Large Partnership & Complex Pass-Through Entity Audits (BBA Regime)

How the IRS actually audits partnerships and multi-member LLCs today, why the rules changed completely in 2018, and how Mike Habib, EA — a Whittier, California tax representation firm — guides partnerships and their partners through a BBA examination.

If your partnership, multi-member LLC, or other pass-through entity has been selected for an IRS audit, one of the first things worth understanding is that the rules governing that audit changed fundamentally in 2018, and most business owners — along with a fair number of accountants who have not had to navigate this specific process before — are still operating on assumptions that no longer apply. The current framework, known as the centralized partnership audit regime, or simply “BBA,” genuinely changes who the IRS deals with, who ends up paying any resulting tax, and how much authority a single designated individual has to make binding decisions for every partner in the entity, often without those partners having any say in the matter at all.

This guide walks through exactly how the BBA regime works, what happens from the moment a partnership receives an IRS audit notice through a final resolution, why the choice of “partnership representative” matters more than most partnerships realize when they make it, what a “push-out election” actually does and when it makes financial sense, and how Mike Habib, EA — a Whittier, California based tax representation practice — helps partnerships and their individual partners navigate this process. Every code section, form number, deadline, and dollar or percentage figure in this guide has been verified against IRS guidance and the underlying statute before being written down.

Part One: What the BBA Regime Is, and Why It Replaced the Old Rules

What Is the “BBA Regime,” and Where Does That Name Come From?

BBA stands for the Bipartisan Budget Act of 2015, the legislation that created the current framework governing how the IRS audits partnerships. Section 1101 of that law repealed the previous set of partnership audit rules — commonly known as TEFRA, after the 1982 statute that originally created them — and replaced them with an entirely new system, formally codified in Internal Revenue Code sections 6221 through 6241. This new system is generally effective for partnership tax years beginning after December 31, 2017, meaning that for the vast majority of partnerships, the 2018 tax return was the first one governed by these rules, and every partnership return filed since has operated under this framework unless a specific, narrow exception applies.

The core idea behind the change was administrative efficiency for the IRS. Under the old TEFRA rules, auditing a large partnership with many partners was genuinely cumbersome — adjustments often had to flow through to each individual partner’s own return, and collecting additional tax meant chasing down potentially dozens or hundreds of separate taxpayers, some of whom might no longer even be partners in the entity by the time an audit concluded years later. The BBA regime solves this by fundamentally shifting where the tax gets assessed and collected: in most cases, the partnership itself pays, at the entity level, rather than the IRS pursuing each individual partner separately.

Does the BBA Regime Apply to My LLC, or Only to Partnerships That Are Actually Structured as Legal Partnerships?

It applies broadly to any entity that files Form 1065, U.S. Return of Partnership Income — which includes multi-member LLCs taxed as partnerships, general and limited partnerships, and other pass-through arrangements that report income on that form. If your business files Form 1065, the BBA regime governs how the IRS will audit it, regardless of whether your state-law entity type is technically called a “partnership” or something else. The label on your formation documents does not matter for this purpose; what matters is which tax return you file.

Can a Partnership Avoid the BBA Regime Entirely?

Yes, but only if it qualifies for a specific statutory election, and this election has to be made affirmatively and correctly, every year, on a timely filed return. Under Internal Revenue Code section 6221(b), an eligible partnership can elect out of the BBA regime if it meets several specific conditions: the partnership must be required to furnish 100 or fewer Schedules K-1 to its partners for the taxable year; every single partner must be an “eligible partner” — specifically, an individual, a C corporation, a foreign entity that would be treated as a C corporation if it were domestic, an S corporation, or the estate of a deceased partner; and the partnership must make the election on a timely filed return for that year, including extensions.

This eligibility test excludes a meaningful number of partnerships from ever being able to opt out, and this is one of the most common surprises partnerships encounter. If even one partner is itself another partnership, a disregarded entity, a trust of any kind (including a simple revocable living trust), or a nominee, the entire partnership loses eligibility to elect out — regardless of how few total partners it has. A small, closely held real estate partnership with just three partners, one of whom happens to be a family trust, cannot elect out of the BBA regime, even though it looks, by any intuitive measure, like exactly the kind of small entity the election was designed to protect.

