What is an IRS Centralized Partnership Imputed Underpayment?

Under the BBA partnership rules, after an IRS audit is completed, the general rule is that an imputed underpayment is imposed on the partnership rather than on the partners. This liability is computed by netting all adjustments and multiplying by highest individual tax rate (39.6%), unless partnership can show rate should be lower.

IRC section 6221(a) states:

“Any adjustment to a partnership-related item shall be determined, and any tax attributable thereto shall be assessed and collected, and the applicability of any penalty, addition to tax, or additional amount which relates to an adjustment to any such item shall be determined, at the partnership level, except to the extent otherwise provided in this subchapter.”

IRC section 6225(a) states:

“In the case of any adjustments by the Secretary to any partnership-related items with respect to any reviewed year of a partnership—

(1)if such adjustments result in an imputed underpayment, the partnership shall pay an amount equal to such imputed underpayment in the adjustment year as provided in section 6232, and

(2)if such adjustments do not result in an imputed underpayment, such adjustments shall be taken into account by the partnership in the adjustment year.”

When is a Payment of the Imputed Underpayment required?

Payment is made for the tax year in which the adjustment is final, not for the tax year audited. Moreover, the imputed underpayment is not deductible, and interest and penalties are assessed at partnership level. Further, any penalty defense must be raised at the partnership level.

There are basically three ways tax can be paid: 1) by partnership in the year the audit is completed; 2) by the the reviewed-year partners on amended returns for reviewed year (modification); 3) by the reviewed year partners (“push out election”).

What Should I Do If I am Contacted by the IRS?

If you have received a Notice of Administrative Proceedings with respect to a partnership audit, contact a tax attorney today to discuss how to expeditiously resolve the audit. If you have received Notice of Proposed Partnership Adjustments containing an Imputed Underpayment, contact us today to discuss.