Partnership BBA Audit Regime: CPAR, Push-Out Elections, and Practitioner Guide

The Bipartisan Budget Act of 2015 fundamentally restructured how the IRS audits partnerships and collects resulting taxes. Under the prior TEFRA regime, the IRS audited the partnership but collected from the partners individually. Under the BBA centralized partnership audit regime (CPAR), the IRS audits and collects from the partnership entity directly -- a shift that carries significant consequences for partners who entered or exited the partnership between the year under audit and the year the tax is paid. For enrolled agents, CPAs, and tax attorneys representing partnerships or their partners, understanding CPAR's default rules, the push-out election, the Partnership Representative's binding authority, and the available modification procedures is no longer optional. This guide covers each of those tools in practitioner-level detail.

All procedures, IRC citations, form mechanics, regulatory references, and IRM section numbers in this guide must be verified at IRS.gov before being relied on in client engagements. IRS procedures and regulatory guidance are subject to change. This guide is informational and does not constitute legal or tax advice.

Section 1: BBA Background and the Shift from TEFRA

TEFRA (1982): partner-level adjustments

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) created the first unified partnership audit regime. Under TEFRA, the IRS examined partnership items at the partnership level but then issued notice to each partner individually, and each partner had independent audit rights and could challenge adjustments. Collection was at the partner level: the IRS assessed and collected from each partner for their share of the adjustment. The regime required the IRS to track down and issue notice to every partner, a burden that made large-partnership audits administratively difficult.

Electing Large Partnerships: a pre-BBA alternative

Before BBA, partnerships with 100 or more partners could elect into a different regime (Electing Large Partnerships, or ELP), which simplified certain audit and reporting procedures. ELP was a minority-use election and has been fully replaced by BBA for tax years beginning after December 31, 2017.

BBA (Bipartisan Budget Act of 2015): effective date and scope

The BBA was enacted in November 2015 and created the centralized partnership audit regime now codified in IRC 6221 through 6241. BBA applies to all partnership tax years beginning after December 31, 2017. It replaced both TEFRA and ELP entirely for those years. Any partnership return covering a year that started on or after January 1, 2018 is subject to BBA unless the partnership made a valid, timely election out under IRC 6221(b).

The key philosophical shift from TEFRA to BBA

Under TEFRA: the IRS audited partnership items at the entity level but assessed and collected from individual partners. Partners had audit rights and received notice. Under BBA: the IRS audits AND assesses AND collects from the partnership entity directly. Partners generally have no right to participate in the audit or receive notice from the IRS (unless the partnership agreement provides otherwise). The practical consequence is that the entity -- not the individual partners -- is on the hook for the tax bill, and that bill falls on whoever is a partner in the adjustment year, not necessarily the partners who were responsible for the items that generated the audit adjustment.

Congress's stated purpose was to make partnerships easier and more efficient to audit by eliminating the requirement to track down and assess against each individual partner. For practitioners advising clients on whether to organize as a partnership versus another entity type, the BBA audit exposure and its consequences for partners deserve careful attention. For a comparison of the compliance and audit differences across entity types, see the S corporation conversion practitioner guide, which covers entity-structure decisions and built-in gains tax considerations when converting a C corporation to an S corporation.

Section 2: The Centralized Partnership Audit Regime (CPAR) -- Default Rule

CPAR is the default rule for all BBA partnerships. Unless the partnership makes the push-out election (IRC 6226) or validly elected out of BBA (IRC 6221(b)), the following mechanics apply.

Imputed Underpayment (IU)

When the IRS determines a net positive adjustment to the partnership's items, it calculates an Imputed Underpayment (IU). The IU is the net positive adjustment multiplied by the highest applicable tax rate in effect for the reviewed year. The IRS applies the highest rate without regard to the actual tax bracket of any individual partner. Verify the current applicable rate at IRS.gov; the rate used in computing the IU is a critical variable and is subject to change.

Assessment at the partnership level

Under CPAR, the IU is assessed against the partnership entity, not against its partners. The partnership pays the IU out of partnership assets. The individual partners are not assessed directly by the IRS under the default rule (though they may bear the economic cost through the partnership's diminished assets or a capital account reduction).

