I Want My Two Dollars: Correcting a Prior Imputed Underpayment, Part 3
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 is also a contributing author for Procedurally Taxing.
In this post, Black discusses factors that could limit a partnership’s ability to get a refund for a prior, incorrectly calculated imputed underpayment under the Bipartisan Budget Act of 2015.
This post reflects the author’s personal views and not necessarily those of Citrin Cooperman.
Under the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015, a partnership files an administrative adjustment request (AAR) to correct its previously filed return. We’ve been discussing the ways in which a partnership could adjust (and be refunded) an imputed underpayment (IU) contained on a previously filed AAR if it made errors in the calculation. Part 1 of this article discussed the methods a partnership might use to adjust the IU on the prior AAR and part 2 discussed the year in which these methods would be done. This part discusses the limitations and impediments that exist that could hamper a partnership’s ability to get its $2 back.
Sections 6235 and 6511
Unlike most other areas of the Internal Revenue Code, BBA has a period of limitations on
making adjustments, not assessment. Outside of BBA, adjustments can be made at any time, it’s just a matter of whether any change in tax related to the change can be assessed or refunded. Under section 6235, no adjustments can be made for the partnership tax year once the period of limitations on making adjustments has expired. But this does not necessarily mean that sections 6501 or 6511 do not apply in BBA.
As discussed in part 2, the IU is assessed and collected as if it were a tax under subtitle A. Taxes under subtitle A can only be assessed if the section 6501 period of limitations on assessing is open. Section 6501 applies to taxes imposed by title 26. Although BBA isn’t located in subtitle A (even though it is assessed and collected as if it were a tax under subtitle A), it’s still in title 26. As the IU is assessed and collected as if it was a tax under subtitle A for the adjustment year and is part of Title 26, the IRS still has to assess the IU before the section 6501 period expires for the adjustment year. 1 But what about refunds?
Similar to section 6501, section 6511 applies to refunds of tax imposed by title 26, which would arguably include the IU.2 Unlike with the 1982 Tax Equity and Fiscal Responsibility Act, there is nothing that excludes BBA from the rules under section 6511. So, that means the partnership can file a claim for a refund of the IU within three years of the date the return was filed (Which return? The AAR? Adjustment year return? Reviewed year return? See parts 1 and 2.) or two
1 I’m not addressing when the section 6501 period would start for purposes of assessing the IU in the adjustment year. Maybe I will tackle that at a future date. Same with when the period under section 6501(c)(12) begins.
2 Some say the IU is not a tax but just a liability. To me it’s poe-tay-toe, poe-tah-tah, but if that distinction mattered then there would be no way to get a refund of the IU and there would be an unlimited period to assess. So let’s just go with tax.
years from the date the IU is paid, right? Well, maybe not. But I said section 6511 probably applies, so what’s the problem? Section 6235. Section 6235 is the problem.
As we’ve been discussing, section 6235 governs whether an adjustment can be made to any partnership-related item (PRI) for a partnership tax year, and the IU is a PRI. This means adjustments to the IU can only be made if the period of limitations on making adjustments is open. Section 6511 governs refunds, not adjustments. If an adjustment can’t be made, there is no way to create an overpayment to be refunded.3 This same problem would exist if the IRS exercised its authority under section 6031(b)(4) to allow a BBA partnership to file an amended return instead of an AAR. Nothing in section 6031(b)(4) “turns off” section 6235, so while the partnership could file an amended return if the IRS “otherwise provided,” it doesn’t change the fact that an adjustment to a PRI can only be made if the period of limitations on making that adjustment is open.4
Under section 6235(a), the initial period of limitations on making adjustments is three years from the date the partnership return or AAR is filed (absent any special rules). This means the section 6235 period on making adjustments can be later than the period in which a partnership can file an AAR. What do I mean? Assume a BBA partnership filed its 2022 tax return on March 15, 2023. When this happens, the section 6235 period of limitations on making adjustments and the
3 Section 6404 allows the IRS to abate any tax that is excessive in amount, regardless of whether the period of limitations on obtaining a refund is open, so long as no refund is provided (unless the section 6511 period is open). So the IRS can abate a balance due even if it can’t give a refund. The question is whether section 6404 can override section 6235. But section 6232(a)(2) requires the IU to be paid when the AAR is filed. Therefore, it is unlikely there will be a situation in which the partnership has filed an AAR and has an outstanding balance for the IU on that AAR. Does “pay” include requesting a payment plan? I’m not sure, but I’ll think about it.
