To Be or Not to Be: Inconsistent Treatment Under the BBA
by Jenni Black
Jenni Black is a managing director in Citrin Cooperman’s National Tax Office and the practice leader of the Tax Procedure and Controversy practice. She has over two decades of combined legal and accounting experience and has extensive experience dealing with complex tax issues, including partnership audit procedures under the Tax Equity and Fiscal Responsibility Act of 1982 and the Bipartisan Budget Act of 2015.
In this post, Black evaluates a partner’s options for IRS reporting in its capacity as a partner when the partner believes the partnership has erred in its tax filings.
Imagine sitting down with your client and discussing the upcoming filing of their tax return. The client provides you with a Schedule K-1, “Partner’s Share of Income, Deductions, Credits, etc.,” for a partnership in which the client is a partner, and the client says, “I don’t think this Schedule K-1 is correct.” You look at it and agree that some of the items appear to be incorrect. The filing deadline for the client’s return is, of course, in two days. Does the partner have to report the incorrect items on their return? What are the client’s options?
Under section 6222, partners in partnerships subject to centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 must report partnership-related items (PRIs) on their returns consistent with how the partnership
treated those same PRIs. That means the partner must report the item in the same amount, character, and timing as the partnership. This concept is not new. Partners in partnerships subject to the Tax Equity and Fiscal Responsibility Act of 1982 also, under rules nearly identical to section 6222 (as amended by the BBA), had to report the partnership’s items consistent with how the partnership treated the items and, under section 6037(c), shareholders in S corporations must report the items of an S corporation consistent with how the S corporation treated the items. But does that mean the partner is doomed to report the wrong information unless the partnership corrects the items on its previously filed return? No.
The partner may file inconsistently with the partnership if the partner notifies the IRS by attaching Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” to their return. What happens if the partner files inconsistently from the partnership? What if the partner forgets to file Form 8082? What about indirect partners? Are there limits on what the partner can treat inconsistently? This article aims to try and answer those questions.
First, let’s take a step back and level set. As noted above, the requirement to file consistently with an entity is not new and existed for partners in TEFRA partnerships and shareholders in S corporations. But it doesn’t apply to partners in partnerships that are not subject to the BBA or TEFRA. Yes, that’s correct; partners have no legal requirement to report consistently with a nonBBA partnership. When a partner in a BBA partnership files a notice of inconsistent treatment, it’s turning off the requirement in section 6222 that the partner must file consistently with the partnership — the same as if the partner
were a partner in a non-BBA partnership.1 This is important for later.
How to File Inconsistently
Next, let’s discuss logistics. As mentioned, if a partner in a BBA partnership wants to report items on their return in a different manner than how the partnership treated the item (on its original partnership return or on an AAR), the partner must complete Form 8082 and attach it to their return (if filing inconsistently from an AAR, the Form 8082 is attached to the partner’s reporting year return (that is, the tax year when the AAR is filed)). If the partnership hasn’t filed a return, then, under section 6222(c)(1)(A)(ii), any items reported for that partnership will be inconsistent and should be reported on Form 8082. Form 8082 should include all items the partner is treating differently. If the partner files inconsistently from the partnership but does not include Form 8082, the IRS may adjust the inconsistently reported items on the partner’s return to be consistent with the partnership and assess any additional tax as a result of that change in the same manner as if the tax were from a mathematical or clerical error appearing on the return (that is, without issuing a statutory notice of deficiency).2 This doesn’t just apply to partners that are C corporations or individuals.
Filing Inconsistently in Tiered Structures
If a BBA partnership-partner files inconsistently from a BBA partnership (and does not file Form 8082), the IRS may assess an imputed underpayment on the BBA partnership-
1 Section 6222(a) provides that “[a] partner shall, on the partner’s return, treat any [PRI] in a manner which is consistent with the treatment of such item on the partnership.” Section 6222(c) provides exceptions to the consistency requirement, stating (in section 6222(c)(1)(B)) that if a partner files a statement identifying a PRI that the partner is treating inconsistently on the partner’s return, the requirement in section 6222(a) (that a partner must file consistently with the partnership) doesn’t apply to the items contained on the statement (the notice of inconsistent treatment). Therefore, if a notice of inconsistent treatment is filed, the items contained on the notice are no longer subject to the consistency requirement under section 6222. This is the same for partners in partnerships that have elected out of BBA (as section 6222 doesn’t apply to them either).
