Memo Outlines Centralized Partnership Audit Regime Exam Procedures

2. Assess whether any negative adjustments related to a prior year BBA examination reported on the return being risk assessed are consistent with how those adjustments are reflected on any Form 14792 or Form 15027. The negative adjustments as reported should be consistent in amount, character/category and timing with the amounts reported on Form 14792 or Form 15027 (and corresponding Form 886-A).

3. Consider any potential non-chapter 1 tax issues; such as, Chapter 2 or 2A issues. If so, you must contact the BBA POC for further guidance.

Mandatory referral to the BBA point of contact (POC)

1. You must contact the appropriate BBA POC if the partnership involves any of the following:

2. A referral should be made as early in the examination as the need is identified.

Determine if a partnership is subject to the BBA regime

1. The centralized partnership audit regime applies to all partnerships required to file information returns under section 6031(a) whose tax years begin on or after 1-1-2018, except:

2. You must determine, for each taxable year, whether the partnership return is subject to the BBA regime. This is necessary since a partnership may have elected out of the BBA for one year under examination but not another.

3. Section 1101(g)(4) of the BBA also provides that partnerships may “elect” to have the centralized partnership audit regime apply to partnership returns filed for tax periods beginning after November 2, 2015 and before January 1, 2018. This election may only be made within 30 days of the date the IRS first notifies a partnership in writing that its return has been selected for examination (via Letter 2205-D) or by filing an Administrative Adjustment Request under section 6227.

4. If the partnership is not subject to the BBA regime, the examination is subject to deficiency procedures at the partner level. Follow IRM 4.31.5 — ILSC Field Procedures.

5. You must record the determination whether it's a BBA partnership or not on your activity record.

Note: The BBA partnership rules and the deficiency procedures are mutually exclusive. Application of the wrong rules will impact the assessment of tax.

Election out of the BBA — tax periods begin on or after 1/1/2018

1. If there's an election out, you must determine if the election is valid. An election out is deemed valid until the IRS says it's invalid.

2. Eligible partnerships may make the election under section 6221(b) to elect out of the centralized partnership audit regime on their timely filed Form 1065/1066, Schedule B, question 25 (including extensions).

Note: Form 1065/1066, Schedule B question 25 (2018 version).

3. In addition, eligible partnerships must attach Schedule B-2 to provide information concerning their partners as required by section 6221(b)(1)(D) to include each partner's name, correct TIN, and federal tax classification.

4. The goal is to have a complete list of the terminal partners for linkage and assessment purposes. You and your manager have the discretion to approve the election out even if the information reflected on SCH B-2 was transposed incorrectly and the IRS has information that would remedy the incorrect information. You should consult the BBA POC if you have any concerns.

Determining if an election was made timely

1. Before determining whether a partnership is eligible to elect out, you must ensure that the election was made timely.

2. The TC 150 date should be used for determining timeliness of the election out of the BBA. If the TC 150 date reflects a late filing, you may use the partnership's proof of timely filing, such as eFile receipts or certified mailing slips.

3. If the election is not made on a timely filed return (including extensions), the election out is invalid.

Eligibility to elect out of the BBA

1. There are two criteria that a partnership must meet to be eligible to elect out of the BBA:

2. If either one of these requirements is not met, the partnership is not eligible to elect out and is automatically subject to the BBA regime.

Criterion #1 — partnership may only have certain types of partners (eligible partners)

1. In the first criterion, a partnership may only have direct partners each of whom is an individual, a C corporation, an estate of a deceased partner, or an S Corporation.

2. A partner that is a foreign entity generally will be considered an eligible partner if the foreign entity would be treated as a C corporation if it were a domestic entity.

3. S Corporations may have shareholders (such as QSSTs and/or ESBTs) that would otherwise be ineligible if they were direct partners. The type of shareholders doesn't factor into the determination of eligible partners.

Note: Partnerships that have Q-Sub(s) as a partner are not permitted to elect out.

4. An estate of a deceased partner filing Form 1041 may issue Schedule K-1s to its beneficiaries. Similar to S Corporations, an estate may have beneficiaries that would otherwise be ineligible if they were direct partners. The type of beneficiaries doesn't factor into the determination of eligible partners.

5. Another way to assess whether a partnership meets the criterion for the type of partners is if any of the following entities or persons are direct partners, then the partnership is not eligible to elect out of the BBA and is subject to centralized partnership audit regime.

Determining if the partnership has any ineligible partner during the taxable year

1. You must do your due diligence and confirm that there are no ineligible partners at any time during the year. Schedule B-2 requires that each partner's federal tax classification be listed, which should agree to the Schedule K-1 entry for “type of entity.”

2. In reviewing the Schedule B-2 to determine the type of partners, the partner information contained in the schedule should be cross referenced with the related Schedule K-1 information for each partner. Any inconsistencies between the two should be investigated, especially the type of partner indicated.

3. If any of the partners are LLC whose type of entity is reported as a corporation, IDRS must be researched to verify the filing status of the LLC as a corporation and not a pass-through entity.

4. If you determine that the partnership had ineligible partners during the taxable year, the election out is invalid.

Criterion #2 — partnerships required to furnish 100 or fewer schedule K-1s

1. In the second criterion, the number of Schedule K-1s required to be furnished can't exceed 100.

2. In the determination of whether the 100 or fewer Schedule K-1 threshold is met, the standard is based upon the number of Schedule K-1s required to be furnished, not the actual number of Schedule K-1s furnished. Therefore, if the taxpayer fails to furnish one or more Schedule K-1s, those not furnished but required to be furnished will be included in the total count.

3. Because S corporations are allowable partners and issue Schedule K-1s to their shareholders, in the determination of whether the partnership has furnished 100 or fewer Schedule K-1s, the Schedule K-1 furnished to the S corporation partner counts as one Schedule K-1 while all of the Schedule K-1s required to be furnished to the shareholders of the S corporation partner count as additional Schedule K-1s.

