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Forbes
24-06-2025
- Business
- Forbes
5 Things You Should Know About The IRS BBA Partnership Audit Rules
BBA Partnership Audits Partnerships are an enigma under federal tax law. Although the partnership files an annual income tax return (i.e., Form 1065), the partners report their allocable share of the partnership's tax items on their income tax returns (e.g., Form 1040). Due to the complexity inherent in partnership income tax reporting, Congress has historically struggled in attempting to find an appropriate examination tool to provide to the IRS to audit partnerships. After more than three decades under the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), Congress changed the partnership audit and collection rules through passage of the Bipartisan Budget Act of 2015 (BBA). Under the BBA, the IRS must generally audit the partnership unless the partnership qualifies for and makes a timely election out of the BBA centralized partnership audit regime. Significantly, the BBA audit provisions also allow the IRS to collect taxes directly from the partnership unless the partnership makes a timely election to 'push out' the adjustments to its partners. The new BBA partnership audit rules are complex and provide ample opportunities to mess up, including missing an election. This article discusses five components of the BBA audit provisions that every tax professional should recognize and understand. BBA Partnership Audit Notices The IRS generally issues four notices during a BBA partnership audit. These notices include: (i) notices of selection for examination; (ii) notices of administrative proceeding (NAP); (iii) notices of proposed partnership adjustment (NOPPA); and (iv) notices of final partnership adjustments (FPA). To commence a BBA examination, the IRS issues the partnership a notice of selection for examination. Roughly thirty days after this notice, the IRS issues the NAP. After the NAP is issued, neither the partnership nor its partners may file an administrative adjustment request or notice of inconsistent statement, either of which often seeks to change the partnership's income tax reporting. If the IRS examiner concludes that adjustments are necessary to the partnership return, the agency will issue a NOPPA that contains and details the proposed partnership adjustments. As discussed more below, the IRS will first allow the partnership an opportunity to an administrative appeal prior to issuance of the NOPPA. After issuance of the NOPPA, the partnership has a 270-day window to request modifications to the proposed partnership-level tax, which is known as an 'imputed underpayment.' Generally, the partnership representative makes the modification requests by electronically filing an IRS Form 8980, Partnership Request for Modification of Imputed Underpayment Under IRC Section 6225(c). If the partnership and the IRS continue to disagree on the proposed adjustments, the IRS issues an FPA. The FPA triggers two important deadlines. First, the partnership representative may elect to 'push out' the FPA's adjustments to the partners if an election is made within 45 days of the FPA. Second, the FPA starts a 90-day deadline for the partnership representative to contest the FPA's determinations in federal court. BBA Partnership Push-Out Election A timely push-out election can significantly reduce overall income tax. If the partnership representative makes the election, any proposed adjustments resulting in an imputed underpayment are pushed out to the reviewed-year partners, i.e., the persons who were partners for the year under IRS scrutiny. Because a push-out election results in a higher applicable interest rate, however, partnerships should consult with their tax advisors to determine the impact of the push-out election prior to making it. Given the 45-day deadline, there is not much time here to make the analysis—so tax advisers should be engaged early on after the IRS issues the FPA. A partnership representative makes a push-out election by completing and electronically filing an IRS Form 8988, Election to Alternative to Payment of the Imputed Underpayment – IRC Section 6226. In addition to filing this form, the partnership representative must provide the partners with certain information concerning the push-out adjustments. These push-out statements must be provided to the partners generally within 150 days of the FPA if the partnership representative accepts the proposed adjustments and does not seek judicial review. If the partnership representative files a timely petition for readjustment in federal court, the push-out statements must generally be provided to the partners within 60 days from the date the court enters its final decision. In either instance, the partnership representative provides its partners with IRS Forms 8985, Pass-Through – Statement Transmittal / Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227), and 8986, Partner's Share of Adjustment(s) to Partnership-Related Items(s) (Required Under Sections 6226 and 6227). If these statements are not provided timely, the IRS may attempt to revoke the push-out election. BBA Partnership Audits And Deposits A BBA partnership dispute can last a long time—even more so if the partnership representative contests the proposed adjustments in federal court. If the partnership representative makes a push-out election and ultimately loses on the merits at federal court, the partners may be responsible for significant interest on the resulting income taxes. Section 6603 of the Code, which governs deposits, may be helpful here. When a taxpayer makes a deposit, it stops interest from accruing on potential taxes owed. BBA partners can make deposits of tax to stop interest, but they must follow special rules. Under IRS guidance, a BBA partner can make a section 6603 deposit by submitting a payment of the estimated tax and submitting a statement to the IRS designating the payment as a deposit. In the statement, the partner should include: (i) the name and TIN of the partnership under examination; (ii) the reviewed year of the partnership under examination; (iii) the audit control number of the partnership under examination; (iv) a statement of the amount and basis of the disputable tax; and (v) the partner's estimated allocable share of the adjustments and the tax, interest, and penalty computations. IRS Appeals Rights In BBA Partnership Audits The IRS Independent Office of Appeals (IRS Appeals) provides taxpayers with an impartial administrative forum to resolve their tax disputes with the IRS. IRS Appeals hears non-docketed cases and docketed cases. Non-docketed cases are those, as applicable to BBA partnership audits, where no petition for readjustment has been filed. Docketed cases are those pending in a federal district court. Generally, the IRS will issue a '30-Day Letter' to the partnership representative after the conclusion of the examination. The 30-Day Letter notifies the partnership of the