2 Section 6222(b). Under section 6222(c)(2), if the partner filed consistently with the Schedule K-1 furnished to the partner but that Schedule K-1 differs from the Schedule K-1 filed by the partnership with the IRS, the partner may make an election to be treated as if they properly notified the IRS. I would be shocked if this has ever come up (it existed under TEFRA and for S corporations too).
partner that is calculated on the adjustment(s) needed to make the BBA partnership-partner consistent with the source partnership.3 If the partnership-partner has elected out of the BBA, the IRS will adjust and assess the partnershippartner’s partners from the year to which the adjustments relate.4 Partnership-partners will be given an opportunity to file an AAR or amended return, as applicable, to correct the inconsistency before an assessment is made.5 If the Form 8082 filed by the partner does not include all items the partner reported inconsistently, the IRS may adjust the items not covered by the Form 8082.6
Unlike under TEFRA, it is only the direct partners in the partnership that must file consistently with the BBA partnership. Section 6222 says “partners” must file consistently. The BBA does not have a specific definition of “partner” like TEFRA did.7 In the absence of a specific definition, the definition of “partner” defaults to section 7701(a)(2), which defines “partner” as a member of the partnership. That makes sense because an indirect partner may have no idea how the source partnership reported its items. Instead, the passthrough partner (as the partner) must file consistently with the BBA partnership and the indirect partner would file consistently with the passthrough partner (if the passthrough partner is subject to the BBA). If a passthrough partner files inconsistently from a BBA partnership and properly notifies the IRS of the inconsistency, the amounts reported to the partners of the passthrough partner would reflect the items as reported on the passthrough partner’s return, which would include any items the passthrough partner reported inconsistently
3 Section 6232(d)(1)(B); reg. section 301.6232-1(d). Curiously, the statute (and corresponding regulations) only refer to partnershippartners and not other types of passthrough partners. Therefore, it’s unclear what happens if a passthrough partner that is not a partnership files inconsistently from a BBA partnership and does not file a notice of inconsistent treatment. There does not appear to be a provision for assessing a non-partnership passthrough partner unless that passthrough partner would have an underpayment. In addition, as indirect partners arguably are not required to file consistently with an entity they are not a direct partner in (and may be required to file consistently with the entity they own an interest in), it’s unclear how an undisclosed inconsistent treatment could be adjusted when done by a non-partnership passthrough partner.
4 Reg. section 301.6232-1(d)(1)(iii).
5 Reg. section 301.6232-1(d)(1)(ii)(B).
6 Reg. section 301.6222-1(c)(3).
7 Section 6231(a)(2) (prior to repeal by the BBA).
from the BBA partnership. However, if a non-BBA partnership-partner files inconsistently from a BBA partnership and does not notify the IRS, the partnership-partner’s partners from the year at issue will bear the tax effects of the partnershippartner’s failure to file a notice of inconsistent treatment even though the indirect partners are not required to file consistently with the BBA partnership.8
It’s important to note that filing inconsistently from the partnership is not a substitute for the partnership filing an AAR. If a partner files inconsistently from the partnership, nothing on the partnership’s return changes as a result of the partner’s actions.9 Therefore, even if its partners have filed inconsistently because of an error discovered on the partnership return after the return was filed, a partnership may still need to file an AAR to adjust items on its return so that those items will carry forward correctly to future years.
Under section 6221(a), any adjustments to PRIs may be made only at the partnership level under the BBA, unless an exception applies. Section 6222 is one such exception. If the partner files a notice of inconsistent treatment, the IRS may open up an exam of the partner to adjust the inconsistently reported item (and any other items on the return).10 Notably, the IRS is not limited to adjusting the item to be consistent with the partnership but may determine the correct treatment of the item, regardless of how the partnership treated the item.11 A partner-level proceeding for an inconsistently reported item is not in any way special — it’s a regular exam subject to the rules and limitations for regular exams, such as the partner’s period of limitations on making assessments and any applicable restrictions on additional statutory notices of deficiency. The IRS can also examine the partnership, and any determination in the partnership proceeding is binding on the partners
8 Reg. section 301.6232-1(d)(1)(iii).
9 See section 6222(d); reg. section 301.6222-1(c)(4)(ii) (noting that a partnership is not bound to the results of any partner-level proceeding involving the inconsistently reported item if the partnership is not a party to the proceeding).