4. With regard to a partner that is an estate of a deceased partner, the estate may file Form 1041 and furnish Schedule K-1s to its beneficiaries. For purposes of determining the number of Schedule K-1s required to be furnished by the partnership, any Schedule K-1s furnish by the estate are NOT taken into account for purposes of determining whether the partnership has furnished 100 or fewer K-1 statements.

5. If more than 100 Schedule K-1s are required to be furnished, the partnership is not eligible to elect out.

Determining the number of schedule K-1s required to be furnished

1. If a statement (Schedule K-1) is required to be furnished (whether issued or not) under section 6031(b) with respect to each of its partner, then each such statement is included in the calculation of the number of schedule K-1s and should be disclosed on Schedule B-2, Part III, Line 3.

2. Page 1 of the Form 1065 requires an entry for the number of Schedules K-1 attached to the return. This entry will provide you a preliminary assessment as to whether the partnership is close to or has exceeded the maximum 100 threshold, notwithstanding whether any partners are S corporations or whether certain Schedule K-1s were actually issued.

3. If an S Corporation partner is listed, you should ensure that Schedule K-1 issued to the S Corporation is counted as well as the number of Schedule K-1s the S Corporation is required to furnish to its shareholders under section 6037(b) are also accounted for.

A. For example, the partnership PS has two partners, S1 and S2, each of which is an S corporation. S1 has 20 shareholders and S2 has 35 shareholders. Solely for purposes of determining eligibility to elect out, partnership PS is deemed to be required to furnish 57 Schedule K-1s, consisting of S1 and S1's 20 shareholders (21 total) and S2 and S2's shareholders (36) for a total count of 57.

4. If you determine that the number of schedule K-1s required to be furnished is more than 100, the election out is invalid.

Determination that an election out of the BBA is invalid

1. Elections out that are determined to be invalid at the field level must be coordinated with a BBA POC before notifying the partnership and/or proceeding with the examination.

2. Letter 6062, Notice of Invalid Election Out of the BBA, is used to notify a partnership of the IRS' determination.

3. You must update ERCS/AIMS to indicate the return is subject to the BBA regime.

Revocation of the election out

1. Once an election is made by the partnership to elect out of the BBA regime, it cannot be revoked without the consent of the IRS.

2. A request to revoke the election out of the BBA regime must be made within the first 30 days after the partnership has received notification from the IRS that an examination will take place (via Letter 2205-D).

3. Partnership must mail or submit the revocation statement to the person whose name appears on Letter 2205-D. The revocation statement must have the following:

Validate the revocation statement

1. You must ensure that the revocation statement was submitted timely, signed by an authorized person and included the required information. Also, validate Form 8979 and identify the PR of record.

2. If you accept the revocation, the partnership examination is subject to the BBA regime.

3. If you reject the revocation, you must communicate the determination to the partnership.

4. The revocation statement should be filed under Section 600 for SBSE/SAIN 724-BBA for LBI.

Note: Only under unusual circumstances and when it is administratively convenient for the IRS and the partnership, will a request to revoke an election out of the BBA regime be considered if received after the first 30 days after the issuance of Letter 2205-D. This should be coordinated with the BBA POC.

Partnership Representative (PR)

1. The partnership must designate a PR on each return filed for taxable years beginning after December 31, 2017. The designation is effective on the date the return is filed.

Note: Form 1065 (2018 version).

2. A PR has a key role in a BBA proceeding. Under section 6223, it is the PR that has the sole authority to act on behalf of the partnership. All partners and the partnership are bound by the PR's actions and the PR's final decision in a BBA proceeding. There may be only one PR for a partnership taxable year at any time. Therefore, it is critical that the PR is clearly identified.

3. A PR can be any person, including the partnership itself. The PR is not required to be a partner, an employee, or have any other relation to the partnership. This allows the partnership to select the person best situated to represent the partnership. The only requirement is that the PR must have a substantial presence in the United States.

Note: For simplicity, throughout this guidance, the term “PR” will be used (unless discussing subject matter that requires more specificity).

4. The IRS is not bound by any limitations, restrictions or agreements placed upon the PR by the partnership in the partnership agreement, any side agreements or any other document to which it is not a party.

5. The designation of a PR remains in effect until the designation is terminated by a valid revocation, a valid resignation, or a determination by the IRS that the designation is not in effect. If there is a change to the PR or DI, any actions of the old PR or DI prior to the change will remain valid.

6. A partnership, through an authorized person, may designate or change the PR or DI by submitting Form 8979 to an IRS point of contact (i.e., examiner, Appeals Officer, or Counsel attorney). An authorized person is a person who was a partner at any time during the partnership tax year to which the designation or change relates. For more information on Form 8979, see below.

7. Form 8979 may also be submitted in conjunction with the partnership's filing of an administrative adjustment request. If so, the change in designation (or appointment) is treated as occurring prior to the filing of the administrative adjustment request.

8. Document all your actions concerning the identification of the PR in your case file under SECTION 600 for SB/SE or SAIN 724 for LB&I cases. You may use the Partnership Representative of Record Job Aid (EXH 2) to keep track of all the designations.

Substantial presence in the United States

1. Both the PR and DI must have a substantial presence in the United States. All the following requirements must be met:

2. If the PR is an entity (including if the PR is the partnership itself), it must be in legal existence to have substantial presence. For example, if the PR is an Entity Partnership Representative (EPR) it must be in legal existence and both the PR and DI must have a United States street address, a telephone number with a United States area code, and a taxpayer identification number.

Form 8979

1. Form 8979 is the sole mean to revoke a PR or DI, resign as a PR or DI, or designate a PR where no PR designation is in effect. Form F8979 is submitted for a single taxable year.

