What Is the Push Out Election for Partnership Audits?

The push out election is an alternative method for a partnership to address tax adjustments from an Internal Revenue Service (IRS) audit under rules from the Bipartisan Budget Act of 2015 (BBA). This option allows a partnership to shift the financial responsibility for audit adjustments away from the partnership itself. Instead, the liability is “pushed out” to the individuals and entities who were partners during the specific year that was audited, known as the “reviewed year.” The election is a direct alternative to the default method where the partnership pays a lump-sum amount, and it requires specific actions from both the partnership and its reviewed-year partners.

The BBA Partnership Audit Regime

The Bipartisan Budget Act of 2015 established a centralized partnership audit regime that changed how the IRS examines partnership tax returns for years starting after 2017. Under these rules, the IRS conducts the audit at the partnership level rather than auditing each partner individually. Any adjustments to items of income, gain, loss, deduction, or credit are determined for the partnership as a whole.

The default consequence of an audit that finds additional tax is due is the assessment of an “imputed underpayment” against the partnership. This imputed underpayment is a lump-sum amount calculated by the IRS. It is computed by netting all audit adjustments and applying the highest statutory federal income tax rate for the reviewed year, which is currently 37%. This calculation method means the resulting liability can be higher than the actual tax the partners would have paid.

This amount is a liability of the partnership, paid from its assets in the year the audit concludes, not the reviewed year. This can create a financial strain and burden current partners who were not with the firm during the reviewed year. The imputed underpayment also includes any applicable penalties and interest, further increasing the total amount due. The existence of this default payment rule is the primary reason a partnership would seek an alternative.

How the Push Out Election Works

As an alternative to the partnership paying the imputed underpayment, the BBA rules allow the Partnership Representative (PR) to make a “push out” election. The PR is a person or entity designated to act on the partnership’s behalf in all matters related to an IRS audit. The decision to make this election rests solely with the PR and formally shifts the responsibility for tax adjustments to the partners of the reviewed year.

The timeline for making this election is strict and cannot be extended. The PR has 45 days from the date the IRS mails the Notice of Final Partnership Adjustment (FPA) to make the election. The FPA is the IRS document detailing the final audit adjustments and imputed underpayment. Missing this deadline means the partnership forfeits the option and must pay the imputed underpayment.

To execute the election, the PR must file Form 8988, Election for Alternative to Payment of the Imputed Underpayment, with the IRS within the 45-day period. This form notifies the IRS of the choice to push out the adjustments. Once made, the election can only be revoked with IRS consent, which is rarely granted.

Required Information and Partner Statements

After making the push out election, the partnership must prepare and distribute statements to its reviewed-year partners. This process begins after the partnership receives a countersigned Form 8988 from the IRS confirming the election. The partnership then has 60 days from the date the audit adjustments are finally determined to furnish these statements to its partners and file them with the IRS.

The partnership uses Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), to communicate with partners. A unique Form 8986 must be prepared for each reviewed-year partner. This form details the partner’s specific share of the audit adjustments and includes all necessary identifying information.

The partnership must also file Form 8985, Pass-Through Statement Transmittal/Partnership Adjustment Tracking Report, which is a summary cover sheet for all the Forms 8986 sent to the IRS. The information on Form 8986 is based on the original allocation of partnership items. Failure to accurately prepare and timely distribute these forms can invalidate the election, making the partnership liable for the imputed underpayment.

Partner-Level Reporting and Tax Payment

Upon receiving Form 8986, a partner must report and pay their share of the tax. A recipient does not amend their tax return for the reviewed year. Instead, the adjustments are accounted for on the partner’s tax return for the “reporting year,” which is the year the partner receives the Form 8986.

The partner performs a two-step calculation to determine the additional tax. First, the partner recalculates their tax liability for the reviewed year, incorporating the adjustments from Form 8986. Second, the partner recalculates their tax liability for any “intervening years”—the tax years between the reviewed year and the reporting year—to account for changes to tax attributes affected by the adjustments.

The sum of the tax increases from the reviewed and intervening years is reported as an additional tax on the partner’s reporting year return. The partner uses Form 8978, Partner’s Additional Reporting Year Tax, to calculate and report this amount. Interest is also calculated on the underpayment for each year, often at a higher rate, and is paid with the reporting year’s tax filing.