The BBA Partnership Audit Regime: Three Election Decisions Every Partnership Should Revisit

The Bipartisan Budget Act of 2015 replaced the old TEFRA partnership audit regime with a new framework codified at I.R.C. §§ 6221-6241. The rules took effect for tax years beginning after December 31, 2017, and most partnerships made their initial BBA elections in 2018 or 2019. Those decisions, for many partnerships, have not been revisited since — and in the intervening six years, partnership composition has changed, the pass-through entity tax landscape has shifted, and the IRS's partnership enforcement posture has become meaningfully more active. Three election decisions every partnership should revisit. This piece draws on the audit-defense work I do with Flannery O'Neill in our Tax group.

Election one: opt-out under § 6221(b)

The first and most basic election is whether the partnership is eligible to, and should, elect out of the BBA regime entirely under § 6221(b). Eligibility is narrow: the partnership must have 100 or fewer partners, all of whom are individuals, C corporations, foreign entities treated as C corporations, S corporations (counted at the shareholder level for the 100-partner threshold), or estates of deceased partners. Partnerships with trust partners, with other partnership partners, or with disregarded-entity partners cannot elect out.

For partnerships that are eligible, the election-out is almost always the right answer — it returns the partnership to the general partner-level audit framework and avoids the centralized-assessment mechanics of BBA. But eligibility can change year to year. A partnership that was eligible in 2018 may have admitted a trust partner in 2022 (common in estate-planning transitions) or had an individual partner's interest shift to an LLC (common in asset-protection planning), and lost eligibility without anyone noticing. We have had two engagements in the last eighteen months where a partnership believed it had a standing election-out in place and discovered, during an audit, that it had lost eligibility three tax years earlier.

The annual review question: is the partnership still eligible to elect out, and has it made the election on the current year's return?

Election two: push-out under § 6226

For partnerships that cannot elect out of the BBA regime, the second key election is whether to make a push-out election under § 6226 when an audit results in an imputed underpayment. The push-out election allows the partnership to push the adjustment down to the partners who held interests in the audited (reviewed) year, rather than having the partnership itself pay the imputed underpayment at the entity level.

The trade-off is administrative burden versus tax outcome. Push-out requires the partnership to issue adjusted Schedules K-1 to the reviewed-year partners, those partners to calculate the effect on their own returns, and the partners to remit additional tax themselves. It is administratively painful. The alternative — paying at the entity level — is simpler but typically produces a higher tax cost, because the entity-level assessment is calculated at the highest individual marginal rate regardless of the actual partners' rate profiles, and because entity-level payment does not allow the partners to apply net operating losses or other attributes against the adjustment.

For most partnerships that can execute the push-out workflow, push-out is the right answer from a tax-cost perspective. For partnerships whose partner composition has changed significantly between the reviewed year and the adjustment year, push-out gets complicated — the partners who bear the tax cost are the reviewed-year partners, who may no longer be partners by the time the adjustment lands. Planning for that reality matters.

Election three: partnership representative designation

The BBA regime replaced the "tax matters partner" role with a "partnership representative" under § 6223. The partnership representative has binding authority to act on the partnership's behalf in any BBA audit, and decisions the representative makes — including whether to settle, whether to challenge, and whether to elect push-out — are binding on all partners regardless of whether the partners agreed.

Most partnerships designated a partnership representative in 2018 or 2019. What many partnerships did not do is address the governance around that role in the partnership agreement. Three specific gaps to look at:

• Consent requirements. Does the partnership agreement require the partnership representative to obtain partner consent before making binding decisions in an audit? If not, the representative can settle an audit without consulting the partners, and the settlement is binding. Most partnership agreements that addressed TMP decisions under the old regime did not carry forward equivalent consent requirements under BBA.

• Successor designation. The original partnership representative may have died, left the partnership, or otherwise become unavailable. If the partnership agreement does not specify a successor, the IRS will designate one, and the partnership will have a representative whom none of the partners chose.

• Indemnification. Partnership representatives take on real exposure — decisions bind the partnership, and aggrieved partners can (and do) sue representatives for breaches of fiduciary duty. The partnership agreement should address the representative's indemnification and liability, and most agreements do not do so adequately.

What has changed in the enforcement environment

The IRS's enforcement posture on partnerships has changed meaningfully in the last two years. The agency's 2023 announcement of a focused enforcement initiative on large partnerships — specifically, partnerships with $10M+ in assets and associated owner-level income — was not just rhetoric. Partnership audits initiated in 2023 and 2024 are running at a pace the agency has not sustained in two decades, and the average adjustment size has increased.

For Connecticut-based partnerships that have not revisited their BBA elections, the window to do so before an audit lands is open but closing. The three elections above — election-out eligibility, push-out mechanics, and partnership representative governance — should be reviewed annually as part of the partnership's tax compliance calendar, not left in place because they were set in 2018.

For partnerships facing an active BBA audit or planning to review their BBA elections before the next tax cycle, the Tax group's audit-defense practice is available. Most of the partnership work I do is in coordination with Flannery O'Neill, who leads the group.