Protect Your Partnership from Audit Surprises in 2026

You can protect your partners from unfair tax bills by choosing the right audit strategy. Understanding the BBA rules helps you keep audit liability where it belongs. Follow these steps to secure your partnership status.

How the BBA Regime Works

Under the old TEFRA rules, audit adjustments moved to individual partners for payment. Today, BBA rules allow the IRS to collect the "imputed underpayment" at the partnership level. The IRS calculates this tax at the highest rate, which is generally 37%.

This creates two specific problems for your bottom line:

  1. Current partners pay for the past: New partners often cover tax costs from before they joined the firm.
  2. Rate mismatch: The 37% rate applies even if your partners would normally pay a lower rate.

The Elect-Out Option

Small partnerships can elect out of the BBA regime under §6221(b) if they meet 3 requirements:

  1. You have 100 or fewer partners throughout the tax year.
  2. All partners are "eligible partners" like individuals, C-Corps, S-Corps, or estates. (Note: Partnerships, trusts, and disregarded entities do not qualify.)
  3. You make the election on a timely filed Form 1065 for each tax year.

Once you elect out, the IRS audits each partner separately under old, pre-BBA rules.

When to Elect Out

Elect out if:

  • All partners are individuals or simple corporations.
  • You have fewer than 100 partners.
  • Partners have different tax situations, such as tax-exempt status or lower brackets.
  • You prefer individual-level audit risk instead of partnership-level exposure.

Do NOT elect out if:

  • You have trust or partnership partners.
  • You have more than 100 partners.
  • Your partners want simplified, centralized audit administration.

The Push-Out Election: An Alternative to Elect-Out

If you cannot elect out, the push-out election under §6226 is your backup plan. It allows your partnership to push audit adjustments back to the partners from the audited year. This avoids the 37% rate and preserves the character of your income items. Note that interest carries a 2% penalty rate when you push out.

Does your partnership have the right audit election? We'll review it. Book a call →