A Summary of the New IRS Appeals Procedures under the Centralized Partnership Audit Regime

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A Summary of the New IRS Appeals Procedures under the Centralized Partnership Audit Regime

Congress has continuously struggled to find the right procedural mechanism to audit, assess, and collect taxes related to partnerships.  Prior to 1982, partnerships were not audited at all.  Rather, the partners of the partnership were subject to audit, assessment, and collection.


In 1982, Congress substantially modified these existing rules.  Under this new scheme – referred to as TEFRA – the IRS was permitted to audit most partnerships at the partnership level and to make any assessments related to the audit directly against the partners after the partnership-level proceeding had concluded.  Only small qualifying partnerships were exempt from TEFRA.

Thirty-two years later, in 2015, Congress again changed the partnership audit rules.  Specifically, after passage of the Bipartisan Budget Act of 2015 (“BBA”), Congress repealed TEFRA in favor of a centralized partnership audit regime, effective for partnerships with tax years beginning on or after January 1, 2018.  Under this new regime, partnerships are subject to audit, assessment, and collection of tax at the partnership level.  Alternatively, the partnership (through its partnership representative) can make certain elections to effectively shift the burden of the tax adjustments back to the Reviewed Year partners.  Similar to TEFRA, certain qualifying partnerships remain outside the scope of the BBA, provided an affirmative election has been made.

Freeman Law has discussed the new BBA partnership audit rules extensively in prior Insights.  These can be found here:  Should You “86” the BBA?; The New Partnership Audit Rules:  An Expansive Scope and Penalty Defenses; Why (Nearly) Every Partnership Agreement Should be Amended; and The Evolution of Partnerships and Partnership Audits.

With the drastic changes in the statutory scheme, the IRS was required to also update its internal procedures related to the BBA.  One fairly recent change was made effective on October 18, 2019, when the IRS issued a memorandum to its Appeals employees regarding Appeals procedures under the BBA (“IRS Appeals Memo”).  The IRS Appeals Memo can be found here.  Although the IRS Appeals Memo is lengthy, some of its more significant aspects follow.

I.  The BBA in General

To understand the new IRS Appeals procedures, it is important to have a firm understanding of the BBA.  Very generally, the new centralized partnership audit regime can be broken down into three distinct parts.

First, the IRS must select a partnership return for audit and propose adjustments.  Second, the IRS must issue a Notice of Proposed Partnership Adjustment (“NOPPA”), which permits the partnership to seek a reduction in the imputed underpayment amount (i.e., the partnership-level tax) through a modification request.  Third, the IRS must issue a Notice of Final Partnership Adjustment (“FPA”), which permits the partnership to push out the adjustments to the Reviewed Year partners and also seek judicial review of the proposed adjustments in the appropriate federal court.

Given these three distinct parts, the IRS was required to think long and hard about when and at what part or parts Appeals rights would be provided to partnerships under the BBA.  For example, should Appeals rights be provided at the end when all the determinations are made?  Or rather, should Appeals rights be provided at different parts of the BBA process?  The IRS Appeals Memo chose the latter approach.  Specifically, the IRS Appeals Memo contemplates that IRS Appeals will have jurisdiction over three types of cases: (1) BBA cases with proposed adjustments; (2) BBA modification disputes; and (3) docketed BBA cases.

  1. BBA Cases with Proposed Adjustments

The first group in which IRS Appeals will have jurisdiction will be after IRS Exam determines proposed adjustments and issues a 30-day BBA Letter (referred to as a Letter 5891) to the partnership.  The Letter 5891 will contain a summary report of the disputed items and will permit the partnership to request an Appeals hearing.

If an Appeals hearing is requested, the partnership may dispute at the hearing any substantive tax issue, penalties, or the IRS’ grouping or subgrouping determinations for the computation of the imputed underpayment amount.  At the conclusion of the Appeals hearing, IRS Appeals will issue a NOPPA for all tax issues and will forward the BBA case to Ogden, Utah for processing.

  1. BBA Modification Disputes

Generally, after issuance of a NOPPA, IRS Exam will determine whether to accept or reject a requested modification from the partnership.  If the partnership seeks a modification and the IRS does not accept it, the IRS Appeals Memo indicates that the partnership may request another IRS Appeals conference.  However, at the Appeals hearing, the partnership may only dispute the modification request and not raise any other issues previously addressed in a prior Appeals hearing.

At the conclusion of this Appeals hearing, IRS Appeals will generally forward the BBA case back to IRS Exam.  IRS Exam will issue the FPA to the partnership unless there is insufficient time on the statute of limitations for assessment of the tax.  In these latter cases, IRS Appeals simply issues the FPA to the partnership.

  1. Docketed BBA Cases

The IRS Appeals Memo reserves on the issue of docketed BBA cases (e.g., those in Tax Court).  Thus, additional guidance on these cases should be forthcoming.

II.  Conclusion

The IRS Appeals Memo is welcome guidance for partnerships which will undergo audits under the new BBA procedures.  Taxpayers and tax professionals should continue to watch for additional guidance, which will surely follow, as the IRS ramps up its enforcement efforts to audit partnerships under the BBA.  To discuss the BBA more, you can contact Matthew Roberts at 214.984.3658 or at mroberts@freemanlaw.com.


Business Litigation Attorney

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