2. The following table presents possible actions and who can submit Form 8979.

ACTION:	FORM 8979 COMPLETED BY:
Revocation of a partnership representative (entity or individual PR). Must include the designation of a successor partnership representative (entity or individual). If a successor entity partnership representative is made, the simultaneous appointment of a designated individual is also required.	Partnership (through an authorized person)
Revocation of a designated individual. Must include an appointment of a successor designated individual.	Partnership (through an authorized person)
Resignation of the partnership representative	Partnership Representative
Resignation of the designated individual.	Designated Individual
Designation of an entity partnership representative and appointment of a designated individual.	Partnership (through an authorized person)
Designation of an individual partnership representative.	Partnership (through an authorized person)

3. Partnerships can submit Form 8979 with an administrative adjustment request (AAR) or any time after the issuance of a notice of selection for examination (Letter 2205-D) to the partnership.

4. A PR or DI may submit Form 8979 any time after the issuance of a notice of administrative proceeding (NAP) to resign.

5. Form 8979 has four (4) parts. Part 1 identifies the reason for submitting the Form 8979. Part 2 provides information on the revocation or resignation. Part 3 shows the designated PR and/or appointed DI. Part 4 is the signature section.

Multiple revocations by the partnership within the 90-day period

1. The IRS's goal is to conduct effective and efficient examinations. Multiple revocations within a relatively short timeframe can have a negative impact on achieving this goal.

2. If you do determine there's no PR designation in effect, you must provide notice within 90 days of receiving the current revocation to indicate that there is no designation in effect. Otherwise, you can't later determine that no designation is in effect because of these multiple revocations. You will send Letters 6053 and 6007 only.

3. Once you have selected a PR, the partnership cannot revoke the PR without the permission of the IRS. Permission is granted if the partnership submits a Form 8979 and the IRS accepts the submittal as valid.

Form 8979 and examiner responsibilities

1. When you receive a Form 8979, date stamp it and carefully review the form to determine if the revocation, resignation, or designation is valid. Within 30 days of receipt, issue the appropriate set of letters (as described below) to inform the appropriate parties about your determination.

2. You may use Form 8979 Filing Chart (EXH 3) as a roadmap. Ensure the form has the following information.

3. Form 8979 must be signed and dated by the appropriate PR, DI or authorized person along with the person's name and title. You can use Form 8979 Job Aid (EXH 4) to assist with validation. Document your determination in your case file.

4. If you cannot determine the PR or DI of record, you may determine that there is “no PR designation in effect”.

5. You must prepare and issue notices upon receiving a Form 8979, such as:

Note: These letters are not required to be mailed when the Form 8979 is received with an AAR prior to issuance of a NAP.

6. Letter 6053 should always be mailed to the partnership. Letters 6007 and 6008 should be mailed to the old PR and the new PR (if applicable), respectively. If the PR is an entity, mail the letter to the PR at the attention of the DI and use the PR address.

7. The following table will help you chose the appropriate selectable paragraph and checkbox (if any) for each of the letters. Additionally, the “PR Notices Summary Grid” job aid (EXH 5) can assist you in determining what letters to mail.

Note: You may encounter combinations of resignations, revocations, designations or determinations of or about a PR/DI that are not contemplated by this guidance or the letters. If you do, contact a BBA POC should questions arise.

8. If you receive two revocations within a 90-day period and determine that no PR designation is in effect due to the multiple revocations, you must provide notice within 90 days of receiving the second revocation to indicate that there is no PR designation in effect. Prepare and issue:

9. If the IRS made a designation of a PR, the partnership can request permission from the IRS to revoke that designated PR by submitting a valid revocation Form 8979. The regulations indicate that you will not unreasonably withhold your permission when this occurs.

Identification of the partnership representative or designated individual for Letter 2205-D

1. The Letter 2205-D is mailed to the partnership as a Notice of Selection of Examination. See “Initiate Taxpayer Contact” section below.

2. Unless the partnership submitted Form(s) 8979 together with an administrative adjustment request (AAR) filing prior to the issuance of Letter 2205-D, the PR or DI on Page 3 of Form 1065 is the PR or DI of record and should be listed on Letter 2205-D.

Note: Obtain the TINs from the PR or DI directly after the NAP has been issued unless the PR or DI has already contacted you.

3. If the partnership filed an AAR with a Form 8979 (properly revoking the prior PR and/or DI) and properly designating a new PR and/or appointing a new DI, then the initial designation has changed. The PR or DI of record is now the PR or DI from the Form 8979 and should be noted on Letter 2205-D.

4. When the partnership filed multiple AARs with Forms 8979, generally you will use the PR or DI information from the most recently submitted Form 8979 to complete the Letter 2205-D.

5. If there is no valid designation on Page 3 of Form 1065 and/or no subsequent designation via a valid Form 8979, then no PR designation is in effect.

No PR designation in effect

1. Some circumstances under which the IRS can determine that no PR designation exists include:

Reminder: Contact the BBA POC if no PR designation in effect.

2. If no PR designation exists or is no longer in effect, you must first give the partnership an opportunity to select one (except in instances where it is due to multiple revocations within the 90-day period). You must prepare and issue the applicable letter to the partnership's last known address:

3. If you determine the existing PR designation is no longer in effect, prepare and issue Letter 6007 to the PR's last known address with selectable paragraph C.

4. If the partnership failed to submit a Form 8979 or you received the form after the response due date, you will select a PR. See “Service's selection of a PR” section below.

5. If a Form 8979 is received timely, date stamp it.

Reminder: Document your activities in the case file.

Service's selection of a PR

1. If the IRS must select a PR, there is no specific prescribed timeframe to do so. However, you must select a new PR with reasonable due diligence while balancing the need to continue the examination in an efficient and effective manner.

2. The IRS can select any person to be the partnership representative (except for an IRS employee, agent, or contractor unless they are a partner in the partnership); however, the person designated by the IRS should have sufficient knowledge of the partnership tax return and business operations to participate in the examination.

3. If you need to designate a PR, you should consider the following factors:

4. To determine the above, you may seek information and discuss the matter with partners, employees, and other prospective candidates to assess the person's depth of knowledge. These inquiries are not disclosures or third-party contacts under sections 6103 and 7602. However, limit your information gathering solely to factors involving an appropriate PR designation. Do not address or inquire about tax issues.