4 The only way the IRS could allow a partnership to obtain a refund of the IU using the rules under section 6511 would be if it exercised its authority under the special enforcement provisions of section 6241(11). However, special enforcement, as its name suggests, is for special things. Looking at the statutory “special enforcement matters,” they are generally situations where the normal BBA rules would not work well, like if the IRS is using an indirect method of proof in a partner audit (because the IRS would have no way to tell if any of the items came from a partnership). I’m not entirely sure the “normal” BBA rules don’t work well here; they just don’t work like section 6511, and different isn’t always bad. But it is possible to turn off section 6235 for refunds of the IU under section 6241(11) if it’s a special enforcement matter.
section 6227(c) limit on filing AARs is the same — three years from when the partnership return was filed (March 15, 2026). The partnership files an AAR on October 1, 2025. This makes the section 6235 period of limitations on making adjustments expire on October 1, 2028, three years from when the AAR was filed. But the limit on filing an AAR is unchanged. It remains March 15, 2026, as there is nothing in section 6227(c) that extends the time to file an AAR beyond three years from the partnership return.5 So if the period of limitations on making adjustments is open, can the IRS adjust the IU at the partnership’s request, even though the section 6227(c) period is closed? Technically yes, but don’t hold your breath. I’m not even sure how you would ask for that. Form 843?
In order to make an adjustment to a PRI, the IRS must open an audit and send the partnership the required forms (notice of administrative proceeding (NAP), notice of proposed partnership adjustment (NOPPA), and notice of final partnership adjustment (FPA)). It is unlikely the IRS would be willing to open an audit of the partnership for the sole purpose of adjusting an IU that the partnership miscalculated in the partnership’s favor. Plus, what taxpayer is going to ask for an audit? While adjustments can be made to a partnership tax year so long as the period of limitations is open, the only means for a partnership to adjust its PRIs is to file an AAR. And the only ways for the IRS to adjust a partnership’s PRIs are either math error6 or issuing an FPA, neither of which realistically gets us our $2 back. Maybe the partnership could request a closing agreement?
5 For the reasons discussed in part 1, I don’t think you could plausibly argue that when section 6227(c) says “partnership return” it includes AARs, as other areas of BBA expressly list AARs as separate from the partnership return when they mean to include AARs. See section 6235(a)(1). Additionally, if section 6227(c) allowed AARs to be filed within three years of when either the partnership return or a prior AAR was filed, this could have the effect of keeping the reviewed year open for a very long time.
6 It is unlikely math error would apply here. Under section 6232(d), the IRS can adjust the partnership’s return if a mathematical or clerical error exists on the return using rules similar to section 6213(b)(1)-(2). However, section 6213(b)(1) applies to assessments, not refunds, so there is no reason to believe the IRS could use its math error authority to make an adjustment that would not result in an assessment. In addition, not all adjustments to the IU would be as the result of a math error. For example, if the partnership did not treat adjustments as zero solely for purposes of calculating the IU when it was able to, this is likely not a math error. Nothing in reg. section 301.6225-1(b)(4) requires a partnership to treat adjustments as zero. It’s optional.
Abatement
What about section 6404? Could the IRS abate a portion of the IU without issuing an FPA? There’s an argument that section 6235 doesn’t preclude the IRS from abating the IU in excess of the correct liability. The IRS does not have to adjust the IU in order to determine the taxpayer is not liable for a portion of it. Under section 6404(a), the IRS has authority to abate assessments, and an assessment is not the same as the taxpayer’s liability under the code.7
Section 6404(a) does not allow the IRS to refund the excessive amount; it only applies to unpaid amounts. If abating an amount under section 6404(a) actually changed the amount of the taxpayer’s liability, then a taxpayer would be entitled to a refund, provided the section 6511 period was open. In addition to the ability to abate unpaid amounts that are excessive in amount, section 6404(a) also allows the IRS to abate unpaid amounts assessed after the expiration of the period of limitations or if the amount was erroneously or illegally assessed. As with abating an unpaid amount that is excessive, if the IRS abates a tax that was assessed after the period of limitations or which was erroneously or illegally assessed, it doesn’t mean the taxpayer’s liability, as determined under the code, is less — it just means the IRS isn’t collecting it. But, as section 6404 only allows the IRS to abate unpaid amounts and the IU has to be paid with the AAR,8 we still aren’t getting our $2 back.
