How to File an Administrative Adjustment Request
Understand the process for amending a partnership return with an Administrative Adjustment Request, including the critical choice of how to handle the tax due.
An Administrative Adjustment Request (AAR) is the method certain partnerships must use to correct a previously filed tax return under the Bipartisan Budget Act of 2015 (BBA). For tax years after 2017, partnerships subject to the centralized audit regime use the AAR instead of a traditional amended return to change items like income or deductions on a Form 1065, U.S. Return of Partnership Income. An AAR is not a typical amendment but a request that initiates specific procedures for assessing and collecting any resulting tax, streamlining the process for the partnership and the Internal Revenue Service (IRS).
Determining if an AAR is Necessary
An AAR is required when a partnership governed by the BBA discovers errors on a previously filed Form 1065, such as misstated income, incorrect deductions, or improper allocations. Most partnerships are subject to these BBA procedures unless they are an eligible partnership that formally elects out of the regime on its timely filed annual return.
The authority to file an AAR rests exclusively with the Partnership Representative (PR). The PR is the sole individual, or entity, empowered to act on the partnership’s behalf in all matters with the IRS under the BBA regime, and their decisions bind both the partnership and all of its partners. If a PR was not designated on the original return, the partnership must designate one by filing Form 8979 along with the AAR.
An AAR must be filed within three years from the later of the date the original return was filed or the last day for filing that return, not including extensions. An AAR cannot be filed after the IRS has issued a Notice of Administrative Proceeding (NAP), which is the formal notification that a return has been selected for audit.
Information and Decisions Required for an AAR
The Partnership Representative must gather specific information, including the partnership’s Employer Identification Number (EIN) and the tax year of the return being adjusted. A detailed, line-by-line reconciliation of every change is required. This must show the original amount reported, the corrected amount, and the net adjustment for each item.
A primary decision is whether the partnership will pay the tax liability or “push out” the adjustments to the partners from the year of the error (the “reviewed year”). If the partnership pays, it must calculate an “imputed underpayment.” This figure is determined by netting all adjustments and applying the highest individual or corporate federal income tax rate for the reviewed year, and the payment is non-deductible.
Alternatively, the partnership can make a push-out election. This choice shifts the responsibility for the tax consequences from the partnership to its reviewed-year partners. Each partner from that year receives a statement detailing their share of the adjustments and becomes responsible for paying their own resulting tax. If an AAR does not result in an imputed underpayment, the partnership must push out the adjustments to the partners by issuing Form 8986.
The AAR Filing Process
The filing method depends on how the original return was submitted. If the partnership was required to file its Form 1065 electronically, as is the case for partnerships with more than 100 partners, the AAR must also be filed electronically. This is done by submitting a Form 1065 with the “Amended Return” box checked and an attached Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR).
For partnerships filing a paper AAR, the completed Form 1065-X must be mailed to the same IRS service center where the original Form 1065 was sent. The submission must include detailed statements that explain the reason for each adjustment, providing a clear narrative of the errors being corrected.
If the partnership chose the push-out election, the filing package must include Form 8985, Pass-Through Statement – Transmittal/Summary. A separate Form 8986, Partner’s Share of Adjustment(s) to Separately Stated Items, must also be included for each reviewed-year partner. These forms must be filed with the IRS and furnished to the partners on the same day the AAR is filed.
Post-Filing Procedures and Partner Obligations
If the partnership opted to pay the imputed underpayment, it is responsible for remitting the full amount, plus any applicable interest and penalties, to the IRS. This payment settles the partnership’s obligation at the entity level for the adjustments reported on the AAR.
When a push-out election is made, the partnership’s obligation is to furnish a completed Form 8986 to each partner from the reviewed year. The responsibility then shifts to the partners, who must take these adjustments into account on their own tax returns. This process does not involve amending their tax return for the reviewed year.
Each partner uses Form 8986 to calculate the total change in their tax liability for the reviewed year and any subsequent “intervening years.” The partner reports this total tax impact on Form 8978, Partner’s Additional Reporting Year Tax. This form is filed with the partner’s income tax return for the year they receive Form 8986, and the amount is added to or subtracted from their current year’s tax liability.