If My Partnership Is Eligible to Elect Out, How Does It Actually Do That, and What Happens After?

The election is made by answering “yes” to the relevant question on Form 1065, Schedule B (question 33 on the 2024 version of the form), and by completing Schedule B-2, Election Out of the Centralized Partnership Audit Regime, listing each eligible partner’s name, U.S. taxpayer identification number, and partner type — including, notably, every individual shareholder of any S corporation that is itself a partner, not just the S corporation entity. The IRS treats all elections out as valid unless it affirmatively determines otherwise and notifies the partnership in writing.

A partnership that successfully elects out is, for that year, examined the old-fashioned way: the IRS audits each partner’s own individual return separately for items connected to the partnership, rather than conducting one centralized proceeding at the entity level. Whether electing out is actually the better choice is not automatic or obvious — some partnerships assume opting out is always preferable, but a centralized, single audit of the entity can, in some circumstances, actually be simpler and less expensive to manage than the alternative of the IRS separately examining every individual partner’s return.

Part Two: The Partnership Representative — The Single Most Consequential Decision Most Partnerships Barely Think About

What Is a “Partnership Representative,” and How Is That Different From the Old “Tax Matters Partner”?

Every partnership subject to the BBA regime must designate a partnership representative (PR) under Internal Revenue Code section 6223, and the scope of this role’s authority represents one of the most significant practical changes from the old rules. Under the prior TEFRA system, a “tax matters partner” had a role in an audit, but other partners retained meaningful rights to participate, receive notice, and take independent action. The BBA regime eliminated nearly all of that. Under section 6223, the partnership representative has the sole authority to act on behalf of the partnership in any BBA proceeding — no other partner, and no other person at all, is even permitted to participate in an administrative proceeding without the IRS’s consent.

The statute is explicit and unforgiving on this point: the partnership and all of its partners are bound by the actions the partnership representative takes and by any final decision reached in a proceeding involving the partnership, whether or not any individual partner agreed with those actions, was consulted about them, or even received notice that they were happening. This is a genuinely dramatic shift in power, and it is precisely why choosing who serves as partnership representative — and, where possible, negotiating contractual limits on that authority in the partnership agreement itself — deserves far more attention than it typically receives when a partnership is simply filling in a box on Form 1065.

Does the Partnership Representative Have to Be a Partner in the Entity?

No. Unlike the old tax matters partner, a partnership representative can be any person or entity with a substantial presence in the United States — the individual does not need to hold any ownership interest in the partnership at all, and does not need to be an employee or have any other formal relationship to it. This allows a partnership to designate an experienced outside professional, such as an enrolled agent, CPA, or attorney, specifically because that person is best equipped to navigate a BBA proceeding — rather than defaulting to whichever partner happens to hold the largest ownership stake or the most visible leadership title, who may have no relevant experience with this kind of examination at all.

A partnership representative must maintain a street address and phone number in the United States, be available to meet with the IRS in person at a reasonable time and place, and possess a valid U.S. taxpayer identification number. There can be only one partnership representative in effect for a given partnership tax year at any time, which makes clear, unambiguous designation on the original return essential — a partnership that fails to properly designate one risks having the IRS select a representative on its behalf.

What Actually Happens Once the IRS Decides to Examine a BBA Partnership?

The centralized proceeding runs through a specific sequence of notices. It generally begins with a Notice of Administrative Proceeding, opening the examination. As the audit progresses and the IRS identifies proposed changes, it issues a Notice of Proposed Partnership Adjustment (NOPPA), laying out the specific adjustments under consideration and giving the partnership representative an opportunity to respond, negotiate, and pursue modifications to reduce the resulting liability before anything becomes final. If the matter is not resolved at that stage, the IRS issues a Final Partnership Adjustment (FPA) — the document that actually determines the adjustments and, critically, starts the clock on two of the most important deadlines in the entire process, discussed in the sections that follow.

What Is an “Imputed Underpayment,” and Why Does It Usually Turn Out to Be Larger Than Partners Expect?

This is the mechanism that makes the BBA regime’s entity-level collection actually work, and it is also the single detail most likely to shock partners the first time they encounter it. When the IRS determines that a partnership under-reported income or over-reported deductions, it calculates an “imputed underpayment” — essentially, the tax that would be owed on the net adjustment, calculated by default at the highest individual or corporate tax rate in effect for the reviewed year, regardless of what tax bracket the actual partners were in, and without regard to any of their individual circumstances, losses, credits, or offsetting items.

