BBA Partnership Audits: What Every Partnership Needs to Know

Federal Tax
Written By Jelena Allen, CPA

If your partnership hasn’t reviewed its operating agreement or considered its audit exposure in the past few years, you’re not alone – but you may also be at risk. The IRS has modernized its approach to partnership audits, and the changes are sweeping. Thanks to the Bipartisan Budget Act of 2015 (BBA), all partnerships – from closely held LLCs to sprawling investment funds – are subject to a centralized audit regime that fundamentally changes how disputes with the IRS are handled.

Even if your partnership is small, you are not automatically exempt from these rules - understanding whether your partnership is eligible to opt out of the BBA regime is important - and you need to know how that is done. Smaller partnerships may be the most vulnerable to unexpected consequences under BBA – having a BBA knowledgeable CPA is vital.

From TEFRA to the BBA: A Shift in Audit Power

Before the BBA, partnership audits were governed by a complicated set of rules under TEFRA (Tax Equity and Fiscal Responsibility Act of 1982). TEFRA required the IRS to make partnership-level adjustments but push those changes down to individual partners – creating a logistical nightmare in cases involving many or tiered partners.

To streamline this, Congress repealed TEFRA and replaced it with the BBA centralized audit regime, effective for tax years beginning after January 1, 2018. Under the BBA, the IRS can audit a partnership, make adjustments, and assess tax at the partnership level. That means one unified proceeding, one payment, and potentially no direct contact with individual partners at all.

Partnership-Level Tax Liability: A Game-Changer

Here’s the big shift: under the BBA, unless a partnership elects otherwise, any audit adjustments result in a tax that is assessed and collected at the entity level, in the year the IRS concludes the audit – not the year under review. This means the current partners (at the time the IRS finishes the audit) are the ones on the hook for the tax, interest, and penalties – even if the issue stems from a year when different partners owned the business.

This default rule can lead to wildly unfair outcomes unless proactively addressed.

Opting Out: Not Always an Option

Some partnership may be eligible to opt out of the BBA regime – but the requirements are strict. To opt out, a partnership must have 100 or fewer eligible partners, and ensure that all partners are:

  • Individuals,

  • C corporations,

  • Foreign entities taxed as corporations,

  • S corporations, or

  • Estates (from a decedent)

If any partner is a trust, partnership, or disregarded entity (like a single-member LLC), the partnership cannot opt out, regardless of size. This often catches small partnerships by surprise – especially those with family trusts, single-member LLCs, or layered ownership structures.

And importantly, even if eligible, the election to opt out must be made annually, on a timely filed Form 1065.

The Rise of the Partnership Representative

Gone is the old concept of a “tax matters partner”. Under the BBA, partnerships must designate a Partnership Representative (PR) – a person or entity with exclusive authority to act on the partnership’s behalf in an IRS audit. That includes the power to bind the partnership to a settlement or final tax determination – with no requirement to inform or consult the other partners.

If a PR isn’t designated, the IRS will appoint one – and their decisions will still bind the partnership. This makes it critical for operating agreements to spell out who the PR is, what their responsibilities are, and how decisions will be handled internally.

Push-Out Election: A Way to Shift the Burden Back to Partners

Partnerships that don’t want to absorb the audit adjustment at the entity level may be able to make a push-out election under IRC §6226. This allows the partnership to shift the tax burden to the individual reviewed-year partners – those who actually benefited from the income or deductions being adjusted.

But this election comes with strict deadlines (generally 45 days after the IRS issues its Final Partnership Adjustment) and administrative burdens. It’s not something that should be decided reactively during an audit – partnerships should plan for this possibility in advance.

Why It Matters

For many partnerships, BBA compliance is a blind spot. Don’t be fooled by the IRS staffing cuts from recent months - the IRS is not ceasing partnership enforcement. The centralized audit regime gives the IRS a streamlined path to collect large amounts of tax – and that puts more partnerships in the crosshairs.

Take Action: Review, Revise, and Prepare

Now is the time to:

  • Review your operating agreement and update it to reflect BBA terms;

  • Designate a qualified Partnership Representative and define their authority;

  • Discuss opt-out eligibility and whether your partnership qualifies;

  • Plan for audit liability – and how it will be shared or pushed out.

Don’t wait until the IRS comes knocking to figure out who’s in charge and who pays. The BBA has changed the game – and every partnership needs to play by the new rules.

This Article is Part of Our BBA Series

This article is part of an ongoing series demystifying the Bipartisan Budget Act audit rules and what they mean for partnerships of all sizes. Upcoming topics include:

  • Top 5 BBA Traps for Small Partnerships

  • How to Choose (and Control) Your Partnership Representative

  • Understanding the Push-Out Election

  • What to Include in Your Operating Agreement under BBA

Follow along as I break down what proactive partnerships need to know – and how to stay audit-ready under the IRS’s modernized enforcement regime.

Jelena Allen, CPA