Reviewed year vs. adjustment year: the core inequity

The "reviewed year" is the tax year being audited. The "adjustment year" is the year in which the partnership actually pays the IU. Because BBA audits can take several years to complete, the adjustment year may be considerably later than the reviewed year. Under the default CPAR rule, the tax is paid by the partnership in the adjustment year, and the economic burden falls on whoever is a partner at that time -- the adjustment year's partners -- even though the tax arose from items generated by the reviewed year's partners. This is the central inequity of CPAR: partners who had nothing to do with the items under audit may bear the full economic cost of the resulting tax.

Response strategies under CPAR

When the CPAR default would produce an inequitable or uneconomic result, practitioners have three primary tools:

• Push-out election (IRC 6226, Form 8988): shifts the adjustment to the reviewed year's direct and indirect partners, who pay at their own rates. Covered in Section 3.
• Modification procedures (IRC 6225(c)): reduce the IU before it is paid at the partnership level. Covered in Section 5.
• Partnership agreement provisions: allocate the economic burden of any adjustment-year tax payment back to the reviewed-year partners through adjustments to distributions, capital accounts, or buyout pricing. These provisions must be in place before the audit closes; they cannot be retroactively imposed.

IRM 4.31.13

IRM 4.31.13 is the IRS Internal Revenue Manual section governing examination procedures for BBA partnership audits. As of the date of this guide, the section was updated in August 2025. Practitioners should verify the current version of IRM 4.31.13 at IRS.gov before advising on BBA examination procedure; IRM sections are updated periodically and the current version controls IRS examiner conduct.

Section 3: The Push-Out Election (IRC 6226 / Form 8988)

The push-out election is the most powerful tool available to avoid the CPAR default and correct the reviewed-year/adjustment-year inequity. When the election is properly made, the partnership does not pay the IU; instead, the adjustment is pushed out to each reviewed year's direct and indirect partners, who compute and pay their own share of the tax.

How the push-out works

After the IRS issues the Final Partnership Adjustment (FPA), the partnership may elect to push the audit adjustment out to each reviewed year's partners rather than paying the IU at the entity level. Each affected partner then receives a statement from the partnership identifying their share of the adjustment. The partner files amended returns (or takes alternative statement procedures as permitted by applicable regulations) and pays their share of the resulting tax plus interest. The interest runs from the original return due date of the reviewed year, not from the FPA date, so the interest accumulation can be significant depending on how many years elapsed between the reviewed year and the FPA.

Timing: 45 days from the FPA

The push-out election must be made within 45 days of the date the IRS issues the Final Partnership Adjustment. This is a hard deadline. Missing the 45-day window means the CPAR default applies and the partnership must pay the IU. Practitioners should calendar this deadline immediately upon receiving the FPA and confirm the PR is aware of it.

Form 8988: the election form

The push-out election under IRC 6226 is made on Form 8988 (Election for Alternative to Payment of the Imputed Underpayment). Specific Form 8988 mechanics, statement procedures, and the requirements for notifying reviewed year partners must be verified against the current Form 8988 instructions and Treas. Reg. 1.6226-1 through 1.6226-3 at IRS.gov before relying on them. Form instructions and regulations are periodically updated.

Interest runs from the reviewed year

When the push-out election is made, interest on each partner's share of the adjustment runs from the original return due date of the reviewed year (not from the FPA date and not from the date the partner receives the statement). In a BBA audit where the reviewed year is several years in the past, the interest load on each reviewed year partner can be substantial. Partners should be advised of the interest exposure before the partnership makes the push-out election.

When the push-out election is most advantageous

• Reviewed year partners face lower effective tax rates than the highest applicable rate used to compute the IU. Under CPAR, the IU is computed at the top rate regardless of partner composition; push-out allows each partner to pay at their actual rate.
• Individual reviewed year partners have unused losses, credits, or deductions that can offset the pushed-out adjustment on their amended returns.
• The partnership's partner composition changed materially between the reviewed year and the adjustment year, so the adjustment year partners (who would bear the CPAR default burden) are not the same people who generated the items under audit.
• Tax-exempt reviewed year partners hold a significant interest; under push-out, their share of the adjustment produces no tax (subject to modification procedures also reducing that amount, covered in Section 5).

Section 4: Partnership Representative

Under BBA, the concept of the Tax Matters Partner (used under TEFRA) is replaced by the Partnership Representative. The PR has significantly more authority and significantly fewer constraints than its predecessor.