proposed partnership adjustments and offers the partnership a right to appeal the adjustments with IRS Appeals. To request an appeals conference, the partnership representative must submit a timely protest. In addition, IRS Appeals will only accept cases where there is sufficient time remaining on the statute of limitations for the IRS to make an assessment. Accordingly, the IRS often asks for a statute of limitations extension waiver from the partnership representative in these circumstances. If the partnership representative submits a timely protest, the partnership has an opportunity to discuss disputes associated with the proposed adjustments with IRS Appeals. These disputes can relate to issues of fact or law. IRS Appeals reviews the parties' contentions to determine whether a settlement may be reached without judicial intervention. Regardless of settlement, IRS Appeals issues the NOPPA at the conclusion of the appeals conference, which as mentioned above triggers the 270-day modification period. If the partnership representative requests modifications and the IRS refuses to grant them, the case may be forwarded again to IRS Appeals solely to review the modification requests. Thereafter, IRS Appeals issues the FPA. Similar to non-docketed cases, IRS Appeals seeks to resolve disputes between the partnership representative and the IRS in docketed cases. BBA Partnership Audits And Judicial Review When the agency issues an FPA, the partnership representative has 90 days to file a petition for readjustment with the proper federal court, which is either the U.S. Tax Court, the district court in which the partnership's principal place of business is located, or the Court of Federal Claims. Partnerships do not have to pay the imputed underpayment prior to filing a petition in the U.S. Tax Court. But for a federal district court or the Court of Federal Claims to have jurisdiction, the partnership must make a deposit of the proposed imputed underpayment with the IRS on or before the petition filing date. By statute, the partnership must also pay any proposed penalties and 'additional amounts.'
Yahoo
06-02-2025
- Business
- Yahoo
Cutting Costs Alone Won't Make Government More Efficient
The U.S. Capitol Building is seen from the Washington Monument the day after Donald Trump was sworn into office as the 47th President of the United States on January 21, 2025 in Washington, DC. Credit -The Trump Administration has decided what the path to efficient government looks like: Cut costs, cut programs, cut jobs. Elon Musk and the 'Department of Government Efficiency' (DOGE) has already claimed responsibility for $420 million in cancelled federal contracts so far. Canceling contracts and cutting costs have their role to play in the pursuit of efficiency, but, beyond these approaches, there are three criteria essential to efficient spending that the Trump Administration must embrace if it wants to be successful. When met, these criteria are the difference between wasting taxpayer dollars and spending taxpayer dollars on outcomes-driven programs that are good for government, good for business, and, most importantly, good for working people. The first rule for efficient spending is that we should routinely evaluate programs to see if they continue to meet their stated goals. Too often, we fund programs without monitoring their results or continue to fund programs that worked only once. This must change. The second rule for efficient spending is even more straightforward: we should spend money only on programs that get results and course correct when they don't. The third rule is the most innovative of the three: we should develop financial mechanisms that extend the impact of every taxpayer dollar we spend. Taken together, these criteria are the basis for the 'Pay for Success' model that took off in England in 2010 and that we've been testing and refining ever since. Pay for Success is a practical, outcomes-based approach that channels government funding to social programs that get results and offramps programs that underperform. The model has been implemented at the federal and state levels in the United States as well to great success. In 2018, Congress passed, and President Trump signed, the Social Impact Partnerships to Pay for Results Act (SIPPRA) as part of the Bipartisan Budget Act. SIPPRA appropriated $100 million to support the launch of state and local Pay for Success initiatives over a decade. Since then, millions in grants have been awarded to states and cities for a range of evidence-based initiatives–most recently housing and childhood literacy–with proven results. Similarly, we've seen state governments embrace Pay for Success models when allocating their funds for education programs. For instance, Texas has made public funding for community colleges contingent on success metrics that include, critically, the number of students who earn 'credentials of value' that are proven to lead to good-paying jobs. Oregon has begun to take the same approach. The logic is simple: when we lean into outcomes and the accountability that ensues, we create the conditions for learners and programs to thrive. These Pay for Success examples satisfy rules one and two: assess for success and spend wisely. We've also developed models that embrace rule number three: where feasible, tie spending to financial mechanisms that compound impact over time–mechanisms that often come in the form of revolving funds. Consider New Jersey's 'Pay It Forward' program, which offers learners no-interest loans for tuition and grant support for other expenses associated with getting trained (e.g., transportation and childcare). The program partners with specific programs at institutions that have a track record of graduating students and placing them in good-paying jobs in nursing, radiography, welding, HVAC, and other industries. And they structure the loans so that students repay them only once they've gotten work with wages that can support a middle-class family. What makes this model even more efficient, however, is the revolving fund at its core: when students repay the loans, the money gets repurposed for the next student. Alternately, employers might relieve their workers of the burden by paying into the fund to access and retain talent. Either way, this approach to government spending rewards success, phases out programs that don't meet their benchmarks, and gets more value out of every dollar. What's more, the approach builds on a template that can be used in any state for training in any sector. Its playbook is clear: pay for success, repurpose funds, and align incentives among the private and public sectors. The logic behind all these efforts has bipartisan support and momentum. Members of Congress from both sides of the aisle have already launched initiatives that signal their willingness to get serious about efficient spending. If DOGE really wants to drive efficient policy, Pay for Success must be the cornerstone of its agenda. Contact us at letters@