5. Your manager must participate in and approve the PR selection. This approval should be noted and substantiated in the case file. You may want to consult with Counsel. Once the PR is selected, prepare and issue:

Note: If a partnership attempts to revoke an IRS designated PR, See “Form 8979 and examiner responsibilities” section above.

Administrative Adjustment Request (AAR)

1. A partnership may file an AAR under section 6227 with respect to any PRI and correct errors on a previously filed partnership return. However, a partnership may not file an AAR solely for the purpose of changing the designation of a PR.

2. A partnership must determine whether the adjustments requested in the AAR result in an imputed underpayment. If so, the partnership must take the adjustments into account and make payment unless the partnership makes a valid election for the adjustments to be taken into account by the reviewed year partners.

3. In general, the partnership must pay the imputed underpayment on the date the partnership files the AAR.

Note: You should contact the BBA POC if the partnership modified the imputed underpayment. Some modifications permitted in the modification phase in exam are not permitted in the AARs.

4. If the partnership makes a valid election to have adjustments resulting in an imputed underpayment be taken into account by reviewed year partners, the partnership is not required to pay the imputed underpayment.

5. If the adjustments requested in the AAR do not result in an imputed underpayment, such adjustments must be taken into account by the reviewed year partners.

6. If a reviewed year partner is required to take into account the adjustments requested in the AAR, the partnership must furnish a statement to the reviewed year partner and file such statement with the IRS on the date the AAR is filed. Each statement must include correct information as follows:

7. If a partner of the partnership that filed an AAR is a pass-through entity, the pass-through partners must issue statements to its partner and include the following (in addition to the above)

Note: The above list doesn't have all the items required for pass-through partners. You should contact the BBA POC if questions arise.

8. Each reviewed year partner must take into account their share of all the adjustments requested in the AAR as shown on such statements.

9. Each reviewed year partner's share of the adjustment requested in the AAR is determined in the same manner as each adjusted PRI was originally allocated on the partnership return for the reviewed year.

10. If the adjusted PRI was not reported on the partnership's return for the reviewed year, each reviewed year partner's share of the adjustments will be based on how such items would have been allocated per the partnership agreement.

11. If an adjustment involves a reallocation of an item, the reviewed year partner's share of the adjustment requested in the AAR is determined in accordance with the AAR.

AAR exam scope

1. The IRS may determine that an AAR is not valid or readjust any items that were adjusted on the AAR. Also, the amount of an imputed underpayment determined by the partnership, including any modifications, may be re-determined by the IRS.

Note: A filed AAR can't be void.

2. The partnership audit plan should include any PRI that you do not agree with, including the following:

Note: You should contact the BBA POC for assistance.

Executing the Examination

1. During this phase of the examination, you will initiate taxpayer contact and execute the examination plan. You will consider the statute of limitations on making adjustments, gather facts and develop the potential issues, and regularly communicate with the PR. Your activities should be recorded.

Initiate taxpayer contact (Letter 2205-D)

1. All initial taxpayer contacts must be made by mail. You must prepare and mail Letter 2205-D to all partnerships regardless of the tax year.

2. Letter 2205-D is used to:

3. Letter 2205-D has selectable paragraphs.

4. The letter also alerts the partnerships to the time sensitive election for partnerships whose tax periods begin after November 2, 2015 and before January 1, 2018 to elect into the centralized partnership audit procedures (BBA). The election must be made within 30 days from the date on Letter 2205-D.

5. Mail Letter 2205-D to the partnership's last known address (which is either the address on the return or on IDRS Master File Entity if more current).

Note: Do not send Form 7036 with the letter. The form is referenced in the letter along with the website reference to download the document. Do not include or attach any IDRs to the Letter 2205-D.

6. A copy of Letter 2205-D should be filed under Section 600 for SBSE/SAIN 724-BBA for LBI.

Reminder: Letter 3798, Non-Filer Appointment, will be issued first in non-filer cases where return solicitation language is unwarranted. Letter 3798 is not a notice for selection for exam. Once a determination has been made to conduct an examination of the non-filed/late filed return, you will issue Letter 2205-D.

BBA partnership check sheet (Reserved)

Form 2848, Power of Attorney (POA)

1. Form 2848, Power of Attorney and Declaration of Representative, is used to authorize an individual to represent a PR who is acting on behalf of the partnership under the centralized partnership audit regime. Refer to IRM 4.11.55 for POA rights and responsibilities.

2. The PR or DI (for an EPR) of record must sign the Form 2848 and the authorized individual must be eligible to practice before the IRS.

3. You must contact the BBA POC if you receive a Form 2848 because instructions for Form 2848 may change.

4. For matters unrelated to the centralized partnership audit regime, a separate Form 2848 must be signed by a partner that has authority to do so under state law. For dissolved partnerships, see 26 CFR 601.503(c)(6).

Note: Any statute extension (Form 872-M) should be signed by the PR or DI (for an EPR).

Notice of Administrative Proceeding (NAP)

1. IRS must mail to the partnership and PR a NAP when initiating an examination of the partnership for a taxable year, including an examination following an AAR filed by the partnership.

2. Prepare and mail the NAP via certified mail. The letter date should match the mailing date.

3. If the PR NAP is mailed to an address other than the address shown on the Form 1065 and it is returned as undeliverable, you must mail the PR NAP by certified mail to the address reflected on the partnership return.

4. A separate NAP will be sent for each year under examination since each year stands on its own. You should not delay issuing the NAP.

5. The case file should be documented to show that the partnership and PR NAP was issued in accordance with section 6223. Letter 5893 and Letter 5893-A should be filed within SAIN 724 (LB&I) or Section 600 (SB/SE).

Note: Discuss any extension of time requested by the PR with your manager. The request will delay issuance of the NAP.

