Partnership Examinations After the Bipartisan Budget Act of 2015

Dean L. Surkin, JD, LLM
Published Date:
Mar 1, 2017

The playing field for partnership examinations changes next year, along with how the IRS collects tax on adjustments to partnership income. The partnership—rather than the partners—will pay the tax in the first instance.

Since the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), there have been three regimes of partnership examinations:

  • Small partnerships, with ten or fewer partners. The IRS examines the individual partners.
  • TEFRA partnerships, with more than ten partners. The IRS examines the partnership and the adjustments at the partnership level apply to the partners. Individual partners can contest the adjustment in court.
  • Electing large partnerships, with 100 or more partners that elect to be covered. The IRS examines the partnership and adjustments apply in the year the IRS makes the adjustment. Only the partnership can contest the adjustment in court.

For tax years beginning after Dec. 31, 2017, TEFRA examination rules have been replaced with a new regime that applies to all partnerships, the Bipartisan Budget Act of 2015. Under this new regime, all items are determined at the partnership level under IRC section 6221(a), and the tax is paid by the partnership. Under IRC section 6225, the tax equals the “imputed underpayment,” figured at the highest rate—individual or corporate, depending upon current law—applied to the adjustment.

Election Out of the New Regime

A partnership with fewer than 100 partners may elect out of the partnership examination regime under IRC section 6221(b). The IRS would conduct the examination on the level of the partners rather than that of the partnership. The election out must be made for each year and must be filed with a timely return. The election must disclose the name and TIN of each partner—and, if any partner is an S corporation, the name and TIN of each S corporation shareholder. The partnership must notify each partner of the election.

In order to elect out, each of the partners of such partnership must be an individual, a C corporation, any foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner. Under IRC section 6221(b)(1)(B), the partnership does not qualify if it is required to furnish more than 100 Schedules K-1 in that year. This means that even if the partnership never had more than 100 partners at any one time, but the partnership interests changed hands and the total number of Schedules K-1 exceed 100, the partnership cannot elect out.

Early Election Into the New Regime

A partnership can elect coverage under the new regime for taxable years beginning after Nov. 2, 2015 and before Jan. 1, 2018 under Treasury Regulation sections 301.9100-22T(a). Under Treasury Regulation sections 301.9100-22T(d), the partnership may elect into the new regime as long as it has neither filed an amended return for the year nor an administrative adjustment request for the year.

Under Treasury Regulation sections 301.9100-22T(b)(1) and (2), the partnership must make the election within 30 days after receiving written notice from the IRS that it has selected the return for examination. The tax matters partner must send the election to the IRS contact listed on the notice of selection received from the IRS, and it must include

  • the partnership name, TIN, and taxable year;
  • the signature of the person sending the election, including his or her name, TIN, address, and daytime telephone number;
  • a statement that the partnership is electing application of Section 1101(c) of the BBA for the partnership return for the eligible taxable year identified in the notice of selection for examination; and
  • information about the partnership representative (name, TIN, address, daytime telephone number).

These statements must include representations about the partnership’s solvency and must be signed under penalties of perjury.

How the New Regime Works

The partner’s return must be consistent with the partnership return, or the partner must file a disclosure (just like current law) under IRC section 6222.

Under IRC section 6223, the partnership must designate a partnership representative, whose decisions are binding on the partnership. Note the difference between this and the tax matters partner of prior law—the representative need not be a member of the partnership. The actions taken by the partnership and the final decision in a tax proceeding bind the partnership and all of its partners.

The new regime introduces the concepts of the reviewed year and the adjustment year.

Under IRC section 6225(d)(1), the reviewed year is the partnership taxable year being examined. Under IRC section 6225(d)(2), the adjustment year can be one of three different years:

  • If there is a court decision, it’s the year the decision becomes final.
  • If the partnership files an administrative adjustment request, it’s the year the request was made.
  • In any other case, it’s the date the IRS mails the notice of final partnership adjustment.

Note that there may be different partners in the adjustment year than there were in the reviewed year. Also note that the imputed underpayment is not deductible by the partnership—after all, federal income taxes aren’t deductible—under IRC section 6241(4).

The IRS examination may result in a positive adjustment (an increase to income or reduction in credits) or a negative adjustment (a decrease to income or an increase in credits). Of course, there’s always the possibility of no change.

Under IRC 6225(a)(2), if there’s a positive adjustment, the partnership pays the imputed underpayment in the adjustment year. The imputed underpayment equals the net of all adjustments, including any increase or decrease in losses or credits, multiplied by the highest rate of tax (whether individual or corporate) in effect for the reviewed year.

The current highest individual rate in IRC section 1 is 39.6%, and the highest corporate rate in IRC section 11 is 35%, so the 39.6% rate applies. As of this writing, there are proposals to change the top rates in both sections.

If there’s a negative adjustment, it applies in the adjustment year. No matter the character of the adjustment, it reduces the non-separately stated partnership income (i.e., partnership ordinary income). Under IRC section 6225(a)(2), the only exception is that a negative adjustment that is a credit affects the separately stated credit.

