Are You Prepared for a Partnership Audit? The Rules Have Changed

Partnership audits no longer work the way many business owners assume. Under the Bipartisan Budget Act of 2015, Congress replaced the old audit system with a centralized partnership audit regime known as the BBA rules or the Centralized Partnership Audit Regime (CPAR).

As a result, the IRS now audits and collects at the partnership level, not the individual partner level. Let’s take a look at how these rules affect your partnership.

The Partnership Pays, Not the Partners

If the IRS audits a partnership and finds errors, it calculates one lump-sum tax bill called an “imputed underpayment” under 26 U.S.C. § 6225. By default, that amount is computed using the highest tax rate in effect for the year under audit—regardless of the actual tax brackets of the individual partners.

What it means: The partnership itself is on the hook first, and the assessment may be higher than what the partners would have owed individually. Unless the partnership takes timely action to reduce or shift the liability, current partners may end up paying for past tax issues, sometimes at an inflated rate.

An Alternative Path: The Push-Out Election

Under the default rule, the partnership pays the IRS assessment. However, if the partnership makes a timely “push-out” election under 26 U.S.C. § 6226, the tax is shifted back to the partners who owned interests in the year being audited, and they pay it individually.

What it means: Without the push-out election, current partners could end up paying for tax issues from years before they joined. If the election deadline is missed or handled improperly, though, the partnership remains fully liable.

Can You Opt Out?

Certain small partnerships (100 or fewer eligible partners) may elect out annually under 26 U.S.C. § 6221(b). Many businesses, however, don’t qualify. The centralized audit regime was designed to make collection easier for the government. It did exactly that.

If your partnership receives an IRS notice, you need to get in front of it immediately. These audits are legal proceedings with real financial consequences. At Gabaie & Associates, LLC, we help partnerships handle these issues strategically and properly. Call us today at (410) 358-1500 or fill out our consultation form to see what we can do for your partnership.