IRC 6223: sole authority

Under IRC 6223, the PR has sole authority to act on behalf of the partnership and all of its partners in any BBA audit proceeding. The PR's actions bind the partnership and every partner. Individual partners have no right to participate in the audit, no right to receive notice from the IRS of audit developments, and no independent right to challenge adjustments -- unless the partnership agreement specifically provides for such rights. The IRS deals exclusively with the PR, not with individual partners.

Who can serve as Partnership Representative

Any person or entity with substantial presence in the United States may serve as PR. The PR does not need to be a partner in the partnership. Common designations include a managing partner, a management company, a CPA firm, or the partnership itself. If the PR is an entity rather than an individual, the entity must designate a specific individual (called the Designated Individual, or DI) who will act on behalf of the entity in the BBA proceeding.

Designation and annual confirmation

The PR is designated on the annual Form 1065 for each tax year. The PR designation applies to the specific tax year covered by that return. Partners and their advisors should confirm the PR designation on each year's Form 1065 and verify that the designated person is still appropriate and willing to serve. A PR designation from a prior year does not carry forward automatically to a new tax year. A change in PR during an active BBA audit requires notification to the IRS.

Practitioner risk: serving as PR

When a CPA or tax attorney is named as PR, that person holds binding authority over the partnership and every partner in any BBA audit. Decisions made by the PR -- including whether to agree to proposed adjustments, whether to make the push-out election, and whether to petition Tax Court -- bind all partners with no right of override. Practitioners asked to serve as PR should think carefully about the scope of that authority and the potential professional liability before accepting the designation. In most cases, it is preferable for the PR to be a partner or managing member of the partnership rather than the outside advisor.

Partnership agreement provisions for the PR

Well-drafted partnership agreements should address the following BBA-specific items:

• Procedures for designating, replacing, and removing the PR.
• Scope of the PR's authority and any limitations on that authority (for example, requiring consent of a majority of partners before the PR may agree to an adjustment exceeding a specified dollar amount).
• Requirement that the PR notify all partners when a BBA audit is initiated and when material developments occur.
• Who has authority to decide whether the push-out election is made (the PR? the majority? all partners?).
• Indemnification of the PR for actions taken in good faith in the course of the audit proceeding.
• Procedures for coordinating with reviewed year partners who are no longer current partners when a push-out election is being considered.

Section 5: Modification Procedures (IRC 6225(c))

Before the partnership pays the IU at the partnership level (or makes the push-out election), IRC 6225(c) gives the partnership a 270-day window after the Notice of Proposed Partnership Adjustment (NOPPA) to reduce the IU through modification procedures. Modifications can significantly reduce the IU by accounting for actual partner-level circumstances that the CPAR default ignores.

The four main modification types

(a) Amended return modification: Reviewed year partners file amended returns for the reviewed year that report their share of the adjustment and pay the resulting tax at their actual rates. The IU is then reduced by the tax paid by those partners at the partner level. This is the most common modification type and effectively replicates (for the partners who use it) the result that would have applied under TEFRA.

(b) Tax-exempt partner modification: The portion of the IU attributable to reviewed year partners that are tax-exempt is reduced or eliminated. A tax-exempt partner (such as a qualified pension plan or a charitable organization) would not owe tax on the adjustment even if it had been reported on its own return, so the IU is reduced for that portion.

(c) Rate modification: If reviewed year partners were taxed at rates lower than the highest applicable rate (for example, because the items produce capital gain income taxed at preferential rates, or because individual partners were in lower brackets), the IU rate is adjusted to reflect the actual rates applicable to those partners.

(d) Pass-through partner modification: If a reviewed year partner is itself a partnership, S corporation, or other pass-through entity, that entity can push the adjustment further down through its own owner structure. The modification reduces the IU for the portion that flows to those pass-through partners' ultimate owners.

The 270-day modification window

The modification window opens when the IRS issues the Notice of Proposed Partnership Adjustment (NOPPA). The partnership has 270 days to submit modification requests; extensions are available by agreement with the IRS. Modification requests require the cooperation of the reviewed year partners (for example, partners must agree to file amended returns under the amended return modification). Practitioners should begin evaluating modification opportunities as soon as the NOPPA is received, not after the window has narrowed.

Coordination with the push-out election

Modifications reduce the IU. The push-out election then shifts whatever IU remains after modifications to the reviewed year's partners. The two tools are commonly used together: modifications reduce the IU as much as possible, and then the push-out election eliminates whatever remains by shifting it to the partners who can pay at their actual rates. Decisions about whether to modify, push out, or do both should be made before the FPA is issued, since the push-out election window opens only after the FPA and must be exercised within 45 days.

