it changes as interest transfers occur.
The opt-out election must be made annually — it is not automatic and does not carry forward from the prior year.
The Partnership Representative
The Partnership Representative (PR) is the single point of contact between the IRS and the partnership during a BBA audit. Under IRC §6223, the PR has sole authority to act on behalf of the partnership in all matters related to the examination, and partners have no independent right to participate unless the PR grants it.
Selection rules:
- Any person (including an entity) with a substantial presence in the U.S. qualifies
- The PR must be designated each year on Form 1065, Schedule B-2
- If no PR is designated, the IRS may designate one
Key powers of the PR:
- Bind the partnership and all current and former partners to audit results
- Agree to extensions of the statute of limitations
- Elect or waive the push-out election
- File an Administrative Adjustment Request on the partnership's behalf
- Accept or dispute proposed adjustments
Because the PR's decisions bind partners who may have no other notice of the audit, partnership agreements should address:
- Notification obligations when the PR receives IRS correspondence
- Consent requirements before the PR agrees to major adjustments
- Indemnification provisions for reviewed-year partners if the entity pays the IU
- Replacement procedures if the original PR is no longer available
See Adding a Partner to an LLC for considerations when drafting or updating partnership agreements to address BBA governance.
How BBA Audits Proceed: The Administrative Timeline
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Notice of Administrative Proceeding (NAP): The IRS notifies the partnership and PR that an examination has begun. Partners themselves receive no statutory notice — the PR is the only required recipient.
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Proposed adjustments: The IRS examiner identifies items to adjust and calculates a proposed imputed underpayment.
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Notice of Proposed Partnership Adjustment (NOPPA): The IRS issues formal proposed adjustments. The PR has 270 days from the NOPPA date to submit modification requests (§6225(c)).
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Modification window: During the 270-day period, partners may file amended returns for the reviewed year, the PR may invoke the push-out election, or eligible partners may invoke the pull-in procedure. These mechanisms can reduce the IU or eliminate it entirely.
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Final Partnership Adjustment (FPA): After modifications, the IRS issues the FPA. The PR may petition Tax Court to challenge the FPA within 90 days.
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Assessment and payment: If the FPA is not challenged or is upheld, the IU is assessed against the partnership and is due within 60 days.
The statute of limitations for BBA audit assessments is generally three years from the later of the date the partnership return was filed or the due date (IRC §6235). A six-year period applies if the understatement of income exceeds 25%. The PR can agree to extend the statute of limitations. See Document Retention Requirements for the recordkeeping obligations that support a BBA examination defense.
The Imputed Underpayment: Calculation and Modifications
The imputed underpayment is the net positive adjustment to partnership income multiplied by the highest applicable tax rate — 37% for ordinary income under current law (IRC §6225(a)).
CPAs can often materially reduce the IU through the modification procedures under §6225(c):
| Modification Type | How It Reduces the IU |
|---|---|
| Amended returns by partners | Partners pay tax at their own rate; amount credited against IU |
| Partner-level pull-in procedure | Partners pay based on their actual tax situation for the reviewed year |
| Rate modification (C-corp partners) | 21% rate applied to corporate partner shares instead of 37% |
| Tax-exempt partner modification | 0% rate applied to tax-exempt partner shares |
| Outside basis modification | Partners with outside basis adjustments can offset the underpayment |
| Closing agreement | Partnership and IRS negotiate terms |
Practical tip: When a partnership has corporate or tax-exempt partners, the rate modification alone can significantly reduce the IU. CPAs should analyze partner composition as soon as the NOPPA is received, not after the 270-day window closes.
The Push-Out Election (§6226)
As an alternative to paying the IU at the entity level, a partnership may elect to push out the adjustments to the reviewed-year partners under §6226. The push-out shifts responsibility for paying the resulting tax — plus interest computed at 2 percentage points above the underpayment rate — to the partners who were in the partnership during the reviewed year.
