The IRS' Process During a Partnership Tax Audit: Know What To Expect

Internal Revenue Service (IRS) audits can lead to substantial liability for partnerships—and ultimately for individual partners as well. Under the Bipartisan Budget Act (BBA), the IRS follows a stringent set of procedures when conducting partnership tax audits, known as the “centralized partnership audit regime.”

What Happens During an Audit Under the IRS’ Centralized Partnership Audit Regime

When facing an IRS audit under the centralized partnership audit regime, knowing what to expect is critical for making informed decisions along the way. With this in mind, here is a brief introduction to the IRS’ process during partnership tax audits:

• The IRS Will Issue a Notice of Selection for Examination (Letter 2205-D) – The partnership tax audit process begins with the issuance of a Notice of Selection for Examination. The IRS will mail this notice to the partnership’s address of record.
• The IRS Will Schedule an Initial Examination Appointment (if the Partnership Responds) – The Notice of Selection for Examination will list an IRS “contact person” and a deadline for the partnership to contact this person to schedule an “initial examination appointment.” Provided that the partnership schedules this appointment in time, the IRS will meet with the partnership’s representatives to discuss the agency’s impending audit.
• The IRS Will Issue a Notice of Administrative Proceeding (Letters 5893 and 5893-A) – After sending Letter 2205-D, the IRS will send Letters 5893 and 5893-A to the partnership and its designated representative. As the IRS explains, these letters “inform[] the partnership and partnership representative that the IRS has started an administrative proceeding;” and, once they have been issued, “partners . . . may not amend their returns to file inconsistently from the partnership for the examined tax year.”
• The IRS Will Issue a Summary Report and a 30-Day Letter Package – After completing its audit, the IRS will issue a summary report detailing its preliminary filings. If the partnership disputes the findings in the summary report or fails to respond, the IRS will then issue a 30-Day Letter Package that provides information about the partnership’s right to appeal.
• The IRS Will Issue a Notice of Proposed Partnership Adjustments (NOPPA) – Following any preliminary appeals, the IRS will issue a Notice of Proposed Partnership Adjustments (NOPPA). This statutory notice states the amount of the IRS’s proposed imputed underpayment as well as the interest and penalties owed on the underpaid amount.
• The IRS Will Respond to the Partnership’s Request for Modification of Imputed Underpayment (if Timely Filed) – Following the issuance of the NOPPA, the partnership has another opportunity to challenge the outcome of the audit by filing a request for modification of imputed underpayment. If the partnership files this request in a timely manner (within 270 days of the issuance of the NOPPA), the IRS will file a substantive response in support of its determination.
• The IRS Will Issue a Notice of Final Partnership Adjustments (FPA) and Defend its Decision During the Appeals Process – As the final stage in the partnership tax audit process, the IRS will issue a Notice of Final Partnership Adjustments (FPA). The issuance of the FPA triggers the start of a 90-day window to file a petition to challenge the outcome of the audit in court.

Request an Appointment with Partnership Tax Attorney Kevin E. Thorn in Boston, MA

At Thorn Law Group, we rely on extensive experience to guide partners and their businesses through the IRS’ partnership tax audit process. If you are facing a partnership tax audit in Boston, we invite you to call 617-692-2989, email ket@thornlawgroup.com or contact us online to arrange a confidential consultation.