Accounting
Partnerships get options for fixing tax errors
The Internal Revenue Service has been
In October, a
The centralized audit regime is probably the best known change for partnerships under the BBA, but there are others that partners should keep in mind when it comes to their tax returns.
In general, a partnership that’s subject to the BBA’s centralized partnership audit regime can’t file amended returns or amended Schedule K-1s, but instead needs to file an administrative adjustment request, or AAR, to make a change to a previously filed partnership return.
“In order to correct errors in partnership returns, the Bipartisan Budget Act of 2015 changed the rules,” said Rochelle Hodes, Washington National Tax Office principal at the Top 25 Firm Crowe LLP. “There are no more amended returns. Everybody has to use the AAR process, except those few taxpayers who have elected out of the BBA regime. Election out of the regime is very limited. Tiered partnerships can’t elect out. Partnerships with trusts and partners with disregarded entities can’t elect out. Partnerships who have S corps with partners in some cases can elect out. But for the most part, unless you have a partnership that has all individuals or all C corporations as partners, they’re going to be covered by BBA, and they’re not going to be able to do amended returns anymore, so they’re going to have to use this AAR process for correction of errors.”
The AAR process may be unfamiliar to many firms. “Even though the rules have been in effect generally for partnership taxable years beginning on or after Jan. 1, 2018, a lot of taxpayers and practitioners are only now just dipping a toe into having to use these new procedures,” said Hodes. “Historically, a lot of partnerships did not amend returns, and if they did, they would send out amended returns and corrected K-1’s. Under the new process, a different set of forms gets filed and effectively the adjustment to the prior year and the tax resulting therefrom is figured on a pro forma kind of basis. You figure out how much tax difference there is when you correct the error, and then you take that tax difference and you move it up to the ‘current year.’ That’s when you pay the tax that results.”
When there’s a mistake that’s not a numeric error like an incorrect amount of income, but instead the partnership neglected to attach a form or make a Section 754 election to adjust the basis of property, then it needs to follow the new AAR process. The American Institute of CPAs has
“When nothing else is changed on the return and you just forgot to attach the statement, you have to do this more complicated AAR process to attach the statement,” said Hodes.
However, there may be help on the way. “It’s my understanding that the IRS is going to be coming out with a more streamlined process for correcting errors like that,” said Hodes. “It’s something that AICPA has been asking for for a number of years now. The AICPA calls it the AAR-EZ, like the easy form. And it’s my understanding that’s something that is close to coming out, so that should be welcomed.”
The 2015 BBA law made it easier for the IRS to audit a large complex partnership such as a private equity firm, changing the rules previously enacted under the Tax Equity and Fiscal Responsibility Act of 1982, also known as TEFRA. But the process for formulating the regulations for the centralized audit regime has taken years to play out, as lobbying groups for PE firms and hedge funds lobbied lawmakers on Capitol Hill to weaken the rules. They have options such as the “pushout election.”
“Partnerships are not taxpaying entities,” said Hodes. “Previously for the IRS to collect any tax due, generally under TEFRA, they would audit the partnership, make adjustments to items, and then the IRS had to flow those adjustments through and find taxpaying partners, and those taxpaying partners then had an opportunity to, in many cases, go to the Tax Court and challenge whether they owed the amounts or not, so the IRS didn’t get their money right away. What the BBA does is it says, look, let’s get this tax thing all set up. We’ll do a stand-in for the tax that would have been owed. We’ll do it close enough, and we’ll take all the adjustments that the IRS made, we’ll multiply it by the highest rate, which happens at this point in time to be 37%, and the partnership can pay the tax, and we’ll call it a day, and that will be much easier, so the IRS won’t have to do any of that work, and the individual partners won’t be able to challenge, and the fisc will be protected. When the BBA rules legislation was first being drafted, that’s how the rules lined up. But groups went to the Hill and said, ‘But that’s not fair, because if you take into account the individual partners’ particular circumstances, the tax that’s going to get paid is far less, and there should be a system to allow the individual partner’s circumstances to be taken into account.’ And thus, the pushout election was born.”
A partnership filing an AAR can decide whether to pay any tax attributable to taking the adjustments into account (called an imputed underpayment) or push the adjustments out to the reviewed year partners, according to an
“Under TEFRA the IRS had to flow through the adjustments to the partners, and it was a lot of work for the IRS and a lot of man hours for the IRS, and they could only do so few because of all that work,” said Hodes. “The burden has now shifted to the partnership. If you want to flow it through partnership, you and all the partners in the tiers will now have to bear that burden, and they flow through the adjustments.”
