Accounting
Partnership pitfalls under the centralized partnership audit regime
Six years of the Centralized Partnership Audit Regime have elucidated a central understanding: the Bipartisan Budget Act provisions present plenty of potential pitfalls for partnerships, partnership representatives and the partners. The BBA creates a fictitious partnership level tax, imbues the partnership representative with authoritarian control, threatens to create conflict between partners and overhauls the partnership examination requiring key decisions at various stages of the examination process.
BBA examination overview
BBA examinations begin with a Notice of Administrative Proceeding, which is sent only to the partnership representative, who is appointed by the partnership on a timely filed original return for each tax year and charged with the responsibility of representing the partnership in matters involving the Internal Revenue Service. (The partnership representative does not have to be a partner and can be an entity. In the context of an entity representative, the partnership must appoint a representative of the entity – a designated individual – as the point of contact for the IRS.)
Then the IRS will issue a Notice of Preliminary Partnership Examination Changes that gives the PR the ability to raise any disputes with the proposed changes with the IRS Office of Appeals. Next, the IRS will issue a Notice of Proposed Partnership Adjustment. The NOPPA asserts a fictitious partnership-level tax called the imputed underpayment and starts a 270-day clock during which the partnership, working with the individual partners, can request a modification of the imputed underpayment. After the close of that period, the IRS will issue a Final Partnership Adjustment (FPA) that asserts an imputed underpayment (less any adjustments for modifications) and penalties, if applicable. The FPA also starts both a 45-day clock for making a push-out election and a 90-day clock for filing a suit to challenge the IRS determinations. Only the PR acting on behalf of the partnership can bring an action and may do so in the Tax Court or, after making a deposit of the imputed underpayment, penalties, additions to tax and additional amounts, through the U.S. District Court or Court of Federal Claims.
There are a number of pitfalls in the BBA process, but perhaps the most important are those associated with the PR, which replaced the prior tax matters partner (TMP) under the Tax Equity and Fiscal Responsibility Act (TEFRA) partnership regime.
TMP versus PR
Under TEFRA, the TMP, as representative of the partnership, could only bind the non-notice partners, leaving notice partners with options to fight — even to the point of litigation — on their own. A notice partner was any partner in a partnership with 100 or fewer partners. For partnerships larger than that, notice partners were any partners owning 1% or more of the partnership. Partners who owned less than 1% could form a notice group that collectively owned 5% of the partnership (notice group) to obtain notice partner rights.
Under TEFRA, notice partners could file a petition with the U.S. Tax Court if the TMP failed to bring such an action, intervene in any Tax Court settlement, pay their share of any flow-through adjustments and file a claim for refund (and suit for refund). Notice partners were not inherently bound by the decisions of the TMP.
Pitfall 1: The BBA regime eliminates that individualism, imbuing the PR with complete control over the partnership. Under the BBA, notice partners are no more; only the partnership representative can bring a court action, and no partner has a right to intervene in a settlement or litigation. Individual partners no longer have the ability to pay their share and file a suit for refund. The partnership representative has complete authority to bind the partnership, exposing the partnership and the partners.
Modifications: An opportunity for individualism
The modification process offers a glimpse at TEFRA-era individualism. During the 270-day post-NOPPA period, an individual partner can request a modification by filing amended returns for the tax year under audit (and any other affected tax years) to account for their share of the partnership adjustments. The partner must also pay all taxes, penalties and interest associated with the amendments. Once a modification has been made, the imputed underpayment at the partnership level is reduced by the amount allocated to the individual partner. However, the individual partner cannot later file a second amended return to undo the adjustments until or unless a court determines that the partnership-level adjustments were incorrect.
For partnerships, modifications make sense if there is no defense to the adjustments raised by the NOPPA, the modification reduces the effective tax owed by the partners for those that are tax-exempt entities or the long-term strategy involves filing an action in the District Court or Court of Federal Claims. Modifications may help reduce the amount the partnership has to pay to file an action in those courts. For partners that do not trust the PR, this could be the first point of dissension from the partnership because partnerships and partners must work together to facilitate a modification.
Push-out elections
During the 45-day period starting with the issuance of the FPA, the partnership may elect to push out the partnership adjustments to its partners. Push-out elections push the adjustments to the individual partners on a pro-rata basis. Unlike modifications, push-outs do not require consent from the individual partners.
Push-outs can be beneficial if individual partners have tax attributes that would lower the effective tax rate. For example, for an individual partner with large capital gains or loss carryovers, the adjustment may have a lower tax impact than the maximum individual default rate of 37%. Push-out elections may also be beneficial to partnerships with a large number of disassociated partners. Otherwise, the partnership as a whole is on the hook for the imputed underpayment and may lack the funds to cover that tax, forcing a capital call that may produce mixed results.
Pitfall 2: Push-out elections require an intensive process that carries administrative burdens. If any mistakes are made in that process, the IRS can void the election.