Section 6: Small Partnership Election (IRC 6221(b))

Partnerships that qualify may elect out of the BBA centralized audit regime entirely. An eligible partnership that makes this election is not subject to CPAR; instead, the IRS audits at the partner level, similar to the pre-BBA TEFRA procedures.

Eligibility requirements

To be eligible to elect out of BBA for a given tax year, the partnership must satisfy both of the following conditions for that year:

• 100 or fewer partners: The partnership must have 100 or fewer partners (measured by K-1 recipients) for the tax year.
• All partners are eligible partners: Every partner must be an "eligible partner" throughout the year. Eligible partners include: individuals; C corporations (and foreign entities treated as C corporations); S corporations that meet applicable requirements; foreign persons; estates of deceased partners; and certain trusts. Partners that disqualify the election include: other partnerships, nominees, disregarded entities, and certain trusts that do not meet the eligibility requirements.

A single ineligible partner -- for example, one partner that is itself a partnership -- bars the election for the entire partnership, regardless of total partner count. Verify eligibility in the actual tax year before making the election, not just in the current year.

How to make the election

The small partnership election must be made on a timely filed Form 1065 for the tax year in question (including extensions). The election is not made once and carried forward; it is an annual election that must be affirmatively made on each year's return for which BBA opt-out is desired. A late-filed return cannot carry a valid election out.

Invalid elections

If the IRS determines that the election was invalid (because the partnership did not meet the eligibility requirements, or because the election was made on an untimely return), the partnership is subject to BBA CPAR as if no election had been made. Practitioners should verify eligibility each year before making the election and document the eligibility determination in the file. An invalid election discovered during an audit is a significant problem because the partnership has not designated a PR and has not maintained the BBA procedures that would otherwise apply.

Section 7: Administrative Adjustment Request (AAR)

The Administrative Adjustment Request (AAR) is the mechanism BBA partnerships use to correct a prior-year return on their own initiative, without waiting for an IRS audit. The AAR is the BBA equivalent of a partnership amended return; it is not a defensive tool in an IRS audit, but a proactive tool to fix known errors. For non-BBA partnerships, the standard amended Form 1065 process applies; for BBA partnerships, only the AAR is available to initiate a correction.

How to file an AAR

The partnership files Form 1065-X (Amended Return or Administrative Adjustment Request) identifying the adjustments and computing the resulting tax change. Alternatively, the partnership may file a superseding return before the original return's due date (including extensions). The AAR must identify each item being adjusted and the amount of the adjustment. Verify the current form, instructions, and filing requirements at IRS.gov before filing an AAR; form requirements and procedures are subject to change.

Two AAR payment options: pull-in and push-out

When the AAR results in an adjustment that creates additional tax, the partnership has two options for paying that tax:

• Pull-in (partnership pays): The partnership pays the resulting adjustment at the entity level, similar to the CPAR default. The partnership computes the tax on the net positive adjustment and pays it directly.
• Push-out (partners pay): The partnership issues statements to the reviewed year's partners, who then report and pay their share of the adjustment. The push-out option in the AAR context has mechanics similar to the IRC 6226 push-out election in an IRS audit.

Timing: statute of limitations for AARs

An AAR generally must be filed within three years of the later of the return due date or the date the return was actually filed for the reviewed year. Filing an AAR does not prevent the IRS from independently initiating a BBA examination of the same partnership for the same or a different tax year. If an IRS examination is already open, coordinate any AAR filing with the examining team. Verify the current AAR statute of limitations and filing procedures at IRS.gov.

Practitioner uses for the AAR

The AAR is the right tool when the partnership discovers a material error in a prior-year return before the IRS initiates an audit. Filing an AAR can demonstrate good faith, potentially reduce the risk of an IRS-initiated examination on the same issue, and give the partnership control over the correction process (including the choice between pull-in and push-out). Practitioners handling corrections to prior-year partnership returns for BBA partnerships should default to the AAR, not an amended Form 1065. For a detailed discussion of basis tracking issues at the partner level that often surface in connection with prior-year corrections, see the partnership and S corporation basis tracking guide. Where a BBA adjustment turns on the relationship between inside basis and outside basis, the Section 743(b) and 734(b) mechanics governing those adjustments are covered in our IRC 754 election and basis adjustment guide.

