The Bipartisan Budget Act of 2015 (BBA) created a “centralized system for audit, adjustment and collection of tax that [generally] applies to all partnerships,” with taxable years beginning after 2017 [P.L. 114-74; Joint Committee on Taxation, “General Explanation of Tax Legislation Enacted in 2015 (JCS–1–16),” March 2016, https://tinyurl.com/y4tf5zwm]. In an effort to circumvent IRS frustrations with assessing and collecting tax in connection with TEFRA audits, the BBA prioritizes administrative ease and generally endeavors to place the burden of compliance on the taxpayer. To the credit of the Congressional drafters, the BBA does a good job at accomplishing these goals, but for taxpayers and their advisers trying to comply with the BBA from start to finish, the task of compliance is daunting. The BBA regime is riddled with taxpayer traps for the unwary and administrative frustrations. The discussion below highlights specific instances of administrative frustrations or unfair taxpayer situations created by the BBA.
Administrative Adjustment Requests
Under the BBA, partnerships generally submit an administrative adjustment request (AAR) to correct errors or change partnership-related items, as opposed to filing an amended return (Treasury Regulations § 301.6227-1, IRS, Sept. 18, 2025, https://tinyurl.com/2s7bsr4z). Both IRC section 6227(c) and Treasury Regulations § 301.6227-1(b) provide that a partnership cannot file an AAR after the IRS issues a notice of administrative proceeding (NAP); a NAP generally notifies the taxpayer of the beginning of a BBA audit. Indeed, IRC § 6227(c) goes as far as to provide that “in no event may a partnership file such a request after a [NAP] with respect to the taxable year is mailed under Section 6231.” Treasury Regulations § 301.6231-1(f) provides that the partnership is no longer precluded from filing an AAR if the IRS withdraws the NAP, and the NAP is treated as if it were never issued. Accordingly, once the IRS issues a NAP, the taxpayer is generally restricted to handling adjustments to returns pursuant to the BBA audit procedures. In a vacuum, the prohibition on AARs in the BBA context seems to promote the concept of finality and a centralized audit regime.
Example.
Consider the following scenario, which arguably results in taxpayers being unfairly whipsawed by the IRS.
At Time 1, Estate owned membership interests in Partnership 1 and Partnership 2, and Estate listed these interests as assets on its Form 706. Partnership 1 owned Land 1, and Partnership 2 owned Land 2 (Exhibit 1). The taxpayer supported the values of Land 1 and Land 2 with appraisals. Partnership 1 and Partnership 2 are both treated as partnerships for US federal income tax purposes, and Partnership 1 and Partnership 2 are both subject to the BBA audit regime.
EXHIBIT 1
Sample Scenario
At Time 2, Partnerships 1 and 2 sold Land 1 and 2, respectively. The Estate reported gain on its Form 1041 using the same basis as the value reported on Form 706. Partnerships 1 and 2 made a basis adjustment under § 743 (the partnerships made a timely and valid § 754 election).
At Time 3, the IRS issues a NAP and proceeds to audit Partnership 1 and Partnership 2 under the BBA audit procedures. The IRS ultimately closes both audits and issues “no-change” letters that do not result in any partnership adjustments, including to the values of Land 1 and Land 2.
At Time 4, the IRS audits Estate’s Form 706 and disputes the value of the membership interests of Partnership 1 and Partnership 2, which are assets of the Estate. The IRS argues that the values of Land 1 and Land 2 should be substantially increased from the values originally indicated on Form 706.
Now to the main issue: Partnerships 1 and 2 would like to make another basis adjustment under § 743 by filing an AAR to take into account the increased values of Land 1 and 2. But IRC § 6227(c) and Treasury Regulations § 301.6227-1(b) explicitly preclude Partnerships 1 and 2 from filing an AAR—even if the IRS issues a no-change letter and closes the BBA audit.
The taxpayers in this scenario are seemingly left being whipsawed by the government. The Estate is assessed additional estate tax based on the increased land values, but the Partnerships cannot submit an AAR to adjust its basis to reduce the resulting income tax. Under the Treasury Regulations, the only clear path available to the taxpayers in this scenario is to request that the IRS revenue agent withdraw the NAP at the partnership level—and this request is unlikely to be granted. The answer cannot simply be that the taxpayer in this scenario is whipsawed both ways.
Push-Out Elections & SALT Reporting
If the IRS issues a Notice of Federal Partnership Adjustment (FPA) that asserts an imputed underpayment, the partnership’s representative may submit an election to push out the partnership adjustments underlying the imputed underpayment amount to its partners, rather than the partnership making a payment on behalf of all its partners (Treasury Regulations § 301.6226-1). Passthrough entities that are partners of the lower-tier partnership may also push out the partnership adjustments to its partners, if the lower-tier partnership makes a pushout election [Treasury Regulations § 301.6226-3(e)]. A partnership that is issued an FPA with an imputed underpayment must file an election within 45 days of the date the FPA is mailed by the IRS [Treasury Regulations § 301.6226-1(c)(2)].
The partnership makes the election pursuant to Form 8988-Election to Alternative to Payment of the Imputed Underpayment. There are lengthy requirements, however, to “perfect” the push-out election, including furnishing and filing Form 8985-Pass-Through Statement–Transmittal/Partnership Adjustment Tracking Report and Forms 8986-Partner’s Share of Adjustments to Partnership-Related Item(s) (Treasury Regulations §§ 301.6226-2, 301.6226-3).
In theory, the process is relatively straightforward. In practice, completing, furnishing, and filing these IRS forms is complex, difficult, and time consuming. In this author’s experience, the BBA Help Desk (PBBA eSubmission Support) has been an excellent resource, and the IRS employees have been professional and helpful. That being said, the IRS system and technology related to submitting push-out forms is riddled with glitches, delays, and traps. As with most things, the best practice with push-out election forms is to start as soon as possible.
The partnership representative (or a designated power of attorney) must electronically submit Form 8988 to the IRS. In order to submit Form 8988 electronically, however, the partnership representative must first have a series of permissions and registrations in place, including an ID.me account, e-services permissions, and PIN, and apply for a subsequent Partnership Bipartisan Budget Act Transmitter Control Code (PBBA TCC), which authorizes the audited BBA partnership or its pass-through partners to electronically submit forms. In addition, if the partnership representative plans to have a designated power of attorney submit the forms on its behalf, the partnership representative will need to execute and submit a Form 2848, Power of Attorney and Declaration of Representative, to the IRS Centralized Authorization File (CAF) unit before submitting Form 8988.
In short, the process to prepare and file Form 8988 for a push-out election should ideally begin before the IRS even issues an FPA. The paperwork required renders it almost impossible to file Form 8988 at the last minute without adequate preparation and planning. In addition, it is likely that advisors may encounter technical glitches at some point along the way.
State & Local Reporting of Federal BBA Partnership Adjustments
Federal BBA partnership adjustments may also result in state and local tax (SALT) reporting requirements, depending on the specific jurisdiction, as well as tax consequences associated with federal adjustments under the BBA regime. The Multistate Tax Commission (MTC), representing several states, issued a model statute named the “Model Uniform Statute for Reporting Adjustments to Federal Taxable Income and Federal Partnership Audit Adjustments,” known as the MTC Statute (https://tinyurl.com/yma2dwyv). The MTC Statute provides a set of model rules for reporting federal partnership adjustments resulting from an AAR or a BBA partnership audit. For SALT purposes, there are generally three types of reporting regimes: 1) states that have materially adopted the MTC Statute, 2) states that have not adopted the MTC Statute and have no specific statute on point; and 3) states that have a specific statute on point that materially departs from the MTC Statute (see, e.g., Georgia Code Annotated § 48-7-53, 2023; Alabama Administrative Code Rule 810-3-40-.01; Hawaii Revised Statuses § 235-2.45, 2023).
This article will focus on states that have materially enacted the MTC Statute, using Georgia as a specific example.
Georgia has adopted the MTC Statute through Georgia Code Annotated (GCA) § 48-7-53. Under the MTC Statute, the Georgia state model works the reverse of the federal BBA model with respect to how adjustments are pushed out to the terminal partners. The default rule is that the adjustments are pushed out to the partnership’s partners, and indirect partners in the case of a passthrough partner (i.e., a tiered partner) [GCA § 48-7-53(c)(2)-(3)]. Partnerships that receive federal partnership adjustments that result in state tax adjustments can make an irrevocable election to pay the tax, penalty, and interest due for all of its partners at the partnership level [GCA § 48-7-53(c)(3)]. Note that the Georgia model also provides rules related to how to report and pay adjustments for a “tiered partner” (i.e., a partnership that is a partner in a lower-tier partnership).
Georgia Code Annotated § 48-7-53(c)(2)(A) provides that, “for all final federal adjustments, the audited partnership shall no later than 90 days after the final determination date of the audited partnership:
- File a completed federal adjustments report;
- Notify each of its direct partners of their distributive share of the adjustments; and
- File an amended composite return under Code Section 48-7-129. If one was originally filed and for withholding partners, file an amended withholding report under Code Section 48-7-129, and pay the additional amount due under this title that would have been due had the final federal adjustments been reported properly as required.” [Note that “Federal adjustments report” generally means “an amended Georgia income tax return that arises directly or indirectly from a partnership level audit and for an audited partnership and tiered partner, identifies all partners that hold an interest directly in such audited partnership or tiered partner, and provides the effect of the final federal adjustments on such partner’s Georgia taxable net income.” [Georgia Code Annotated § 48-7-53(a)(7)].
Now, the trap for the unwary: Georgia requires the audited partnership to report the federal adjustment no later than 90 days after the final determination date of the audited partnership [GCA § 48-7-53(a)(10) defines “final determination date”]. If the federal BBA dispute resulted in a case in US Tax Court, the final determination date is generally 90 days after the court enters a decision in the case BBA decisions in Tax Court are governed by Tax Court Rule 255.7—Tax Court Rule 248 is not applicable. Tax Court Rule 255.7 simply states the following: “A decision that the Court enters in a partnership action shall be binding on the partnership and on all of its partners.”
Under IRC § 7481(a)(1), Tax Court decisions become final when time allowed for filing of a notice of appeal expires. Under IRC § 7483, “review of a decision of the Tax Court shall be obtained by filing a notice of appeal with the clerk of the Tax Court within 90 days after the decision of the Tax Court is entered.” In the case of an AAR, the final determination date is the day the AAR is filed. A discussion of the final determination date for federal partnership adjustments in every context is beyond the scope of this article, but it is worth noting that this is an important date that triggers several important deadlines for both state and federal tax purposes. In addition to SALT reporting requirements, the date the partnership adjustments are “finally determined” also triggers certain deadlines related to push-out elections at the federal level. Regarding a federal push-out election, the audited partnership must furnish Forms 8986 to its partners and file Form 8985 and Forms 8986 within 60 days of the date the partnership adjustments are finally determined [Treasury Regulations § 301.6226-2(b)].
As discussed above, reporting requirements for states may closely follow federal BBA deadlines. Tax preparers should be thinking about the SALT reporting requirements and tax consequences in parallel with the federal side, not as an afterthought. Georgia is the example here, but it is important to note that different states will have different requirements.