How it works:
- The PR elects the push-out within 45 days of the FPA
- The partnership issues adjusted statements (similar to corrected K-1s) to reviewed-year partners
- Each reviewed-year partner computes its additional tax for the reviewed year, computes the interest, and pays the total
- Partners must file a "push-out" statement with their return for the first taxable year following the adjustment year
When push-out is preferable:
- When reviewed-year partners face lower effective rates than 37% (e.g., corporate partners at 21%, partners with NOLs, tax-exempt partners)
- When the partnership itself lacks liquidity to pay the IU
- When current partners should not bear liability for prior-year partners' tax
When entity-level payment may be preferable:
- When the partnership agreement indemnifies current partners for the IU (reviewed-year partners fund a reserve)
- When reviewed-year partners are no longer findable or solvent
- When simplicity of the audit resolution outweighs the rate benefit
Administrative Adjustment Requests
A partnership can also proactively correct a prior-year return by filing an Administrative Adjustment Request (AAR) (IRC §6227) within three years of the later of the filing date or due date of the reviewed-year return. The AAR is the BBA equivalent of an amended partnership return.
Under an AAR, the partnership must either:
- Pay the resulting IU at the entity level, or
- Push out the adjustments to reviewed-year partners via a push-out election
Unlike a traditional amended 1065, a partnership cannot simply file a corrected return and let partners file amended 1040s. The AAR process must be followed. This affects how CPAs handle error corrections discovered after filing.
Annual CPA Compliance Obligations Under the BBA Regime
For clients filing Form 1065, CPAs should:
- Designate a PR each year on Schedule B-2 — do not leave it blank
- Confirm opt-out eligibility annually by reviewing partner type composition before filing
- Review the partnership agreement for BBA-specific provisions: PR selection, notification obligations, indemnification, push-out authority, and funding mechanisms
- Educate the PR on their authority and obligations — many PR designees do not understand that they bind all partners
- Retain reviewed-year records for at least three years from filing, accounting for potential statute extensions
- Track partner ownership changes throughout the year, since the composition at year-end determines both the K-1 recipients and the BBA audit exposure for that year
For an overview of audit risk factors and how the IRS selects returns for examination, see IRS Audit Triggers and Defense. For IRS operational context affecting audit timelines, see IRS Workforce Reduction 2026.
Frequently Asked Questions
Does the BBA regime apply to LLCs taxed as partnerships?
Yes. Any entity that is classified as a partnership for federal tax purposes and required to file Form 1065 is subject to the BBA regime by default, including multi-member LLCs. The legal entity type does not matter — the tax classification does.
Can a partnership opt out of the BBA regime mid-year?
No. The opt-out election must be made on a timely filed Form 1065 for that tax year. It is not available retroactively or after filing.
What happens if the partnership cannot pay the imputed underpayment?
The IU is assessed against the partnership as an entity. If the partnership cannot pay, the IRS has standard collection tools available (liens, levies) against partnership assets. The partnership agreement may provide indemnification rights against reviewed-year partners, but enforcing those rights requires separate action.
Can partners challenge the PR's decisions in court?
Generally, no. Under IRC §6223, the PR's binding authority is broad. Partners cannot independently bring actions in Tax Court to challenge partnership-level adjustments. The only recourse is through the partnership itself, via the PR or by replacing the PR under the partnership agreement.
How does the push-out affect reviewed-year partners who have sold their interest?
Reviewed-year partners who have transferred their interest are still subject to the push-out. The partnership must issue adjusted statements to those partners based on their reviewed-year ownership, and they must pay the additional tax and interest. CPAs should advise departing partners that their BBA exposure for prior reviewed years does not end at transfer.
Are S corporations subject to the BBA regime?
No. S corporations are not partnerships and are not subject to the BBA centralized audit regime. However, a single S-corporation partner in a partnership disqualifies that partnership from making the small-partnership opt-out election.
What is the statute of limitations for a BBA audit?
Generally three years from the later of the filing date or the due date of the Form 1065 for the reviewed year. This extends to six years if the partnership omits more than 25% of gross income. The PR can agree to further extensions. Unlike individual returns, there is no separate statute of limitations tracking at the partner level for items addressed in the BBA regime.
How do I report Schedule K-1 adjustments resulting from a BBA push-out?
Reviewed-year partners receive adjusted statements from the partnership after a push-out election. Partners must include the additional income, loss, deduction, or credit on their return for the year following the adjustment year (not the reviewed year), along with interest at the enhanced rate. See How to Report Schedule K-1 Income for general K-1 reporting mechanics.
Arvori helps CPAs identify insurance coverage gaps and risk management needs for their partnership clients. When a BBA audit produces an unexpected liability, the client's financial exposure — and the CPA's professional risk — can both be significant. Learn how Arvori's CPA-broker collaboration tools connect you with brokers who serve the same clients.