NAP date on Examination Returns Control System (ERCS)

1. The NAP date represents the start of a BBA examination. The date the NAP is issued needs to be loaded onto ERCS as soon as the NAP is issued, but no later than 5 business days after issuance. Once input on ERCS, the date will also be reflected on AIMS and IMS.

2. Prepare Form 5348, AIMS/ERCS Update (Examination Update), and include the following:

Note: You must ensure the date on the letter is the same as the certified mailing date.

3. Submit completed Form 5348 to your manager for approval.

4. Submit the completed and approved Form 5348 to the group secretary or other designated person for input on ERCS. Input of this date will trigger:

Note: It may take at least 2 weeks to update AIMS and TC 971 to process.

Withdrawal of the NAP

1. The IRS may, without consent of the partnership, withdraw a NAP within 60 days from the issuance of the NAP if:

2. Withdrawing the NAP is treated as if it had never been mailed. If the IRS withdraws a NAP with respect to a partnership taxable year, the prohibition on filing an AAR after the mailing of a NAP no longer applies with respect to such taxable year.

3. Your manager must approve the withdrawal of the NAP.

4. You should prepare:

5. If the case is to be closed after withdrawal of the NAP, the case must be closed to Technical Services within 15 days from the determination to withdraw the NAP.

6. If the case is to be worked under a different audit regime after withdrawal of the NAP, you will maintain control of the case file and continue with the examination based on such audit regime.

Note: If you have adjustments but resulting in no imputed underpayment, the NAP CANNOT be withdrawn. Proceed with the Summary Report Package to show the adjustments.

Consistency principle

1. In general, a partner's return must be consistent with the partnership return in all respects, including:

2. Also, a partner is bound by any action taken by the partnership and any final decision in a proceeding with respect to the partnership under the BBA regime.

3. If the treatment of an item on the partner's return is consistent with how the item was treated on a schedule (e.g., Schedule K-1) or other information furnished to the partner by the partnership but inconsistent with the treatment of the item on the partnership return that is filed with the IRS, the partner's reporting is considered inconsistent with the partnership return.

4. A partner's treatment of a PRI attributable to a partnership that did not file a return is per se inconsistent.

5. For a partner that is a partnership (partnership-partner), the consistency principle applies regardless if the partnership-partner is subject to the centralized partnership audit regime or has made an election out pursuant to section 6221(b).

Partner fails to report a PRI consistently

1. When a partner fails to report an item on its return consistent with the partnership, whether intentional or not, there are two treatment streams depending on whether the partner has provided notice of the inconsistently reported PRI to the IRS.

Math error correction

1. The IRS may adjust the inconsistently reported item on the partner's return to make it consistent and assess the underpayment of tax that results from that adjustment to correct the mathematical or clerical error when:

2. The procedures under section 6213(b)(2) for requesting abatement of an assessment made on the basis of math error do not apply.

3. The underpayment of tax is the amount by which the correct tax, as determined by making the partner's return consistent with the partnership return, exceeds the tax shown on the partner's return. Except as provided in A, this does not include any taxes under chapters other than chapter 1.

Notify the partner of an assessment on account of mathematical error

1. If you determine to make an assessment on account of math error, you must contact the BBA POC to help you determine the most effective and efficient way to maximize taxpayer compliance based on facts and circumstances.

2. You will prepare Letter 6202, Notice of Partner's Inconsistency, which identifies the adjustment(s) with respect to inconsistent treatment and the underpayment of tax on account of math or clerical error, including any penalty and interest as provided by law.

3. Only a partnership-partner may correct the inconsistency by filing an AAR (for partnership-partner subject to the BBA) under section 6227 or an amended partnership return (for partnership-partner not subject to the BBA) prior to assessment.

4. If the inconsistency is due to the partner filing consistently with a statement, schedule or other form prescribed by the IRS and furnished to the partner by the partnership (e.g., Schedule K-1) but differs from what the partnership actually filed with the IRS, then the partner has 60 days from the issuance of Letter 6062 to file a written election under section 6222(c)(2)(B) with you.

A partner files inconsistently with the partnership return and provides notice of the inconsistent treatment

1. When a partner reports a PRI inconsistent with the treatment of such item on the partnership return and provides notice to the IRS (via Form 8082), assessment based on math error does not apply.

2. The partner is protected only to the extent of the items identified as inconsistent treatment. Assessments to the unidentified, inconsistent PRI on the partner's return are treated as being based on math error.

3. If the IRS disagrees with the identified inconsistent treatment, the IRS may adjust the identified, inconsistently reported item in a deficiency proceeding with respect to the partner as follows:

4. Any final decision with respect to an inconsistent position in a proceeding to which a partnership is not a party is not binding on the partnership.

Informal claims (LB&I Taxpayers)

1. As discussed above, after a NAP is issued, an AAR cannot be filed. However, for LB&I taxpayers, the partnership may submit informal claims within 30 days from the opening conference which is consistent with the LB&I Examination Process (LEP).

2. Informal claims timely submitted by a BBA partnership must meet the standards of Treasury Regulation Section 301.6402-2, which provides that a valid claim must:

3. A BBA partnership must submit or mail the informal claim to the person whose name appears on Letter 2205-D within 30 days from the initial conference.

4. If the informal claim complies with the above requirements and you accept the submission, you must include the issue(s) in your audit plan, develop the issue(s) and prepare Form 886-A accordingly.

5. You MUST NOT accept any informal claim after the 30-day window has lapsed unless certain exceptions are met as provided under the LEP. Please refer to the LEP and Publication 5125 for details. You may also contact the BBA POC.

Statute of limitations (SOL) on making adjustments

1. Statute control is usually the number one priority in all programs. Refer to IRM 25.6 for Statute of Limitations Handbook.

Note: Contact the BBA POC pertaining to any questions you may have regarding the BBA statute of limitations, including preparation of Form 872-M.