Pitfall 3: If the partnership elects to push out the adjustments, the IRS will increase interest on any balance by an additional 2% over the going rates. This could result in increased exposure for the partner.
Pitfall 4: The individual allocations and additional interest could cause inconsistent results among partners. Unlike modifications, push-outs affect every partner. Situations may arise where a push-out helps a partner with a lower effective tax rate but increases out-of-pocket costs for a partner at a 37% effective rate that now has to contend with 2% additional interest.
Pitfall 5: Push-out elections shift responsibility for the adjustment to the partners that make up the partnership in the adjustment year, which is defined as the year in which the adjustment is finalized (the year the FPA is accepted or the year a court decision becomes final). This creates a situation where a partner in the partnership during the year under audit subsequently sells its partnership interest to another taxpayer and avoids liability while sticking the new partner with a liability from a year when they were not even a partner, creating a disconnect between benefits and burdens associated with the adjustments.
This means that each partnership needs to think about the administrative burdens of trying to collect contributions from each partner to pay the tax, the likelihood of a push-out reducing the collective tax by amounts sufficient to offset the additional 2% interest and the possibility that some partners will be worse off with such a decision while others benefit.
A faction of President-elect Donald Trump’s allies is harboring doubts about Republicans’ chances of passing a sweeping tax bill in 2025 amid party infighting and strategy disputes.
Republicans broadly agree that there’s little room for error on what is a rare opportunity for the GOP to update the Tax Code without having to make any concessions to Democrats. There’s also time pressure: households and privately-held businesses will see their tax bills rise if Congress doesn’t act by the end of the year.
But Republicans openly disagree on how to meet that deadline. Little progress was made on Wednesday night when Trump met with GOP senators, with the president-elect telling reporters at the conclusion of the meeting that it “doesn’t matter” to him how his allies in Congress plan to get his top legislative achievements passed.
Stephen Miller, the incoming deputy White House chief-of-staff and a vocal advocate for an immigration crackdown, has pushed lawmakers to first pursue a border security bill, before pivoting to taxes, an idea Senate Republican Majority Leader John Thune endorsed during his address to open the new Congress.
That pits them against House Republicans, many of whom want to cram all the party’s legislative goals — immigration, energy production and taxes — into a singular bill. That’s an approach that yields to the reality that the tiny House GOP majority — a fractious group of lawmakers willing to torch members of their own party during heated disputes — will have a hard time passing even one bill, let alone two.
“The best chance for a reconciliation bill that includes tax cuts to pass the House is for the tax cuts to be included in the first one, and preferably in one big beautiful bill,” said House Ways and Means Chairman Jason Smith, referring to the legislative process, known as reconciliation, which allows the majority party to advance its priorities with the votes of the opposing party.
Trump, who made taxes and an immigration crackdown the centerpiece of his 2024 presidential campaign, has waffled on his wishes, further muddying the debate. Over the weekend, he posted that he supported “one powerful Bill that will bring our Country back, and make it greater than ever before.” At a press conference on Tuesday, however, he indicated a willingness to separate immigration from taxes.
“Well, I like one big beautiful bill. I always have. I always will. But if two is more certain, it does go a little bit quicker, because you can do the immigration stuff early,” he told reporters.
Senator Rand Paul, a Kentucky Republican, said following Wednesday’s meeting with Trump that they discussed using tariff hikes as a way to offset the cost of the tax cuts, a politically risky move that could further divide Republicans.
Thune, after meeting with House Speaker Mike Johnson on Tuesday, joked with reporters that the plan for sequencing the legislation is “as clear as mud.”
After the Wednesday meeting with Trump, Thune told reporters they are all united on the goals but lawmakers still have different views on the legislative strategy to get there.
Strategy planning
Congress also must raise the debt ceiling this year — an issue that has routinely caused Republican infighting and soured relationships within the party. Johnson told reporters Tuesday he plans to add a debt ceiling increase to the bill, with the final product put together by “churning it out amongst our colleagues.” He also set an April goal to pass it out of his chamber.
Paul, however, said Wednesday there’s opposition from Republicans in both chambers to addressing the debt ceiling in the bill.
“We need to do the tax bill in the first 150 days,” said Steve Moore, an informal economic advisor to Trump.
Moore said that he, along with Trump’s former National Economic Council Chair Larry Kudlow and economist Arthur Laffer, urged Trump to tackle taxes first.
“We shouted from the rooftops,” Moore said. “The argument made to Trump that carried the day was that delaying it would put the tax cut at risk.”
The business community has also warned that a delay — or failure — of the tax measure could stymie the economic growth promises Republicans ran on.
“I’m not going to second guess the speaker or the majority leader on the timing of the tax bill, but I will say that from a business perspective, from an investment perspective, a manufacturing perspective, sooner is going to be a whole lot better than later if they truly want to keep their promises that they’ve made,” said Jay Timmons, president and chief executive officer of the National Association of Manufacturers.
