TEFRA vs. BBA Partnership: What Are the Differences?

The Bipartisan Budget Act of 2015 (BBA) altered partnership audits for the Internal Revenue Service (IRS). This legislation replaced the long-standing rules of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA). Effective for tax years starting after December 31, 2017, the BBA established a new default regime where the partnership itself is liable for any tax assessment from an audit. This shift from partner-level to entity-level assessment is the primary difference between the two systems.

The TEFRA Audit Regime

The Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA) established a unified procedure for auditing partnerships, but it placed the burden of tax adjustments on the individual partners. Under this system, the IRS would conduct a single audit at the partnership level to determine adjustments to income, deductions, and credits. However, the financial consequences of these adjustments flowed through to the partners who were part of the partnership during the specific year under examination.

A central figure in this process was the Tax Matters Partner (TMP). The TMP was a designated general partner who served as the primary liaison between the partnership and the IRS, with responsibilities including receiving notices, keeping other partners informed, and representing the partnership. The TMP’s authority was not absolute; they could not bind partners to a settlement without their consent.

Once the IRS finalized the audit adjustments, each partner was then responsible for paying their share of the additional tax, plus any applicable penalties and interest. This required the IRS to separately assess and collect the tax from each partner, a process that could be complex and resource-intensive.

The BBA Centralized Partnership Audit Regime

The BBA regime streamlines the audit process by defaulting to an entity-level assessment, meaning the partnership itself is directly liable for any tax underpayment found during an IRS examination. A component of the BBA framework is the replacement of the Tax Matters Partner with a new role: the Partnership Representative (PR). This individual, who can be any person or entity and is not required to be a partner, has the sole and binding authority to act on behalf of the partnership during an audit.

The PR’s decisions, including agreeing to settlements and extending statutes of limitations, bind the partnership and all of its partners, and they do not require consent from any other partner. Under the BBA’s default rules, when an audit results in an adjustment, the partnership is required to pay what is known as an “imputed underpayment.” This amount is calculated by netting all of the audit adjustments together and then applying the highest statutory federal income tax rate for individuals or corporations that was in effect for the reviewed tax year.

This calculated tax, along with any related penalties and interest, is then assessed directly against and collected from the partnership in the year the audit is finalized, not the year that was audited.

Key Elections Under the BBA

The BBA provides partnerships with important elections. One of the most significant is the annual opt-out election. Eligible partnerships, generally those that issue 100 or fewer Schedule K-1s to eligible partners, can choose to opt out of the BBA regime entirely for a given tax year. Eligible partners include individuals, C corporations, S corporations, and estates of deceased partners. This election, which must be made annually on a timely filed Form 1065, causes the partnership and its partners to be audited under the rules that existed before the BBA.

For partnerships that remain within the BBA regime, another tool is the “push-out” election under Internal Revenue Code Section 6226. If a partnership faces an imputed underpayment after an audit, it can elect to push the audit adjustments out to the individuals and entities who were partners during the year that was audited. Instead of the partnership paying the tax at the highest rate, the reviewed-year partners receive statements detailing their share of the adjustments. They then take these adjustments into account on their own tax returns for the current year—the year the election is made—and pay the resulting tax, which is calculated based on their individual tax situations.

Filing Amended Returns (Administrative Adjustment Requests)

Under the BBA regime, the process for a partnership to correct a previously filed return has been overhauled. The method of individual partners filing amended personal returns (Form 1040-X) to reflect changes from a partnership is no longer applicable for BBA partnerships. Instead, a partnership must use a specific process known as an Administrative Adjustment Request (AAR), which is the exclusive way to amend its return.

To initiate this process, the partnership files Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), along with a revised Form 1065 with the “Amended Return” box checked. This action is initiated and controlled at the partnership level by the Partnership Representative.

When a partnership files an AAR, it can calculate an imputed underpayment based on the adjustments and pay the resulting tax itself. Alternatively, the partnership can elect to “push out” the adjustments to the partners from the reviewed year, mirroring the push-out election available in an audit.