More than 10 years since its enactment, both taxpayers and the IRS are still learning the ins and outs of the Centralized Partnership Audit Regime (BBA). Effective for tax years 2018 and forward, the BBA was intended to make partnership audits and the assessment and collection of related taxes more manageable for the IRS. The BBA shifts much of the administrative burden to the partnership, with numerous requirements that must be accomplished under a strict timeline.

BBA Audit Process

A BBA partnership audit begins when the IRS issues a Notice of Selection of Examination (NOSE). The NOSE provides the taxpayer with 30 days to file an Administrative Adjustment Request (AAR) to correct an originally filed partnership return or change the Partnership Representative (PR) or Designated Individual (DI). After the 30 days, the IRS issues a Notice of Administrative Proceeding (NAP). At that time, an AAR is no longer permitted, and a change to the PR or DI is limited to future specified points in time.

After issuance of the NAP letter, the exam proceeds with the issuance of Information Document Requests (IDRs). At this time, discussions between the taxpayer (or its representatives) and the IRS exam team begin. If adjustments are proposed, the IRS issues a Notice of Preliminary Partnership Examination Changes report, which includes an Imputed Underpayment (IU) calculation. The IU is calculated by netting partnership adjustments in the manner permitted by IRC § 6225 and the accompanying regulations and multiplying by the highest federal income tax rate (currently 37%).[1] As a result, the IU could be significantly different from the amount of tax a partner might be required to pay for that same item. 

If the partnership does not appeal, the IRS issues a Notice of Proposed Partnership Adjustment (NOPPA), which provides the PR with 270 days to modify the IU. The 270-day modification period (“modification period”) may be waived by the PR or extended by agreement with the IRS.  As an example, if the NOPPA is issued on Jun. 15, 2024, the 270-day modification period would expire on Mar. 12, 2025, unless the modification period is waived or extended. A modification request is submitted on Form 8980 (Partnership Request for Modification of Imputed Underpayments Under IRC § 6225(c)). The modification request and any related documentation must be submitted electronically on the IRS’ BBA online portal. Advance registration is required to utilize the BBA online portal. Accordingly, planning ahead is strongly recommended.

Partnership Adjustment Payments

Following the expiration of the modification period, the IRS issues a Final Partnership Adjustment (FPA) notice. With an FPA in hand, the partnership formally decides whether to pay the IU (at the entity level) or “push out” the IU to the direct partners. It should be noted that payments made at the partnership level impact the current-year partners. However, when a push-out election is made, the partners subject to the IU are those in the partnership for the year under review (“reviewed year partners”). The determination to pay at the partnership level or to push out to the direct reviewed year partners is made by the PR alone. Therefore, partnerships are encouraged to review the language in their partnership agreements on the expectations related to imputed underpayments and the filing of modification requests. 

If the PR chooses to push out the IU, the push-out election is made on Form 8988 (Election for Alternative to Payment of the Imputed Underpayment - IRC § 6226). Form 8988 must be filed electronically on the BBA online portal within 45 days of the FPA’s issuance. Once the IRS approves the election on Form 8988, the PR has 60 days from when the audit becomes final to submit push out statements to the IRS on Form 8985 (Pass-Through-Statement Transmittal/Partnership Adjustment Tracking Report) and Forms 8986 (Partner’s Share of Adjustment(s) to Partnership-Related Items) and furnish Forms 8986 to the direct reviewed year partners.

The BBA audit becomes final upon expiration of the 90-day period to petition the courts or on final determination by any court.[2] The 60-day period cannot be extended. If the push-out statements are not submitted within the 60-day period, the push-out election is invalidated, and the partnership remains responsible for paying the entire IU at the partnership level at the highest applicable rate.

Example: BBA partnership receives an FPA dated Mar. 15, 2025. The Partnership Representative has 45 days following the FPA issuance date (Apr. 29, 2025) to submit Form 8988 to elect to push out the IU. The Partnership Representative then has 60 days from when the audit adjustments become final to file Forms 8985 and 8986 with the IRS and furnish Forms 8986 to the direct partners for the reviewed year. The adjustments become final in an agreed BBA audit 90 days from issuance of the FPA (Jun. 13, 2025). Forms 8985/8986 must be filed no later than Aug. 12, 2025. 

A direct reviewed-year partner who is an individual or a C corporation that receives a Form 8986 includes its share of partnership-related adjustments on its tax return for the adjustment year. For agreed BBA audits, the adjustment year is defined as the year in which the FPA is mailed by the IRS or a waiver is executed.[3] In the above example, the adjustment year would be 2025, as the FPA was issued on Mar. 15, 2025. The reviewed-year partner is required to include a Form 8978 (Partner’s Additional Reporting Year Tax) with its tax return for the adjustment year, which is used to determine the associated tax from the partnership adjustment.

If the direct partner is a partnership partner, the partnership partner who receives Form 8986 must decide whether to pay the IU at the partnership partner level or push out the adjustments to its partners. If the partnership partner does not push out the adjustments to its partners on a timely basis, the partnership partner is responsible for payment of the IU.[4]

Underpayment interest is generally calculated at the federal short-term rate plus 3%. However, if the IU is pushed out, the reviewed year partner is subject to an increased rate of interest calculated at the federal short-term rate plus 5%. Interest runs from the original due date of the return for the year under IRS review. Conversely, the BBA does not provide interest on overpayments.[5] Penalties are determined as if the IU is underpaid tax.[6]

Conclusion

The BBA audit regime is here to stay, demanding steady preparation over last-minute efforts. Partnerships that maintain contemporaneous records and build audit readiness into their day-to-day processes are far better positioned if or when an examination begins. With complex administrative procedures and strict deadlines under the BBA, even small, proactive steps can help prevent surprises and reduce potential tax exposure.