A pushout can occur in the context of an examination, an IRS audit or an AAR. “An audit is when the IRS makes adjustments,” said Hodes. “An AAR is when the partnership, on its own, makes an adjustment. And in the case of an AAR, Congress made the decision in statute and said, You know what? If those adjustments are taxpayer favorable, the partnership must push out those adjustments if you’re doing an AAR. If you’re correcting something because you didn’t give your partners enough of the good stuff, we have made the policy call in Congress that if you’re going to do it yourself, you need to send that good stuff out to the partners. In my experience, most AARs involve a pushout, and that is a big part of what’s making these AARs so complex. In many cases, an AAR is going to have both taxpayer favorable and some taxpayer unfavorable items. But so long as you have a tax favorable item, you’ve got to do the push, so why not just push everything? It is a rare circumstance where I have seen the partnership pay the [imputed underpayment] and not do a pushout.”
The IRS has made efforts to crack down on tax evasion by large partnerships, but that could change with the incoming Trump administration. On Wednesday, President-elect Trump announced that he would be
“You previously had an audit rate of partnerships of zero or quite near zero,” said Hodes. “Meanwhile, over the past 50 or 40 years, we have seen more and more assets in the economy flow through partnership structures, as opposed to corporate structures. But partnerships are complex.”
The AAR process and the pushout election made large partnership audits even more complicated for the IRS. She noted that the regulations in
“It’s a good thing to keep in mind,” said Hodes. “I had a boss who once told me that the ability to correct mistakes is the reason why pencils have erasers, and 9100 relief processes are intended to not punish people for ministerial oops’s. It’s just something to keep in mind that there are opportunities to obtain relief.”
She also pointed out that the IRS is offering extensions in many parts of the country that have been affected by natural disasters. “There were a lot of disasters in 2024, and due dates and such have been extended,” said Hodes. “When you think you might have been late, you might not have been late in filing or with payment. As you go through and look to see if you have errors, it’s important to keep in mind opportunities for relief through the disaster rules as well, if they’re applicable.”
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Fifty-two percent of accountants expect their firms to shrink in headcount by 20% in the next five years, according to a new report.
The Indiana CPA Society, in collaboration with CPA Crossings, released today a 2025 Workforce Transformation
Sixty percent of respondents said that entry-level professionals are the role they anticipate needing fewer employees in the future due to automation. Nearly half as many responded saying experienced professionals (approximately 33%) and manager-level roles (approximately 25%).
The report highlights the weaknesses of the pyramid-shaped practice structure that is the basis for most firm’s current talent management and workforce development systems. One challenge is the pyramid’s low retention design.
“The pyramid practice structure was not designed to retain staff. It actually does the opposite. Upward mobility is statistically difficult to attain,” the report reads. “Firms have a lot of requirements for entry-level staff, but there is a lot less need for experienced staff. Firms eventually have a lot of entry-level professionals qualified to become experienced staff but only a few openings. It only gets more difficult as staff try to move from experienced staff to managers. For those who want to move from managers to owners, the wait could be 15 years or more — or maybe never.”
The report discussed the dwindling pipeline of incoming talent, saying, “Currently, there are not enough qualified staff to maintain a bottom layer that is wide enough,” and generational preferences, saying, “Gen Zers are looking for meaning and emotional connection. If they cannot find these connections in their work, it won’t take much for them to decide to move on.”
The final weakness of the pyramid model the report highlighted was advances in technology, particularly automation and artificial intelligence.
“Advances in technology, especially with automation and artificial intelligence, could obliterate the work being done by the bottom of the pyramid,” the report reads. “This impact is beginning to be seen in accounting firms across the country as manual and time-consuming data entry and reconciliation tasks, once assigned to entry-level staff, are being automated. Firms are already seeing great benefits from this transfer, such as faster and more accurate data processing.”
The report suggests that firms take on a new practice structure that focuses on precision hiring, proactive retention, practical technology implementation, pricing expertise, practice area expansion or focus, and people acceleration.
Senate Republicans intend to propose revised tax and health-care provisions to President Donald Trump’s $3 trillion signature economic package this week, shrugging off condemnations of the legislation by Elon Musk as they rush to enact it before July 4.