Section 8: The BBA Audit Timeline

A BBA audit follows a specific procedural sequence. Each stage has its own deadlines and practitioner obligations. The timeline below covers the standard BBA examination process from initiation through Tax Court.

Section 9: Practitioner Checklist and Partnership Agreement Review

The following checklist covers the key compliance and planning actions for practitioners advising BBA partnerships. Use this list as a starting point; specific facts and circumstances will require additional steps not listed here.

Annual compliance actions

• Review the current Form 1065 to confirm the PR designation is correct and that the designated person is still appropriate, willing to serve, and has substantial US presence.
• Determine each year whether the partnership qualifies for the small partnership election under IRC 6221(b); verify partner count and all partners are eligible partners; make the election on a timely-filed Form 1065 if eligible and if the election is advisable given the partnership's circumstances.
• If an IRS notice of selection for examination is received, confirm the PR is aware immediately; notify all partners per the partnership agreement; do not have any partner contact the IRS directly without authorization from the PR.

During an active BBA audit

• Upon receiving the NOPPA, calculate the potential IU early and evaluate the three response pathways: (a) modification procedures to reduce the IU; (b) push-out election to shift the IU to reviewed year partners; (c) a hybrid approach using both.
• Coordinate with all reviewed year partners before making modification or push-out election decisions. The PR has sole authority to act, but should make those decisions with the informed consent of the relevant partners (especially reviewed year partners who are no longer current partners and who will be directly affected by a push-out election).
• Evaluate Tax Court as an option before the FPA's 90-day window expires, particularly for partnerships facing large or legally complex adjustments.
• Calendar the 45-day push-out election deadline from the FPA date as the first action upon receiving the FPA.
• Calendar the 90-day Tax Court petition deadline from the FPA date simultaneously.

Partnership agreement review

• Review partnership agreements for adequate BBA provisions: PR designation and removal procedures; PR authority scope and any limitations; partner notification requirements for material audit developments; push-out election decision-making authority; PR indemnification; reviewed-year partner coordination procedures.
• For partnerships that may undergo partner buy-ins or buy-outs, ensure the agreement addresses the economic allocation of any BBA audit adjustment that arises from reviewed years in which the incoming or outgoing partner was not a member of the partnership.
• Confirm that the partnership agreement's BBA provisions have been updated for any changes in the partnership's ownership structure or management that affect PR designation.

Frequently Asked Questions

Related Practitioner Guides

The following guides cover partnership tax rules that practitioners should consider alongside the BBA audit and CPAR push-out election analysis.

• IRC 705 and 752 Partnership Outside Basis Guide -- BBA partnership audit adjustments in the reviewed year can affect partners' outside basis under IRC 705 when the partnership makes a push-out election; practitioners must track basis implications alongside the audit adjustment.
• IRC 704(b) and 704(c) Partnership Allocations Guide -- BBA audits frequently target improperly reported partnership allocations under IRC 704(b); understanding the allocation rules is essential for assessing and responding to IRS examination adjustments.
• Schedule K-1 Allocation Errors and Amended Partnership Return Guide -- K-1 allocation errors are among the most common triggers for BBA partnership audits; the amended return and administrative adjustment request options run parallel to the BBA push-out election.
• IRC 6501 Audit Statute of Limitations Guide -- BBA partnership audits operate under special statute of limitations rules separate from the standard IRC 6501 assessment periods; practitioners advising partnership clients on audit risk must understand both frameworks.
• IRC 706: Partnership Taxable Year and Section 444 Deferral Election -- BBA audits may span multiple taxable years of the partnership; under IRC 706(b), the partnership's taxable year determines the reviewed year and the adjustment year; when a BBA audit straddles a change in the partnership's required taxable year, practitioners must track which IRC 706 tax year each reviewed item belongs to before computing the imputed underpayment or push-out amounts.
• IRC 708: Partnership Termination Statute -- open BBA audit years survive partnership termination; the partnership representative retains authority to bind former partners in post-termination audit proceedings and to make the push-out election for reviewed years.
• IRC 761: Partnership Defined, Election Out -- an organization that has not elected out under IRC 761(a) is a partnership subject to BBA centralized audit; an organization that successfully elected out is not subject to the BBA audit rules or CPAR.

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