Many Republicans also publicly and privately worry that isolating immigration — an issue that has vexed Congress for decades — into an initial bill will take far more time than anticipated and eat up a great amount of political capital and good will, potentially jeopardizing the size, scope and ambition of a tax measure.
History lesson
In 2017, Trump faced a similar legislative strategy quandary on the sequencing of policy when his team spent months trying to repeal the Affordable Care Act only to have then-Senator John McCain, an Arizona Republican, strike down the bill at the last minute. The Trump White House managed to barely pass tax reform that December — and that was with a much larger margin of Republicans in the House.
That legislation was also hastily written and passed solely with the support of Republicans. At the time, there was a feeling in the Trump orbit that tackling infrastructure or taxes first would have provided the new president with far more political dividends than pursuing the failed health care legislation.
In the closing days of the 2024 election, Trump promised to extend the personal tax cuts from 2017 and expand the state and local tax deduction, while also creating new tax breaks like no taxes on tips, overtime pay or Social Security checks.
Trump has vowed to Wall Street executives that he would reduce the corporate tax rate to as low as 15%. That laundry list of promises surprised even some of his closest economic advisors, who privately said Trump was unlikely to turn all of this rhetoric into reality.
Trump, as recently as last weekend, has repeatedly singled out one specific pledge — no taxes on tips — which suggests it could be among the highest priority cuts for the incoming president.
Political calculus
For Republicans, a key calculation is delivering on Trump’s tax promises so the party can hold onto its control of the House of Representatives in 2026. Former House Speaker Newt Gingrich, a close Trump ally, said history shows that Trump needs to pass the tax bill by July 4, 2025, to satisfy voters.
When President Ronald Reagan “did not front-load the tax cuts in 1982-1981, we lost 26 seats in 1982. When Trump did not get the tax bill through fast enough, we lost 40 seats in 2018. We also know that Franklin Delano Roosevelt, by acting aggressively, picked up nine seats,” he said.
Former Representative Kevin Brady, who led efforts on Trump’s 2017 tax overhaul, said Republicans ought to “educate” — or perhaps browbeat — their colleagues to make a priority of the cuts.
“Failure is not an option. You cannot wreck this economy. You cannot damage this presidency,” Brady said at an event in Washington. “You’re going to find a way to get this done.”
Taxpayers have an extra day, until Friday, Jan. 10, to file any return or pay tax originally due on Thursday, Jan. 9.
The IRS granted the time for the Jan. 9 National Day of Mourning for Jimmy Carter, the 39th U.S. president. He was the longest-lived president in history, dying December 29 at the age of 100.
The one-day extension also applies to any federal income, payroll or excise tax deposit due on Jan. 9, including those required to be made through the Treasury Department’s Electronic Federal Tax Payment System.
IRS Free File Guided Tax Software will be available this Friday for taxpayers ahead of the start of tax season later this month.
Starting Jan. 10, IRS Free File will begin accepting individual returns. Providers will generally allow taxpayers to prepare and file returns now and hold them for e-filing when the season starts.
Taxpayers can access free software tools at
“Taxpayers have multiple filing choices,” said IRS Commissioner Danny Werfel, in a statement, “including trusted tax professionals, tax software, Free File, Direct File or free preparation services through IRS partners.”
IRS Free File is entering its 23rd filing season and is delivered through a partnership between the IRS and Free File Inc. (formerly the Free File Alliance). Eight private-sector partners will provide online guided tax software products for taxpayers with an adjusted gross income of $84,000 or less in 2024. Taxpayers with an AGI above $84,000 can use the Free File Fillable Forms starting Jan. 27.
For 2025, the partners participating in IRS Free File are 1040Now, Drake (1040.com), ezTaxReturn.com (also in Spanish), FileYourTaxes.com, On-Line Taxes,TaxAct, TaxHawk (FreeTaxUSA) and TaxSlayer.
Trump allies fret tax-cut plans at risk with GOP infighting in Congress
Missing quarterly tax payment could trigger ‘unexpected penalties’
Extra tax filing time granted for Carter remembrance
New 2023 K-1 instructions stir the CAMT pot for partnerships and corporations
The Essential Practice of Bank and Credit Card Statement Reconciliation
Are American progressives making themselves sad?
-
Economics1 week agoHomelessness rises to a record level in America
-
Personal Finance6 days agoHow to rebalance your portfolio after lofty stock returns in 2024
-
Personal Finance1 week agoAs ETF assets top $10 trillion for first time, here are trends to watch
-
Personal Finance1 week agoHere’s how to decide on the right student loan repayment plan for you
-
Economics1 week agoJimmy Carter reshaped his home town
-
Accounting5 days agoDepreciation of Assets and Key Strategies for Accurate Valuation
-
Finance7 days agoKen Griffin’s flagship hedge fund at Citadel climbs 15.1% in 2024
-
Personal Finance1 week agoHere are steps you can take to avoid overspending next holiday season