The Senate Finance Committee’s plan to extract savings from the Medicaid and — perhaps — Medicare health insurance programs could depart in key respects from the version of the giant bill that narrowly passed the US House in May. The release of the panel’s draft will likely touch off a new round of wrangling between fiscal conservatives and moderates.
As the debate unfolds, businesses in the energy, health care, manufacturing and financial services industries will be watching closely.
SALT dilemma
A crucial decision for Majority Leader John Thune, Committee Chairman Mike Crapo and other panel members will be how to handle the $40,000 limit on state and local tax deductions that was crucial to passage of the bill in the House.
Senate Republicans want to scale back the $350 billion cost of increasing the cap from $10,000 to $40,000 for those making less than $500,000.
House Speaker Mike Johnson and a group of Republican members from high-tax states have warned that any diminishing of the SALT cap would doom the measure when it comes back to the House for a final vote. At the same time, so-called pass-through businesses in the service sector are pushing to remove a provision in the House bill that limits their ability to claim SALT deductions.
(Read more: “
The Senate Finance Committee is widely expected to propose extending three business tax breaks that expire after 2029 in the House version to order to make them permanent. They are the research and development deduction, the ability to use depreciation and amortization as the basis for interest expensing and 100% bonus depreciation of certain property, including most machinery and factories.
Manufacturers and banks are particularly eager to see all of them extended.
To pay for the items, which most economists rank as the most pro-growth in the overall tax bill, senators may restrict temporary breaks on tips and overtime, which Trump campaigned on during last year’s election in appeals to restaurant and hospitality workers. The White House wants to keep those provisions as is.
White House economic adviser Kevin Hassett said Trump “supports changing” the SALT deduction and it’s up to lawmakers to reach a consensus.
“It’s a horse trading issue with the Senate and the House,” Hassett said Sunday on CBS’s Face the Nation. “The one thing we need and the president wants is a bill that passes, and passes on the Fourth of July.”
The committee will also face tough decisions on green energy tax credits. Scaling those back generates nearly $600 billion in savings in the House bill.
On Friday, rival House factions released dueling statements.
The conservative House Freedom Caucus warned that any move to restore some of the credits would prompt its members to vote against the bill. “We want to be crystal clear: If the Senate attempts to water down, strip out, or walk back the hard-fought spending reductions and IRA Green New Scam rollbacks achieved in this legislation, we will not accept it,” the group said.
In contrast, a group of 13 Republican moderates, led by Pennsylvania’s Brian Fitzpatrick and Virginia’s Jen Kiggans, urged senators to make changes that would benefit renewable energy projects, many in Republican districts, that came about through President Joe Biden’s Inflation Reduction Act.
(Listen: “
“We remain deeply concerned by several provisions, including those which would abruptly terminate several credits just 60 days after enactment for projects that have not yet begun construction,” the lawmakers said in a letter to the Senate.
Banks are especially interested to ensure that tax credits on their balance sheets as part of renewable energy financing aren’t rendered worthless by the bill.
Health-care perils
Medicaid and Medicare cuts present the most daunting challenge in the committee’s draft. While Republicans are generally in favor of new work requirements for able-bodied adults to be insured by Medicaid, some moderates like Senator Lisa Murkowski of Alaska have expressed concern over giving states just a year and a half to implement the requirement.
Senator Lisa Murkowski House provisions instituting new co-pays for Medicaid recipients and limits on the ability of states to tax Medicaid providers in order to increase federal reimbursement payments are more disputed.
Senators Josh Hawley of Missouri and Jim Justice of West Virginia have said they oppose these changes.
To find savings to make up for removing these provisions, Republicans said last week that they are examining whether to put
Yet overall, GOP leaders say the tax bill remains on schedule and they expect much of the House bill to remain intact.
The Senate’s rules-keeper is in the process of deciding whether some provisions are not primarily fiscal in nature. Provisions that restrict state regulations on artificial intelligence, ending some gun regulations and putting new limits on federal courts are seen as most vulnerable to being stripped under Senate budget rules.
Lawmakers are largely taking their cues from Trump and sticking by the $3 trillion bill at the center of the White House’s economic agenda.
Musk, the biggest political donor of the 2024 campaign, has threatened to help defeat anyone who votes for the legislation, but lawmakers seem to agree that
“We are already pretty far down the trail,” Thune told reporters on Thursday afternoon as his colleagues left for the weekend.
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