Business Entities · Partnerships

Partnership level audit and opt-out

The centralised audit regime moved the payment of tax on a partnership adjustment from the partners to the partnership. That single change carries all the consequences: the partnership pays, the partners who were there in the year adjusted may no longer be there in the year the bill arrives, the rate applied is not any actual partner’s rate, and the only reliable way to avoid all of it is to elect out — annually, on a timely return, and only if every partner qualifies.

The rule

Everything happens at the partnership. any adjustment to a partnership-related item is determined, any tax attributable to it is assessed and collected, and the applicability of any penalty, addition to tax or additional amount relating to such an adjustment is determined, at the partnership level, except as the subchapter otherwise provides (IRC § 6221(a))^TY2026Verified 2026-08-21IRC § 6221(a), read at law.cornell.edu/uscode/text/26/6221

Unless the partnership elects out. 100 — the subchapter does not apply to a partnership for a taxable year where the partnership elects out, is required to furnish 100 or fewer statements under IRC § 6031(b) for that year, has only partners who are individuals, C corporations, foreign entities that would be C corporations if domestic, S corporations or estates of deceased partners, makes the election on a timely filed return disclosing each partner name and taxpayer identification number, and notifies each partner of the election (IRC § 6221(b)(1))^TY2026Verified 2026-08-21IRC § 6221(b)(1), read at law.cornell.edu/uscode/text/26/6221

With a special count for S corporation partners. where a partner is an S corporation the eligibility condition is met only if the partnership also discloses the name and taxpayer identification number of every person to whom that S corporation must furnish a statement under IRC § 6037(b) for its year ending with or within the partnership year — and those statements count toward the 100-statement limit (IRC § 6221(b)(2)(A))^TY2026Verified 2026-08-21IRC § 6221(b)(2)(A), read at law.cornell.edu/uscode/text/26/6221

What the partnership pays. where adjustments to partnership-related items for a reviewed year result in an imputed underpayment, the partnership pays it in the adjustment year; where they do not, the adjustments are taken into account by the partnership in the adjustment year. The imputed underpayment is determined by netting all partnership adjustments for the reviewed year and applying the highest rate of tax in effect for that year (IRC § 6225(a), (b)(1))^TY2026Verified 2026-08-21IRC § 6225(a), (b), read at law.cornell.edu/uscode/text/26/6225

How that can be reduced. the Secretary must establish procedures under which the imputed underpayment may be modified, including where reviewed-year partners file returns taking all adjustments properly allocable to them into account with payment of the tax due — in which case the imputed underpayment is determined without regard to the portion so taken into account (IRC § 6225(c)(1), (2))^TY2026Verified 2026-08-21IRC § 6225(c), read at law.cornell.edu/uscode/text/26/6225

Or pushed out to the partners. 45 days — where the partnership elects within that period after the notice of final partnership adjustment and furnishes each reviewed-year partner and the Secretary with a statement of that partner share of the adjustments, IRC § 6225 does not apply, no assessment, levy or collection proceeding may be brought against the partnership for that underpayment, and each partner takes the adjustment into account. Once made the election is revocable only with the consent of the Secretary (IRC § 6226(a))^TY2026Verified 2026-08-21IRC § 6226(a), read at law.cornell.edu/uscode/text/26/6226

Correcting a return. a partnership may file a request for an administrative adjustment in the amount of one or more partnership-related items for any partnership taxable year, and the adjustment is determined and taken into account for the year in which the request is filed — either by the partnership under rules similar to IRC § 6225 or by the partnership and partners under rules similar to IRC § 6226 (IRC § 6227(a), (b))^TY2026Verified 2026-08-21IRC § 6227, read at law.cornell.edu/uscode/text/26/6227

Who acts for the partnership. each partnership must designate a partner or other person with a substantial presence in the United States as the partnership representative, who has sole authority to act on behalf of the partnership; where no designation is in effect the Secretary may select any person. The partnership and all its partners are bound by the actions taken and by any final decision in a proceeding (IRC § 6223(a), (b))^TY2026Verified 2026-08-21IRC § 6223, read at law.cornell.edu/uscode/text/26/6223

And consistency. a partner must treat any partnership-related item on their own return consistently with its treatment on the partnership return, and an underpayment resulting from a failure to do so is assessed and collected as if it were a mathematical or clerical error — with the IRC § 6213(b)(2) right to request abatement of such an assessment expressly disapplied (IRC § 6222(a), (b))^TY2026Verified 2026-08-21IRC § 6222(a), (b), read at law.cornell.edu/uscode/text/26/6222

Current figures

How it works in practice

Two years matter and they are not the same year. The reviewed year is the year whose items are adjusted. The adjustment year is the year in which the adjustment becomes final and the partnership pays. The imputed underpayment is computed by netting the adjustments for the reviewed year and applying the highest rate of tax in effect for that year — and it is paid by the partnership out of adjustment-year money, borne economically by whoever holds the interests then.

That produces the mismatch that dominates the topic. A partner who sold their interest in the reviewed year has no exposure; a partner who bought in afterwards bears an adjustment for a year they had nothing to do with. Nothing in the statute fixes this. It is fixed, if at all, in the purchase agreement, by indemnities and by pricing — which is why partnership interest sale documents now routinely address it.

The highest rate is a deliberate default and it is nearly always too high. Applying the top individual rate to adjustments that were in fact allocated to tax-exempt partners, corporate partners, or individuals in lower brackets overstates the tax. IRC § 6225(c) exists to correct that, and its central mechanism is partner participation: if reviewed-year partners file returns taking their allocable adjustments into account and pay the resulting tax, the imputed underpayment is computed without that portion. The relief is real but it costs cooperation from people who may have left.