2. Under the centralized partnership audit regime, the statute is controlled exclusively at the partnership level. Ensure that cases transferred from the team/group to Technical Services will be received with the following periods of time remaining on the statute; otherwise, you must contact a BBA POC for imminent statute procedures:

Type of Cases	Time Remaining on Statute
No change (no adjustment)	6 months
With adjustments (no Appeals)	12 months
With adjustments (to Appeals)	18 months

Overview of section 6235(a)

1. The statute of limitations under section 6235 is applicable to the time allowed to make partnership adjustments instead of time to assess. The general rule is that no partnership adjustment for any partnership taxable year may be made after the later of three specified dates:

2. The notice of proposed partnership adjustment must be issued prior to the expiration of the 6235(a)(1) date.

3. You are responsible for the 6235(a)(1) date, which is the later of:

Note: Generally, the 6235(a)(1) date (see “IRC6235A1-PPA-DEADLINE-DT” field) will match with the ASED field on AIMS.

4. If an AAR was filed, verify that the 6235(a)(1) date was properly updated on AIMS/ERCS (3 years after the date the AAR was filed). If not, you are responsible for updating the system.

5. The 6235(a)(1) date can be extended by executing Form 872-M.

6. Under section 6235(c), the general 3-year period is expanded in situations where no return is filed, fraud, and other specified reasons as shown in the table below.

Special rules for:	Period of limitations
IRC 6235(c)(1): False return or fraudulent partnership tax return with the intent to evade tax.	Adjustments can be made at any time
IRC 6235(c)(2): Substantial omission of income in excess of 25 percent of the amount of gross income per 6501(e)(1)(A) [or omission from gross income of amounts properly includible under IRC 951(a) per 6501(e)(1)(C).]	6 years
IRC 6235(c)(3): Failure to file a partnership return. Note: Under IRC 6235(c)(4), a return executed by the Secretary under IRC 6020(b) on behalf of the partnership shall not be treated as a return of the partnership.	Adjustments can be made at any time
IRC 6235(c)(5): Reportable foreign transactions — failed to report information described in section 6501(c)(8).	Date that is determined under IRC 6501(c)(8)
IRC 6235(c)(6): Listed Transactions — failed to include any information with respect to a listed transaction as described in IRC 6501(c)(10).	Date that is determined under IRC 6501(c)(10)

When to extend the 6235(a)(1) date

1. You should request an extension if the 6235(a)(1) date will expire within 14 months presuming the case is not a no-change. If the partnership refuses to extend the 6235(a)(1) date, you need to begin the process of closing the examination.

2. Your activity record should document that you've received managerial approval to solicit the extension.

3. Follow IRM 25.6.22 for general guidelines for soliciting extensions.

Form 872-M

1. Form 872-M, Consent to Extend the Time to Make Partnership Adjustments, is used to extend the period of limitations (SOL) on making adjustment for any of the following:

2. At the field exam level, the 6235(a)(1) date must be selected.

3. You must contact the BBA POC for guidance on preparation and issuance of Form 872-M.

4. If the partnership includes any additional restrictive language on the form, you must consult with local counsel before the IRS countersigns the extension.

5. The PR or DI (for the EPR) must sign the form before the expiration of the 6235(a)(1) date.

Note: The POA should not sign the extension. The current Form 872-M does not have a line for a POA to sign.

6. Follow IRM 25.6.22 for general guidelines.

6235(a)(1) date on Examination Returns Control System (ERCS)

1. The 6235(a)(1) date is reflected in the “IRC6235A1-PPA-DEADLINE-DT” field.

2. If you need to update the 6235(a)(1) date, update the “IRC6235A1-PPA-DEADLINE-DT” or “6235(a)(1)-PPA-DL-DT” field via Form 5348.

Note: If a managerial decision is made to allow the 6235(a)(1) date to expire after issuance of the NOPPA, Alpha Statute "AE" must be entered in the ASED field. Once "AE" is in the ASED field, the 6235A1-PPA-DL-DT can no longer be updated.

Resolving the Examination

1. During this phase of the examination, your goal is to reach a mutual agreement on the tax treatment of each issue examined at the earliest appropriate point in the examination in a quality manner.

2. A case may result with:

Note: A Form 906 agreement may be executed at the field level. An executed Form 906 agreement is the only way an examiner may secure a formal agreement at the field level. Any other agreements (such as, Form 14792 or Form 15027) may be secured after the case is transferred from the field.

3. A partnership may request to go to Appeals and protest an adjustment on a substantive issue, any penalty associated with such adjustment, and the imputed underpayment amount.

No change exam

1. If the examination results in a no-change where all examined issues are accepted as reported (no adjustments to PRI items), you will discuss the examination results with the partnership.

2. If the partnership agrees with the no-change, Technical Services will prepare and CCP will issue the no-change letters to the partnership (Letter 6099) and PR (Letter 6099-A). Go to Case Disposition Procedures for next steps.

3. If the partnership doesn't agree with the no change determination, you will prepare a summary report package.

Partnership adjustments and imputed underpayment (IU)

1. A partnership does not compute and pay an income tax upon filing Form 1065 but instead passes through any profits and losses to its partners. However, when a partnership is examined under the BBA regime, any partnership adjustment resulting in an imputed underpayment and the applicability of any penalty, addition to tax, or additional amount (plus interest as provided by law) that relates to such adjustment are determined, assessed and collected at the partnership level.

2. Partnership adjustments are communicated to the partnership in accordance with the existing report writing procedures for SB/SE and LB&I. In general, Form 886-A, Explanation of Items, is used to convey each adjustment. In addition to preparing a Form 886-A for each substantive issue, you will prepare a Form 886-A for the imputed underpayment.

3. An imputed underpayment may reflect an amount that is larger than the cumulative amount of tax the partners would have paid as a result of the partnership adjustments. This is not an attempt to maximize tax revenue, but rather is a byproduct of disregarding certain adjustments that may be subject to limitations and that would otherwise reduce the imputed underpayment. Disregarding adjustments that would otherwise reduce the imputed underpayment and using the highest tax rate permit a streamlined audit process in which the IRS and the partnership generally do not account for particular partners' facts and circumstances. The imputed underpayment determination also allows the partnership to pay an amount of tax that generally eliminates the need for the IRS to proceed against and collect from the partnership's partners.