This default calculation method exists for administrative simplicity — it lets the IRS assess one number against the partnership itself without needing to trace adjustments through to dozens or hundreds of individual partners, each potentially in a different tax bracket. But it also means the default imputed underpayment is frequently, sometimes dramatically, larger than the sum of what the individual partners would actually have owed had the same adjustment been made on each of their personal returns — particularly when the partner group includes tax-exempt entities that would owe nothing on their own share, individuals in lower brackets than the top rate, or partners with net operating losses or other items that would have reduced their individual liability.

Is There Any Way to Reduce That Default Imputed Underpayment Calculation?

Yes, through a process called modification, available under section 6225(c). After the IRS proposes the initial, default imputed underpayment figure, the burden shifts to the partnership to request modifications that bring the calculation closer to what the actual, correct tax liability would be — for example, requesting modification for adjustments allocable to a tax-exempt partner (who would otherwise be assumed to owe tax at the top rate despite paying no tax at all), or for adjustments to capital gains or qualified dividends attributable to an individual partner, which are properly taxed at preferential rates rather than the flat top ordinary rate the default calculation assumes. Successfully pursuing modification requires detailed, partner-specific documentation and is a genuinely technical undertaking — but for a partnership with a diverse partner base, it can meaningfully reduce the gap between the IRS’s starting number and the partnership’s actual, defensible liability.

What Is a “Push-Out Election,” and When Does It Actually Make Financial Sense?

Instead of having the partnership itself pay the imputed underpayment, the partnership representative can elect, under Internal Revenue Code section 6226, to “push out” the adjustments directly to the individuals who were partners during the specific reviewed year under audit — which may be entirely different people than who owns the partnership today, particularly if ownership interests have changed hands since. Each pushed-out partner then reports their share of the adjustment on their own return and pays tax at their own actual marginal rate, rather than the flat top rate the default imputed underpayment calculation assumes.

The election is made by filing Form 8988, and the timing is unforgiving: the partnership representative has exactly 45 days from the date the FPA is mailed to make this election, and that 45-day window cannot be extended under any circumstances. Once made, the partnership furnishes Form 8985 (a transmittal and tracking statement) along with a separate Form 8986 for each affected partner, detailing that specific partner’s share of the adjustment — and these statements must reach the affected partners promptly, because a failure to timely furnish them can jeopardize the validity of the entire push-out election.

The push-out election is not free, and this trade-off needs to be evaluated carefully before the 45-day window closes. Partners who receive a pushed-out adjustment must pay interest calculated at a rate two percentage points higher than the standard underpayment rate under section 6621 — and that interest is generally computed using the corporate short-term applicable federal rate plus five percentage points, rather than the individual rate of the federal short-term rate plus three percentage points that would otherwise apply, regardless of what type of partner is actually paying it. This higher interest cost means a push-out election is most clearly advantageous when the reviewed-year partner group includes tax-exempt entities (who would owe nothing regardless of the interest rate), individuals meaningfully below the top tax bracket, or partners with losses or other offsetting items — situations where the gap between the flat top-rate imputed underpayment and each partner’s actual, individual liability is large enough to outweigh the additional interest cost of pushing the adjustment out rather than simply having the partnership pay it directly.

Part Three: Fixing a Return Yourself, Before the IRS Finds the Error

If My Partnership Discovers a Mistake on an Already-Filed Return, Can It Just File an Amended Return the Way an Individual or Corporation Would?

No, and this is one of the most consequential and least understood changes the BBA regime introduced. A partnership subject to the BBA regime cannot file a traditional amended Form 1065 with corrected Schedules K-1 once the original return’s filing deadline (including extensions) has passed. Instead, the exclusive mechanism for self-correcting a previously filed return is called an Administrative Adjustment Request (AAR), governed by Internal Revenue Code section 6227.

This distinction matters practically because an AAR does not work the way an amended return does. Filing an AAR does not go back and rewrite the original reviewed year’s return — instead, the adjustment is generally reflected in the year the AAR itself is filed, and if the requested adjustment would result in an imputed underpayment, the partnership must calculate that amount using essentially the same framework that applies in an actual IRS-initiated audit, including, if it chooses, its own version of a push-out election to pass the adjustment through to the reviewed-year partners rather than paying it at the entity level.