10 See reg. section 301.6222-1(c)(4).
11 Reg. section 301.6222-1(c)(4)(ii).
under section 6223. Therefore, when deciding whether a partner should file inconsistently from the partnership (for example, before the partnership files an AAR) it’s important for the taxpayer to understand that the IRS does not have to audit the partnership regarding the inconsistently reported item and could come knocking on their door, resulting in the partner having to discuss the correct treatment of the item from the partnership return with the IRS.
Reasons to File Inconsistently (That Is, to Be)
Now that we’ve gotten the basics out of the way, we can discuss a couple situations in which a partner may need to file inconsistently from the partnership. As alluded to in the opening example, the error on the partnership return may be discovered after the partnership return has been filed but before the partners’ returns for the tax year have been filed. Although the partnership may be preparing an AAR, the partner is faced with a choice: file inconsistently on their current return or wait until the partnership files an AAR (which will result in the tax effects of the correction being reflected on the partner’s next year return). Understandably, many partners want everything to be correct on their return from the get-go. In those situations, it may be beneficial for the partner to file inconsistently on their current return. When the partnership files the AAR and pushes out the adjustments, the partner will still need to take account for the adjustments on their next return by filing a Form 8978, “Partner’s Additional Reporting Year Tax.”12 However, if the partner correctly reported the items (as adjusted) when the partner filed inconsistently on their (now) prior return, the calculation of the additional reporting year tax will be zero. Even though the additional reporting year tax is zero, the partner should still fill out Form 8978, reflecting the calculation as the IRS will be looking for that form because the partner received a Form 8986,
12 See reg. section 301.6227-3(a). While the partner takes into account the adjustments by increasing or decreasing their chapter 1 tax for the reporting year, and there would be no change in tax, from a practical standpoint, there would be no real way for the IRS to tell if the partner reported the tax effects from the AAR or even acknowledged the requirement to take into account the adjustments without the partner filing Form 8978 showing the calculation. Otherwise, it just looks like the partner received the statement and did nothing.
“Partner’s Share of Adjustment(s) to PartnershipRelated Item(s) (Required Under Sections 6226 and 6227),” when the partnership filed the AAR and pushed out the adjustments.13
Filing Inconsistently to Avoid the Case of the Missing Refund
Probably the most important time a partner may want to file inconsistently from the partnership is to avoid the loss of an excess decrease in tax (for example, a refund) resulting from an adjustment to a prior year. Let me explain, although many of you know this one already. Let’s say a partnership files an AAR that results in a decrease to a partner’s tax and elects to push out the adjustments to the partners. The partner has to decrease its chapter 1 tax for the tax year that corresponds to the date that the AAR was filed (the reporting year).14 For example, if the AAR is filed on December 1, 2024, the reporting year would be 2024 and the decrease would be reported on the partner’s 2024 return. The decrease in tax is calculated by reference to what the change in the partner’s chapter 1 tax would have been if the partner had reported the adjusted items on their return for the tax year to which the adjustments relate (and any intervening years). This cumulative change in tax is referred to as the additional reporting year tax, and it can be positive or negative, although it would have resulted in a refund in this example.
When Congress added the ability to have decreases in tax as part of the Tax Technical Corrections Act of 2018 (yes, originally it was increases only), it neglected to include language that would allow an excess decrease in tax (that is, a decrease in tax that exceeds the partner’s other chapter 1 tax for the reporting year) to create an overpayment or be carried forward. As such, if the adjustments in the push-out statement result in a decrease in the partner’s tax (a negative additional
13 If there’s no change in the partner’s tax and the partner fails to file the Form 8978, it’s unclear if there is any real consequence. As there would not be an understatement or underpayment (because there would be no change in tax) and there is no filing penalty with respect to the Form 8978, it does not seem as if a penalty could be applied. However, in the absence of the Form 8978, the IRS will be unable to tell there is no change in tax as a result of the adjustments, which could result in notices and other scrutiny by the IRS that would likely be way more of a hassle than simply filing the form.
