The Bipartisan Budget Act of 2015, also known as the BBA, is the centralized partnership audit regime that is intended to apply to partnership entities unless the partnership elects out of the regime. This was found necessary in dealing with the unique nature of partnerships, where the partners file returns individually, and yet the partnership itself is also a taxpayer when it comes to certain taxes, such as employment taxes and excise taxes. The BBA imposes a regime under which assessment and collection may be made upon the partnership as taxpayer, and the liabilities, if any, of the partners, are also taken into consideration.
The Partnership Participates through the Partnership Representative
Partnerships that do not elect out of the Bipartisan Budget Act are required to appoint a partnership representative, who will be participating in the BBA proceeding on behalf of the partnership. While this partnership representative will be acting for the partnership entity, his actions will also be binding on the individual partners, as well.
1. Notice of Administrative Proceeding
The proceeding begins when the IRS notifies the partnership and the partnership representative of the audit through a Notice of Administrative Proceeding (NAP).
The NAP is a statutory notification that informs the partnership that an administrative proceeding has been commenced.
Once a NAP is issued, the partnership may not file an Administrative Adjustment Request (AAR), or the equivalent of an amended return for the partnership entity. The individual partners are also not allowed to amend their returns for the tax year in issue.
2. Summary Report
Once the IRS examiner has completed the audit, a summary report is issued.
The summary report sets out the following:
- The preliminary audit results;
- The computation for the imputed underpayment, including any interests and penalties;
- An explanation detailing the adjustment, the relevant facts, and related laws;
- Instructions on the next steps for the partnership representative to take, which include requesting a conference with the examining agent and what to do if the partnership representative agrees or disagrees with the preliminary audit results;
- An explanation of the actions to be taken by the IRS if the partnership representative does not communicate with the examining agent after receipt of the Summary Report
3. Request for an Appeals Conference
If the partnership representative does not agree with the findings set out in the summary report, he may request an Appeals conference. In response, the IRS will issue a Letter Package detailing the procedures for how to proceed with the Appeals Process. The process includes the submission of a protest by the partnership representative, to which the IRS may submit a rebuttal.
Once the protest and the rebuttal are submitted, the matter will then be forwarded by the IRS to Appeals.
4. The Appeals Process and the Notice of Proposed Partnership Adjustment
Upon a review of the Protest and Rebuttal, the expected result of the Appeals Process is called the Notice of Proposed Partnership Adjustment (NOPPA). This is the second statutory notification issued to the partnership and partnership representative, and it provides instructions to the partnership representative on how to request a modification to the proposed imputed underpayment for purposes of arriving at a final partnership adjustment.
5. Request for Modification of the Imputed Underpayment
If the partnership, through the partnership representative, disagrees with the imputed underpayment, the partnership representative has 270 days from the date of the NOPPA to request a modification of the imputed underpayment. This is a non-extendable time period that may also be waived. The partnership representative can again request an Appeals conference to consider each disputed item.
6. Notice of Final Partnership Adjustments
The final step in the BBA proceeding, after consideration of the positions of both the partnership representative and the IRS, is the issuance of the Notice of Final Partnership Adjustments (FPA). It sets out the final amount of taxpayer liability, which must be paid within 45 days unless the partnership elects the alternative push-out election, wherein the audit adjustments are pushed out to the partners for payment.