If the partnership no longer exists during the adjustment year, the former partners report the adjustment. The mechanism for doing so will be determined by regulations yet to be issued, according to IRC section 6241(7).

The imputed underpayment—that applies in the case of a positive adjustment—equals the net of all adjustments, including any increase or decrease in losses or credits, multiplied by the highest rate of tax, whether individual or corporate, in effect for the reviewed year. If there is an adjustment to allocations among the partners, only the increase to a partner affects the imputed underpayment. The reduction to another partner is disregarded under IRC section 6225(b)(2).

Modification of Imputed Underpayments

According to IRC section 6225(c), the Treasury Department will issue regulations governing the mechanics of modifying the imputed underpayment. A modification isn’t automatic—it must be approved by the IRS, and the partnership must submit its modifications within 270 days after the IRS mails its notice of proposed partnership adjustment.

Some of the possible modifications under IRC section 6225(c) are:

  • Partners filing amended returns
    • For each partner that reports his, her, or its share of adjustments for the reviewed year and pays the tax, those adjustments are excluded from the partnership-level adjustments.
    • This rule about excluded adjustments will not apply to a partnership adjustment that reallocates income among the partners, unless all the affected partners file amended returns.
  • Tax-exempt partners
    • If partnership proves part of the adjustment is allocated to a tax-exempt partner, then that part of the adjustment is excluded from the imputed underpayment calculation.
  • Modification of highest rate
    • If the partnership proves part of the adjustment is allocated to a C corporation, then the IRC section 11 rate applies.
    • If part or all of adjustment is a capital gain or a qualified dividend, then the capital gain rate applies.
  • Passive activity losses of publicly traded partnerships
    • The net decrease in specified passive activity loss is to be excluded from the imputed underpayment.


Under IRC section 6223(a)(2), interest starts on the day after the due date for the reviewed year return and ends on the due date for the adjustment year return under IRC section 6233(a)(2).

Penalties are computed as if the partnership were an individual, and as if the imputed underpayment were an actual underpayment for the reviewed year under IRC section 6233(a)(3).

Under IRC section 6226(a), the partnership may elect to have the partners make the payment. It must make the election within 45 days after the date of notice of final partnership adjustment. The partnership must also provide a statement showing the allocation of the adjustment among partners. Under IRC section 6226(b), once the partnership makes this election, each partner computes the tax as if income had been increased in the reviewed year, and each partner also computes the effect the adjustment has on subsequent years. The partner pays tax in the adjustment year. Under IRC section 6226(c), penalties and interest apply for the reviewed year—and subsequent years, if the adjustment affected them.

Under IRC section 6227(c), a partnership may file an administrative adjustment request (i.e., an amended return) within the three-year statute of limitations. The partnership adjustment applies in the year the partnership makes the request under IRC section 6227(b).


The notice of administrative proceeding begins the examination. The IRS mails it—and all subsequent notices—to both the partnership and the partnership representative under IRC section 6231(a).

In the course of the examination, the IRS issues the notice of proposed partnership adjustment and subsequently the notice of final partnership adjustment. This final notice can be issued no earlier than 270 days after the date the IRS mailed the notice of administrative proceeding, and no later than 330 days after the notice of proposed partnership adjustment under IRC section 6235(a)(3). The final notice acts as the Notice of Deficiency (i.e., the 90-day letter that is the prerequisite for Tax Court jurisdiction). Under IRC section 6234(b)(1), the partnership may choose to litigate in the U.S. District Court or the Court of Federal Claims, but it must pay the imputed underpayment in full when—or before—filing suit.

Under IRC section 6231(b), the IRS cannot reopen a year after mailing the notice of final partnership adjustment and the partnership filing a petition in Tax Court.

To the extent applicable, the regular rules for the statute of limitations, assessment, and collection apply.


The partnership-level examinations and payments greatly simplify IRS enforcement regarding large, publicly traded partnerships. Additionally, multistate professional partnerships that have fewer than 100 partners—such as accounting firms—may see an advantage to not electing out of the new regime, due to the ease of enforcing a fair sharing of the tax burden.

We can readily anticipate statutory changes to the IRC, and those of us who practice in the area of partnerships should carefully watch for the anticipated regulations and any other changes to the IRC.

dean-surkinDean L. Surkin, JD, LLM, is a principal at JM CPA LLP and is the firm’s in-house counsel. He is a tax attorney with broad-based experience in tax planning and research; has litigated major cases in the fields of taxation, probate and general commercial matters; and has been peer-reviewed by Martindale-Hubbell. He holds the highest rating for legal ability and ethical standards, AV. Mr. Surkin received his BA from the University of Pennsylvania in 1973 (double major in mathematics and political science), his JD from New York University School of Law in 1976, and his LLM in taxation from New York University School of Law in 1985. He is admitted to the New York State Bar, the Federal District Courts of the Southern and Eastern Districts of New York, the Second Circuit Court of Appeals, and the U.S. Tax Court. Mr. Surkin also holds the faculty appointment of professor (adjunct) at Pace University Graduate School of Business, where he currently teaches tax procedure, research, writing, and ethics. He can be reached at (212) 303-1887 or

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