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Partnership pitfalls under the centralized partnership audit regime

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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.

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House passes tax administration bills

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The House unanimously passed four bipartisan bills Tuesday concerning taxes and the Internal Revenue Service that were all endorsed this week by the American Institute of CPAs, and passed two others as well.

  • H.R. 1152, the Electronic Filing and Payment Fairness Act, sponsored by Rep. Darin LaHood, R-Illinois, Suzan Delbene, D-Washington, Randy Feenstra, R-Iowa, Brad Schneider, D-Illinois, Brian Fitzpatrick, R-Pennsylvania and Jimmy Panetta, D-California. The bill would apply the “mailbox rule” to electronically submitted tax returns and payments to allow the IRS to record payments and documents submitted to the IRS electronically on the day the payments or documents are submitted instead of when they are received or reviewed at a later date. The AICPA believes this would offer clarity and simplification to the payment and document submission process while protecting taxpayers from undue penalties.
  • H.R. 998, the Internal Revenue Service Math and Taxpayer Help Act, sponsored by Rep. Randy Feenstra, R-Iowa, and Brad Schneider, D-Illinois, which would require notices describing a mathematical or clerical error to be made in plain language, and require the Treasury to provide additional procedures for requesting an abatement of a math or clerical error adjustment, including by telephone or in person, among other provisions.
  • H.R. 517, the Filing Relief for Natural Disasters Act, sponsored by Rep. David Kustoff, R-Tennessee, and Judy Chu, D-California. The process of receiving tax relief from the IRS following a natural disaster typically must follow a federal disaster declaration, which can often come weeks after a state disaster declaration. The bill would provide the IRS with authority to grant tax relief once the governor of a state declares either a disaster or a state of emergency and expand the mandatory federal filing extension under Section 7508(d) of the Tax Code from 60 days to 120 days, providing taxpayers with more time to file tax returns after a disaster.
  • H.R. 1491, the Disaster related Extension of Deadlines Act, sponsored by Rep. Gregory Murphy, R-North Carolina, and Jimmy Panetta, D-California, would extend the amount of time disaster victims would have to file for a tax refund or credit (i.e., the lookback period) by the amount of time afforded pursuant to a disaster relief postponement period for taxpayers affected by major disasters. This legislative solution would place taxpayers on equal footing as taxpayers not impacted by major disasters and would afford greater clarity and certainty to taxpayers and tax practitioners regarding this lookback period.

“The AICPA has long supported these proposals and will continue to work to advance comprehensive legislation that enhances IRS operations and improves the taxpayer experience,” said Melanie Lauridsen, vice president of tax policy and advocacy for the AICPA, in a statement Tuesday. “We are pleased to work closely with each of these Representatives on common-sense reforms that will benefit taxpayers, tax practitioners and tax administration and we’re encouraged by their passage in the House. We look forward to continuing to work with Congress to improve the taxpayer experience.”

The bills were also included in a recent Senate discussion draft aimed at improving tax administration at the IRS that are strongly supported by the AICPA.

The House also passed two other tax-related bills Tuesday that weren’t endorsed in the recent AICPA letter. 

  • H.R. 1155, Recovery of Stolen Checks Act, sponsored by Rep. Nicole Malliotakis, R-New York, would require the IRS to create a process for taxpayers to request a replacement via direct deposit for a stolen paper check. If a check is determined to be stolen or lost, and not cashed, a taxpayer will receive a replacement check once the original check is cancelled, but many taxpayers are having their replacement checks stolen as well. Taxpayers who have a check stolen are then unable to request that the replacement check be sent via direct deposit. The bill would require the Treasury to establish processes and procedures under which taxpayers, who are otherwise eligible to receive an amount by paper check in replacement of a lost or stolen paper check, may elect to receive such amount by direct deposit.
  • H.R. 997, National Taxpayer Advocate Enhancement Act, sponsored by Rep. Randy Feenstra, R-Iowa, would prevent IRS interference with National Taxpayer Advocate personnel by granting the NTA responsibility for its attorneys. In advocating for taxpayer rights, the National Taxpayer Advocate often requires independent legal advice. But currently, the staff members hired by the National Taxpayer Advocate are accountable to internal IRS counsel, not the Taxpayer Advocate, creating a potential conflict of interest to the detriment of taxpayers. The bill would authorize the National Taxpayer Advocate to hire attorneys who report directly to her, helping establish independence from the IRS. 

House  Ways and Means Committee Chairman Jason Smith, R-Missouri, applauded the bipartisan House passage of the various bills, which had been unanimously passed by the committee.

“President Trump was elected on the promise of finally making the government work better for working people,” Smith said in a statement Tuesday. “This bipartisan legislation helps fulfill that mandate and makes improvements to tax administration that will make it easier for the American people to file their taxes. Those who are rebuilding after a natural disaster particularly need help filing taxes, which is why this set of bills lightens the load for taxpayers in communities struck by a hurricane, tornado or some other disaster. With Tax Day just a few days away, we must look for common-sense, bipartisan ways to make filing taxes less of a hassle.”

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Accounting

In the blogs: Many hats

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Teaching fraud; easement settlement offers; new blog on the block; and other highlights from our favorite tax bloggers.

Many hats

  • Taxbuzz (https://www.taxbuzz.com/blog): There’s sure an “I” in this “teamwork:” What to know about potential IRS and ICE collaboration.
  • Tax Vox (https://www.taxpolicycenter.org/taxvox): How IRS data would likely be unhelpful validating SNAP eligibility.
  • Yeo & Yeo (https://www.yeoandyeo.com/resources): How financial benchmarking (including involving taxes) can help business clients see trends, pinpoint areas for improvement and forecast future performance.
  • Integritas3 (https://www.integritas3.com/blog): One way to take a bite out of crime, according to this instructor blogger: Teach grad students how to detect, investigate and prevent financial fraud.
  • HBK (https://hbkcpa.com/insights/): Verifying income, fairly distributing property, digging the soon-to-be-ex’s assets out of the back of the dark, dark closet: How forensic accounting has emerged as a crucial element in divorces.

Standing out

Genuine intelligence

  • AICPA & CIMA Insights (https://www.aicpa-cima.com/blog): How artificial intelligence and other tech is “Reshaping Finance,” according to this podcast. Didem Un Ates, CEO of a U.K.-based company offering AI advisory services, tackles the topic.
  • Taxjar (https:/www.taxjar.com/resources/blog): How AI and automation can help even the knottiest sales tax obligations and problems.
  • Dean Dorton (https://deandorton.com/insights/): Favorite opening of the week: “The madness doesn’t just happen on college basketball courts — it also happens when your finance team is stuck using a legacy on-premises accounting system.”
  • Canopy (https://www.getcanopy.com/blog): Top client portals for accounting firms in 2025.
  • Mauled Again (https://mauledagain.blogspot.com/): Despite what Facebook claims, dependents have to be human.

New to us

  • Berkowitz Pollack Brant (https://www.bpbcpa.com/articles-press-releases/): This Florida firm offers a variety of services to many industries and has a good, wide-ranging blog. Recent topics include the BE-10, nexus and state and local tax obligations, IRS cuts and what to know about the possible bonus depreciation phase out. Welcome!

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Accounting

Is gen AI really a SOX gamechanger?

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By streamlining tasks such as risk assessment, control testing, and reporting, gen AI has the potential to increase efficiency across the entire SOX lifecycle.

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