14 Section 6226(b); reg. section 301.6226-3.
reporting year tax), the partner’s chapter 1 tax can be reduced to zero but not below zero. Any excess would effectively go “poof” (technical term).15
A partner may file inconsistently from the partnership on an amended return (assuming the partnership has not been issued a notice of administrative proceeding for the tax year).16 If the partner is concerned that it may not get the full benefit of any negative additional reporting year tax, the partner could amend its tax return, provided the section 6511 period is open, for the tax year to which the AAR relates. The partner would take into account the partner’s allocable share of the adjustments on that amended return, resulting in a refund to the partner. With the amended return, the partner would include a Form 8082, which would notify the IRS that the partner is filing inconsistently with the original Schedule K-1 furnished to the partner for the reviewed year (not the AAR). Therefore, when the partner calculates the additional reporting year tax, it will be zero because there would be no change in tax if the adjusted items were reported correctly on the partner’s return for the tax year to which the adjustments relate (which would include any amendments to the return) as the adjustments were included in the amended return. Accordingly, it’s important to evaluate the impact of the pushed-out adjustments from the AAR on the partner to en sure that the partner does not lose a potential refund.
Limitations on Inconsistent Treatment
I saved the best for last: Are there PRIs on the partnership return for which the partner cannot file inconsistently from the partnership? Remember when I said that a partner filing inconsistently from a BBA partnership puts them in the same position as if the partner were a
15 Treasury has included a requested fix for that issue in many of its green books, the most recent version of which is: Treasury, “General Explanations of the Administration’s Fiscal Year 2025 Revenue Proposals” (Mar. 11, 2024).
16 See reg. section 301.6227-1(a). As a partner may not amend its prior year returns to file inconsistently with the partnership after the IRS has issued a notice of administrative proceeding to the partnership for the taxable year, the solution discussed here will not apply in the case of pushed out adjustments resulting from an exam. However, a partner may file an amended return as part of a request to modify the imputed underpayment during the exam and achieve the same result.
partner in a partnership that elected out of BBA would be important later? This is the later.
The BBA is procedural. It does not affect the substantive tax rules (that is, whether something is income, whether the partnership can claim a specific deduction, etc.). Therefore, the BBA will generally not create a situation in which the substantive tax rules apply differently, depending on whether BBA applies. What do I mean? On the partnership return, there are many decisions that only the partnership can make — for example, certain elections.17 If a partner could not make or benefit from an election the partnership did or did not make on the partner’s return if the BBA does not apply, the partner can’t do it by filing a notice of inconsistent treatment related to a BBA partnership. As previously mentioned, filing a notice of inconsistent treatment just turns off the requirement that a partner in a BBA partnership must report items on the partner’s return consistently with how the partnership reported the items on its return — which is exactly the same situation the partner would be in if the BBA did not apply. Filing a notice of inconsistent treatment does not provide authority for the partner to do whatever they want on their return. Whether a partner can take a position different from the partnership (for example, file as if the partnership made an election it did not make) depends entirely on the substantive tax provision at issue. If something can occur only at the partnership level under the substantive tax provisions (for example, only the partnership can make the election), the BBA will not change that.
17 For example, the election to push out the adjustments contained on an AAR is on the partnership return (i.e., the AAR) and is therefore a PRI. However, if a partner in a BBA partnership receives a push out statement, it cannot file inconsistently from the fact a push out election was made and fail to take into account the adjustments. Under section 6223, the partners are bound to any actions taken by the partnership (through the partnership representative) under BBA. An election to push out the adjustments is an act under BBA, and the partners are bound to it under section 6223. However, the partner may file inconsistently from the adjustments on the AAR if it files a notice of inconsistent treatment. A partner may not file inconsistently from a push out statement received following an audit as the partner is bound to the outcome of the BBA proceeding. Reg. section 301.6222-1(c)(2).