4. There are two types of imputed underpayments: a general imputed underpayment and a specific imputed underpayment. Each type of imputed underpayment is based solely on partnership adjustments with respect to a single taxable year.

5. There is only one general imputed underpayment in any administrative proceeding which will be determined at the field level.

Imputed underpayment (IU)

1. The formula for computing the imputed underpayment (IU) is as follows:

 

2. The process of taking the proposed audit adjustments and inputting those adjustments into the above formula requires an understanding of the unique BBA concepts of grouping, subgrouping and netting.

3. Once all adjustments have been grouped, subgrouped (if applicable) and netted, the total netted partnership adjustment (TNPA) can be determined and entered into the above formula. The TNPA is the sum of all net positive adjustments in the reallocation grouping and the residual grouping. If, after netting, either the reallocation or residual grouping summed total is less than or equal to zero, it is not taken into account in calculating the TNPA.

4. Multiply the TNPA by the highest rate of Federal income tax in effect for the reviewed year under section 1 or 11 and increase or decrease the product by:

5. For purposes of determining the IU at the field level;

Steps in computing the imputed underpayment (IU)

1. Computing the IU requires approximately 7 steps. The first step in computing an IU involves the placing of each proposed adjustment into one of four groupings: reallocation, credit, creditable expenditure and residual groupings. Each of the four groupings is explained below:

2. The second step in computing an IU is to determine if any proposed adjustment, within one of the four groupings, needs to be subgrouped. If all the proposed adjustments within any grouping are positive adjustments only, then subgrouping is not required for such grouping, and you can determine the IU at this point by plugging in the positive numbers to the above formula. If any of the proposed adjustments within a grouping is a negative adjustment, then subgrouping for that grouping is required. Each of the proposed adjustments will need to be subgrouped according to the following rules.

3. The third step in computing the imputed underpayment is to appropriately net all the proposed adjustments within each of the groupings and subgroupings.

4. The fourth step is to compute the TNPA. The TNPA is the sum of all net positive adjustments in the reallocation grouping and the residual groupings.

5. The fifth step is to determine the highest rate in effect for the reviewed year under section 1 or 11.

6. The sixth step is to determine the sum of net positive adjustments to creditable expenditure and credit groupings that will increase or decrease the product of the TNPA times the highest rate in effect.

7. The seventh and final step is to compute the IU based on the results of steps 4 through 6 and insert those results into the IU formula identified above.

Examples

1. The AB Partnership's 2019 return is under examination. Form 1065, page 1 consists of gross receipts of $1,000 and COGS of $250 for a net ordinary business income of $750 from a single activity. The $750 of net ordinary business income was included on Schedule K, line 1. The revenue agent proposes to increase gross receipts by $100 and increase COGS by $30. The $100 increase in gross receipts represents a positive adjustment while the increase in COGS represents a negative adjustment. Both of these adjustments are placed in the residual grouping since neither is properly classified as a reallocation, credit or creditable expenditure grouping. Since one of the adjustments is negative, subgrouping is required. The agent verified that AB Partnership netted the gross receipts and COGS as a single partnership-related item on Schedule K, line 1, and therefore, the negative adjustment for COGS will be subgrouped with the positive gross receipts adjustment. After netting these adjustments, the result is a net positive adjustment of $70 in the Schedule K, line 1 subgroup as well as a net positive adjustment in the residual grouping. The $70 will be included in the total netted partnership adjustment for purposes of computing the imputed underpayment.

2. The facts are the same as example 1 above, except the partnership's operations included two distinct activities (“Activity A” and “Activity B”). The net income from each activity were separately stated on a statement attached to Form 1065. The audit adjustment to gross receipts of $100 (increase) was identified as being related to Activity “A” while the adjustment to COGS of $30 (increase) was identified as being related to Activity “B.” Again, both the positive adjustment to gross receipts of $100 and the negative adjustment of $30 to COGS are placed in the residual grouping. Since the separate net income from each activity are required to be separately stated on line 1 of Schedules K/K-1 (via an attached schedule), those amounts were not treated as a single partnership-related item for purposes of section 702(a) and were not allocated as a single item on the filed tax return as was proper. Therefore, each adjustment must be placed into a separate subgroup within the residual grouping. The two subgroups (within the residual grouping) could be identified as “Schedule K, line 1, Activity A” and “Schedule K, line 1, Activity B” or similar. Under the netting rules, netting adjustments across subgroups is not permitted and the positive $100 adjustment and the negative $30 adjustment may not be netted. Thus, the residual grouping contains a net positive adjustment of $100 (netting rules only allow positive adjustments to be added together in each grouping to arrive at a net positive adjustment). This amount will be included in the total net partnership adjustment for purposes of computing the imputed underpayment. The net negative adjustment of $30 is an adjustment that does not result in an imputed underpayment and must be included on the partnership's tax return for the year in which such adjustment becomes final.

Form 886-A for substantive issues

1. For each adjustment to a PRI, you will also need to consider and document the following:

2. After you have finalized and issued all Forms 886-A, proceed with computing the preliminary imputed underpayment. Reach out to the Tax Computation Specialist (TCS).

3. Provide the TCS a listing of all proposed adjustments in sequential numbers with the following information:

Note: If you use the IUA Workbook (see EXH 6) to compute the preliminary imputed underpayment, print the “Adjustments Input Summary” tab and forward it to the TCS, in lieu of the above listing.

Form 886-A for imputed underpayment amount (IUA)

1. Once you have issued all Form 886-A for substantive issues, you will prepare one more Form 886-A to show the preliminary general IU calculation, summary of all the partnership adjustments, and penalties (if any).

2. You may use the IUA Workbook (see EXH 6) to compute the preliminary IU. Complete the IUA Workbook in accordance with the workbook instructions, inputting all the proposed adjustment amounts from all substantive issues and penalties (if applicable).