How Does a Partnership Actually File an AAR, and How Long Does It Have to Do So?

The mechanics depend on how the original return was filed. If filing electronically, the partnership submits a revised Form 1065 with the “Amended Return” box checked, along with Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, identifying each specific change from the original return. If filing on paper, the partnership instead uses Form 1065-X, Amended Return or Administrative Adjustment Request. Either way, the AAR must be signed by the partnership representative as designated on the original reviewed-year return — and if no representative was ever properly designated, one must first be identified using Form 8979 before the AAR can be filed at all.

The general deadline to file an AAR is three years from the later of the date the original Form 1065 was actually filed or its original due date. But there is a hard cutoff that operates independently of that three-year window: once the IRS mails a statutory Notice of Administrative Proceeding, opening a formal examination of that tax year, an AAR can no longer be filed for that year at all — the partnership has lost its opportunity to self-correct and is now committed to responding within the IRS-initiated audit process instead. This is precisely why a partnership that discovers an error on its own should move to file an AAR promptly, rather than treating the three-year window as a comfortable amount of time to deliberate — an unrelated audit notice arriving before the AAR is filed forecloses this option entirely, regardless of how much of the three-year period technically remains.

Part Four: Questions Partners and Partnerships Actually Ask

Part Five: How These Cases Actually Play Out

Scenario 1: The Real Estate Partnership That Discovered a Costly Reporting Error on Its Own

A three-partner real estate holding partnership discovered, during a routine internal review, that a significant depreciation adjustment had been miscalculated on a return filed two years earlier — an error that, left uncorrected, would understate future depreciation deductions for years to come. Because one of the three partners was a family trust, the partnership was not eligible to elect out of the BBA regime despite its small size, and the partners were unsure whether they could simply file an amended return the way they always had for their individual returns.

Mike Habib confirmed that a traditional amended return was not available and prepared a proper Administrative Adjustment Request instead — filing the required Form 8082 alongside a revised Form 1065, calculating the resulting adjustment’s imputed underpayment figure using the correct methodology, and making a push-out election on the AAR itself so that each of the three reviewed-year partners could account for their share of the corrected depreciation on their own returns at their own individual tax rates, rather than the partnership paying a flat top-rate imputed underpayment that would have overstated the actual tax due given the partners’ individual circumstances.

Scenario 2: The Manufacturing Partnership Facing a Six-Figure Imputed Underpayment With a Diverse Partner Base

A manufacturing partnership with fifteen partners — including two tax-exempt retirement accounts holding indirect interests, several individuals in varying tax brackets, and one corporate partner — received a Notice of Proposed Partnership Adjustment proposing to disallow a significant portion of claimed research and development expenses, generating a default imputed underpayment calculated at the flat top individual rate on the full adjustment amount.

Mike Habib worked with the partnership representative to pursue modification under section 6225(c), specifically documenting the portion of the adjustment allocable to the tax-exempt partners (who would owe no tax at all on their share) and preparing partner-specific computations showing that several individual partners’ actual marginal rates fell well below the flat top rate the IRS had initially assumed. The modification process reduced the imputed underpayment substantially below the IRS’s original proposed figure, reflecting the partnership’s genuinely diverse partner composition rather than the flat, one-size-fits-all default calculation.

Scenario 3: The Partnership Whose Representative Faced a 45-Day Deadline With High Stakes on Both Sides

A professional services partnership received a Final Partnership Adjustment following a contested, multi-year examination, proposing a substantial imputed underpayment. The partnership representative needed to decide, within the unforgiving 45-day statutory window, whether to make a push-out election or have the partnership pay the imputed underpayment directly — a decision complicated by the fact that several reviewed-year partners had since left the firm and were, understandably, reluctant to cooperate with a push-out that would create a personal tax liability for them years after they had any ongoing stake in the business.

Mike Habib ran the comparative analysis within the available window: calculating the actual aggregate tax the departed and current partners would owe individually under a push-out, including the two-percentage-point interest rate penalty, against the cost of having the partnership pay the flat-rate imputed underpayment directly. Because several of the reviewed-year partners were in significantly lower brackets than the flat top rate the direct-payment calculation assumed, the push-out election produced a substantially lower aggregate cost even after accounting for the higher interest rate — and Mike coordinated the required Form 8985 and Form 8986 statements to each affected partner within the same tight deadline, ensuring the election’s validity was not jeopardized by late delivery.

How Mike Habib, EA Approaches BBA Partnership Audits

Start by Understanding Exactly Where the Partnership Stands Procedurally

Every BBA case begins with the same foundational questions: is the partnership eligible to have elected out, and did it actually do so correctly on the relevant year’s return; who is the properly designated partnership representative, and does the partnership agreement place any contractual limits on that person’s authority; and, if a notice has already been received, exactly which stage of the process — Notice of Administrative Proceeding, NOPPA, or FPA — the case is currently in, since each stage carries entirely different deadlines and available options.

Run the Actual Numbers Before Any Deadline-Driven Decision Gets Made

Whether the question is modification of a proposed imputed underpayment, the push-out election decision within its unforgiving 45-day window, or the calculation required for a self-initiated AAR, Mike Habib builds the specific, partner-by-partner analysis the decision actually requires — not a general estimate, but the real comparative math between the default flat-rate calculation and what the partnership’s actual partner composition would produce under the available alternatives.

Coordinate With the Partnership Representative and, Where Appropriate, Individual Partners

Because the BBA regime concentrates so much authority in a single representative, Mike works directly with whoever holds that role — whether that is a partner, an outside professional, or Mike himself serving in that capacity — to ensure decisions are made with full information and within every applicable deadline, while also helping individual partners understand their own economic exposure under whatever resolution path the representative ultimately selects.

Why Flat-Fee Representation Fits BBA Partnership Cases

BBA cases can involve substantial technical work — partner-by-partner modification calculations, push-out election analysis under a genuine deadline, or AAR preparation for a self-identified error — and the complexity scales with the number of partners and the diversity of their individual tax situations. An hourly billing structure creates exactly the wrong incentive here: the more partners involved, the more complex the modification analysis, the larger the bill grows, right when a partnership is already facing a significant proposed liability.

Mike Habib, EA represents BBA partnership audits at a flat fee, quoted once the scope of the examination, the number of partners, and the specific resolution strategy being pursued are understood. You know the cost of getting this handled correctly before the work begins.

About Mike Habib, EA

Mike Habib is a federally licensed Enrolled Agent, which means he holds unlimited practice rights before the IRS and can represent taxpayers in audits, appeals, collections, and all IRS matters. He operates Mike Habib, EA, a tax representation and business financial advisory practice based in Whittier, in Los Angeles County, California, serving clients in all fifty states.

Before building the representation practice, Mike worked in corporate finance, including service as a Controller at Xerox Corporation and Director of Finance at AEG. That background is directly relevant to BBA cases, which turn heavily on precise, partner-by-partner financial calculations and the ability to present a complex ownership structure clearly and credibly to an IRS examiner.

He has more than 20 years of experience in tax representation. Mike Habib, EA is a BBB A+ Accredited Business.

Every case is handled personally by Mike. There is no intake department, no junior staff the file gets handed to, and no one between you and the person who will actually be running the modification calculations, evaluating the push-out decision, and communicating directly with the IRS on your partnership’s behalf.

What to Do Right Now

If your partnership has received any BBA-related notice — a Notice of Administrative Proceeding, a Notice of Proposed Partnership Adjustment, or a Final Partnership Adjustment — identify exactly which one it is and the date it was issued, because every meaningful deadline in this process, including the unforgiving 45-day push-out window, is measured from that specific date. If your partnership has discovered an error on its own and no audit notice has arrived yet, moving to file an Administrative Adjustment Request promptly protects that option before an unrelated examination notice could foreclose it.

Call Mike Habib, EA at 562-204-6700 or 1-877-788-2937. Or ONLINE to set up a consultation. Bring whatever IRS correspondence you have received, your partnership agreement, and your recent Forms 1065 and Schedules K-1.

The BBA regime concentrates enormous consequences into a small number of tightly timed decisions. Getting the right analysis in front of the partnership representative before those deadlines pass is the difference between a resolution that reflects your partnership’s actual tax position and one that defaults to the IRS’s flat, worst-case assumption.