The push-out election under IRC § 6226 is the other route and the one most often chosen where the partner group has changed. Within 45 days of the notice of final partnership adjustment, the partnership elects and furnishes statements to each reviewed-year partner and to the Secretary. IRC § 6225 then does not apply, and — the language is emphatic — no assessmentassessmentThe formal, recorded determination that a taxpayer owes a specific amount of tax. It's what actually allows the IRS to begin collecting that amount., levy or court proceeding for collection of that underpayment may be brought against the partnership. The adjustment lands on the partners who were actually there. The 45 days is short, the election is revocable only with the Secretary’s consent, and missing the window leaves the partnership paying.

The election out under IRC § 6221(b) is the cleanest answer and the most easily lost. Five conditions must all hold: the election is made, the partnership furnishes 100 or fewer statements under IRC § 6031(b), every partner is an eligible type, the election is made on a timely filed return with each partner’s name and taxpayer identification number disclosed, and every partner is notified. Two of those are where elections fail. A late return kills the election for that year outright — there is no reasonable cause relief in the subsection. And the eligible-partner list is exhaustive: individuals, C corporations, foreign entities that would be C corporations if domestic, S corporations, and estates of deceased partners. A partnership partner, a trust partner, a disregarded entitydisregarded entityA business entity, usually a single-member LLC, that the tax law treats as if it doesn't exist separately from its owner. The owner reports the entity's income directly on their own return. partner, or a single-member LLC holding an interest all disqualify the election.

The S corporation rule adds a trap on top. Where a partner is an S corporation, the partnership must also disclose every person to whom that S corporation furnishes a statement, and those statements count toward the 100 limit. A partnership with twelve partners, one of which is an S corporation with ninety-five shareholders, is over the limit.

The election is annual. There is no continuing election, so a partnership that qualifies must make it again every year on a timely return, and a partnership whose ownership changes mid-year may qualify in one year and not the next.

Scenarios

How this has changed

This regime replaced its predecessor for returns filed for partnership taxable years beginning after 31 December 2017, and the change is best understood as three separate reversals.

Who pays. Under the prior regime adjustments were determined at the partnership level but the tax was assessed against the partners. Now the partnership pays the imputed underpayment itself unless it elects to push the adjustment out, which is why the identity of the partners at the adjustment date matters so much more than it used to.

Who is covered. The prior regime applied only to partnerships above a size threshold, with small partnerships outside it automatically. Now every partnership is inside the regime unless it affirmatively elects out, and the election has conditions that the old automatic exception did not.

Who is heard. The prior regime gave partners statutory notice of proceedings and rights to participate. Those provisions were repealed. The partnership representative acts alone and binds every partner.

The practical drafting consequence of all three is that partnership agreements written before 2016 are silent on questions that now determine substantial economic outcomes: who may be the partnership representative and on what terms, whether a push-out election must be made, whether the election out must be preserved by restricting transfers to eligible partner types, and who indemnifies whom for an adjustment relating to a period before a partner arrived.

Exam focus

Learn the election-out conditions as a checklist, because that is how they are tested. One hundred or fewer statements; every partner an individual, a C corporation, a foreign entity that would be a C corporation, an S corporation, or the estate of a deceased partner; election on a timely filed return with names and taxpayer identification numbers; and notice to every partner. Questions typically break exactly one of these, most often by introducing a trust or a partnership as a partner.

The second recurring shape asks who pays an adjustment. The default is the partnership, in the adjustment year, at the highest rate for the reviewed year. The alternatives are IRC § 6225(c) modification, which reduces the imputed underpayment, and the IRC § 6226 push-out, which moves it to the reviewed-year partners.

Remember the 45-day period for the push-out election, and remember that it runs from the notice of final partnership adjustment rather than from the start of the examination.

Check yourself

1. A partnership with 40 partners, all individuals, files its return three weeks late and includes the election out under IRC § 6221(b) with all required disclosures. Is the election effective?

Answer: no. IRC § 6221(b)(1)(D)(i) requires the election to be made with a timely filed return for the taxable year. A late return defeats it, and the subsection contains no reasonable cause provision. The partnership is within the centralised regime for that year.

2. A partnership has 30 partners: 29 individuals and one family trust. May it elect out?

Answer: no. IRC § 6221(b)(1)(C) requires each partner to be an individual, a C corporation, a foreign entity that would be treated as a C corporation were it domestic, an S corporation, or an estate of a deceased partner. A trust is not on the list, and the estate exception covers only the estate of a deceased partner.

3. A partnership’s 2023 return is adjusted, with the adjustment becoming final in 2027. Which year’s tax rate applies, and who pays?

Answer: the highest rate in effect for 2023, and the partnership pays in 2027. IRC § 6225(b)(1) computes the imputed underpayment by netting the adjustments for the reviewed year and applying the highest rate of tax in effect for that year, and IRC § 6225(a)(1) makes the partnership liable in the adjustment year.

4. A partnership receives a notice of final partnership adjustment on 1 March. By when must it make the push-out election, and what is the effect?

Answer: by 15 April — 45 days after the notice. Under IRC § 6226(a), if the partnership elects within that period and furnishes each reviewed-year partner and the Secretary with a statement of that partner’s share of the adjustments, IRC § 6225 does not apply, no assessment or collection proceeding may be brought against the partnership for the underpayment, and each partner takes the adjustment into account. The election is revocable only with the Secretary’s consent.

5. A partnership with 15 individual partners also has one S corporation partner with 88 shareholders. May it elect out?

Answer: no. Under IRC § 6221(b)(2)(A)(ii) the statements the S corporation must furnish under IRC § 6037(b) are treated as statements furnished by the partnership for the 100-statement test. Fifteen individuals plus the S corporation plus its 88 shareholder statements exceeds 100. The partnership would also have to disclose the name and taxpayer identification number of each of those shareholders.