3. If you use the IUA Workbook to compute the preliminary imputed underpayment, you can attach the IUA spreadsheets from the Workbook to show the preliminary IU calculation, summary of all the partnership adjustments and penalties (if any). Otherwise, you will need to include the information listed above within the body of Form 886-A.

4. Similar to any substantive issue, examiners and the PR will have discussions concerning the preliminary IU prior to formally issuing this Form 886-A. During those communications, the PR may propose that adjustments be subgrouped and/or netted in a manner different from the procedures set forth above. If so, examiners must contact the BBA POC for further guidance.

5. Issue Form 886-A for the preliminary imputed underpayment. If the PR is not in agreement with the preliminary IU calculation and provides a written response detailing additional facts and applicable law for the examiner to consider using a different method of subgrouping or netting, contact the BBA POC for further guidance. Otherwise, inform the PR that the IU can be appealed or modified in the modification phase with the BBA Unit.

Reminder: Form 886-A should be updated to document all facts, including any request to change the preliminary IU and/or discussions after the issuance of Form 886-A and conclusion.

Interest and Penalties

1. Under the centralized partnership audit regime, the partnership is liable for any interest and penalties associated with any imputed underpayment (unless they elect the alternative to payment of imputed underpayment under section 6226).

2. You will contact the Centralized Case Processing (CCP) campus and request interest computation after the TCS prepared Form 14791. Go to Interest Computations for Payoffs for CCP point of contact. In general,

3. Work with CCP and provide the following data:

Note: For Form 14792, Appeals or Technical Services will request the interest computation.

4. You will compute the applicable penalties and consider reasonable cause and good faith defenses.

5. Computing the penalties may require coordination with the Office of Servicewide Penalties (OSP) and/or Penalties Practice Network.

Report Writing

1. A Tax Computation Specialist (TCS) will prepare Forms 14791 and 14792. A TCS is requested through the SRS.

Summary report package

1. After you have finalized and issued all Forms 886-A, proceed with the summary report package, which includes:

2. Request and work with the TCS to prepare Form 14791.

3. After you received Form 14791 from the TCS, review the form and verify the IU. Ensure the adjustments not resulting in an IU are reflected in the “other information” section.

4. Contact the appropriate CCP campus and request interest computation. See Interest and Penalties section above. Once you have the interest amount, update Form 14791 and incorporate the following:

5. Prepare Letter 5895 and remember to include the audit control number (ACN) in the header.

6. Issue the summary report package to the PR no later than 14 months prior to the 6235(a)(1) date.

30-day letter package

1. A partnership may protest and want to go to Appeals for any unagreed partnership adjustment, including the substantive issues, imputed underpayment amount and penalty.

2. If the partnership requests to go to Appeals, you must have at least 18 months remaining on the 6235(a)(1) date when the case is transferred to Technical Services.

3. If there's at least 20 months left on the statute, prepare and issue the 30-day letter package to the PR. The package does not need to be certified mail.

4. The 30-day letter package includes the following:

5. After the issuance of the 30-day letter package, update the case status to 13.

6. Follow existing procedures for responding to the 30-day letter package, including the protest letter.

Note: The 30-day letter package must also include the NOPPA package when transferring to Technical Services.

Notice of proposed partnership adjustment (NOPPA) package

1. The NOPPA package is required in any administrative proceeding (examination) under the BBA regime, including an administrative proceeding with respect to an administrative adjustment request (AAR) filed by a partnership under section 6227.

2. Prepare the NOPPA package no later than:

3. The NOPPA package includes the following:

4. Contact and work with the TCS to prepare Form 14792.

5. Prepare Letters 5892 and 5892-A without the following:

6. You must not issue the NOPPA package. Technical Services or Appeals will issue the NOPPA package to the partnership and PR.

7. Your manager must review and approve the NOPPA package. This managerial review and approval should be documented in the case file activity record.

Case Disposition Procedures

1. Process and transfer the case to Technical Services.

2. Technical Services will always perform a cursory review of the case file, prepare and issue relevant letters (i.e., no-change letter), issue the NOPPA package (if applicable), and forward the case to either CCP, Appeals or the BBA Unit as appropriate.

3. Ensure the case has the following periods of time remaining on the statute when received by Technical Services; otherwise, you must contact the BBA POC for imminent assessment statute procedures.

Types of Cases	Days Remaining on Statute
No change (no adjustment)	6 months
With adjustment (no Appeals)	12 months
With adjustments (to Appeals)	18 months

No-change case

1. You should transfer the case file to Technical Services within 30 days from the approval of the no-change determination.

Reminder: The return should have at least 6 months remaining on the 6235(a)(1) date when received by the Technical Services.

2. Complete Form 5344 and follow existing procedures except as otherwise provided below:

3. Complete Form 3198 and follow existing procedures except as otherwise provided below:

Case with adjustments (no Appeals)

1. After you prepared the NOPPA package, transfer the case file to Technical Services within 30 days.

Reminder: The return should also have at least 12 months remaining on the 6235(a)(1) date.

2. Technical Services will review the case. If no corrections are warranted, Technical Services will mail the NOPPA package to the partnership and PR; otherwise, the case will be returned back to you and your manager for corrections.

3. Complete Form 5344 and follow existing procedures except as otherwise provided below:

4. Complete Form 3198 and follow existing procedures except as otherwise provided below:

Case with adjustments (to Appeals)

1. After you prepared the NOPPA package, transfer the case file to Technical Services within 30 days.

Reminder: The return should have at least 18 months remaining on the 6235(a)(1) date when received by Technical Services.

2. Technical Services will review the case. If no corrections are warranted, Technical Services will forward the case to Appeals; otherwise, the case will be returned back to you and your manager for corrections.

3. Complete Form 5344 and follow existing procedures except as otherwise provided below:

4. Complete Form 3198 and follow existing procedures except as otherwise provided below: