6.4 Centralized Partnership Audits, Notices & Opting Out

Entity-level examination is a distinct issue

Ordinary partnership income generally passes through to partners, but that does not mean every tax examination proceeds separately against each partner. The Bipartisan Budget Act of 2015 (BBA) created a centralized partnership audit regime generally applying to partnership tax years beginning after 2017. Under it, the IRS generally determines partnership-related adjustments in a single partnership proceeding. An imputed underpayment can be collected from the partnership in the adjustment year unless applicable alternatives or modifications apply.

Distinguish the reviewed year, whose return is being examined, from the adjustment year, when the determination becomes final or the relevant adjustment occurs. The partners who own the entity in those years can differ. This timing is why partnership agreements often address audit costs, former partners' cooperation, and who bears a liability attributable to an earlier ownership group.

Annual election out

A partnership may elect out for a year if it meets the statutory eligibility rules, including issuing 100 or fewer required Schedules K-1 and having only eligible partners. Eligible partners generally include individuals, C corporations, qualifying foreign entities that would be C corporations if domestic, S corporations, and estates of deceased partners. Partnerships, trusts, disregarded entities, nominees, and estates other than estates of deceased partners are generally ineligible partner types for this purpose.

When an S corporation is a partner, count both the partnership's K-1 issued to the S corporation and the K-1s the S corporation must issue to its shareholders. The counting rule prevents an entity with many indirect owners from treating one S corporation as a single owner for the 100-statement limit.

Example: A partnership has 90 individual partners and one S corporation partner with 12 shareholders. Its count is 91 partnership K-1s plus 12 shareholder K-1s, or 103. It fails the count test even though it has only 91 direct partners. A partnership with just two direct partners can also fail if one is an ineligible trust.

The election is made each year on a timely filed Form 1065, including extensions, with the required partner information. The partnership must notify partners of the election within 30 days of making it. It is not enough to write an opt-out clause in an operating agreement or tell the preparer that the entity is small. An election out for one year does not automatically cover the next year.

Partnership representative

A partnership subject to BBA generally designates a partnership representative (PR) for each year. The PR may be a partner or another eligible person with substantial presence in the United States. If an entity is designated, it must appoint a designated individual who meets the applicable requirements. The PR has sole authority to act for the partnership in the proceeding, and the partnership and partners are generally bound by those actions.

A private agreement requiring unanimous approval before settlement can create contractual rights among owners. It does not restrict the IRS's ability to rely on the PR's statutory authority. This differs from assuming each partner receives the same participation rights and separate notices as under older partnership procedures.

Notices and procedural choices

A push-out election generally must be made within 45 days after the final partnership adjustment notice. Reviewed-year partners then take the adjustments into account using the prescribed statements and reporting-year computations; it is not simply a direction to amend every reviewed-year return. The statutory interest rules for push-out can differ from ordinary underpayment interest.

For a BBA partnership correcting its own previously filed return, an administrative adjustment request (AAR) generally replaces an ordinary amended partnership return. Form 8082 and other required forms or statements implement the request under the applicable instructions. An entity that validly elected out follows different amendment procedures. Always determine the regime before selecting the correction mechanism.

Examination scenario

A partnership had three individuals in 2025 and a new corporate purchaser in 2028. The IRS examines 2025 in 2028. If no valid election out covered 2025, do not conclude that each of the old partners alone owes the adjustment simply because all 2025 income passed through. Begin with the centralized regime, identify the reviewed and adjustment years, consult the PR, and evaluate modification or push-out procedures within the actual notice deadlines. Preserve the original K-1s, partner identities, and ownership history to support that decision.

Official references

Publication 541, BBA procedures and IRS electing out guidance, checked October 17, 2026.