Comparison to Exam
So far we’ve discussed what the partnership can do if it filed an AAR, paid the IU, and later discovered that it made an error in calculating the IU it paid. As mentioned above, the time for the IRS to make adjustments for a partnership tax year may be longer than the time the partnership has to file an AAR to adjust its PRIs. So what happens if the IRS opens an audit of the partnership tax year and makes adjustments to
7 See, e.g., United States v. Daniel, 956 F.2d 540, 542 (6th Cir. 1992) (“The law does not require an assessment or demand for payment before a tax deficiency arises.”); Carlin v. United States, 100 F. Supp. 451, 455 (Ct. Cl. 1951) (abating is a bookkeeping entry and does not relieve the taxpayer of the liability).
8 Section 6232(a)(2).
the IU? How does that compare to what the partnership can do on its own?
Under the regulations, if the IRS makes an adjustment to a previously calculated IU, how the adjustment is treated depends on if the IRS increases or decreases the prior IU. This is discussed more fully in my prior article, “Practical Tips for Preparing an Administrative Adjustment Request” (Tax Notes Federal, Nov. 18, 2024, p. 1437). Under reg. section 301.6225-1(b)(1), (c)(3), and (d)(2), if the IRS increases the prior IU, the increase is added to, and increases, the ultimate IU calculated as part of the audit. If the IRS decreases the prior IU, the decrease can reduce the exam IU (but not below zero).9 Any excess reduction in the IU can offset other unpaid amounts the partnership is liable for or be refunded. But here’s something to ponder — can the reduction in the prior IU reduce any other amounts due by the partnership or be refunded if the section 6511 period is closed?
Can the IRS Just Give Me My $2?
As mentioned above, unlike under TEFRA, there is nothing in BBA that turns off the rules of section 6511 when it comes to refunds of amounts determined under BBA. Does this mean that, in an audit, the IRS can increase the IU and assess the additional amount, but may not be able to reduce the prior IU (to the extent it creates a credit or refund)? Although this is not at all addressed in the statute or regulations, I think if people are not careful, that’s exactly what can happen. Just as the period of limitations on making adjustments can prevent there from being an overpayment because the prior IU cannot be changed, it seems that so too can the period of limitations on making a refund prevent an adjustment to the IU from being refunded.
We’ve been discussing how section 6235 governs whether adjustments can be made to PRIs, which would include an IU calculated by the partnership on a previously filed AAR. Although section 6232(a) provides that an IU is
9 There are rules in reg. section 301.6225-1(f) for recalculating the IU in situations where the overall calculation would be zero or less than zero. The calculation contains a reduction in a prior IU but this recalculation doesn’t really matter for purposes of this discussion, so I am keeping it simple.
assessed and collected as if it were a tax under subtitle A for the adjustment year, this same language would not seem to apply to refunds, which are not assessments or collections. As mentioned before, BBA is completely silent on refunds of IUs. Maybe Congress didn’t think there would be any? After all, Congress obviously didn’t envision there could be reductions in partner tax as the result of a push out (exam or AAR) until 2018, almost three years after BBA was passed.10
Under section 6511, to get a refund, a taxpayer must file a claim for refund within three years of when the return was filed or within two years of the date the tax was paid. Unlike earlier, for purposes of this discussion, let’s assume the “return” at issue under section 6511 would be the AAR that reported the IU. For those that have been involved in a BBA audit, you know that these audits take a long time. Regardless of how fast the IRS is in determining the adjustments, it must wait 270 days from when it issued the NOPPA before it can issue an FPA, which ultimately makes the adjustments (the partnership can waive this period).11 But nothing is holding open the section 6511 period during a BBA audit (normally it doesn’t need to, as all tax impacts are shoved into a “current” year) and a partnership cannot file an AAR after the NAP has been issued.
Let’s look at how this could work. Assume the BBA partnership filed its original 2022 Form 1065 on March 15, 2023. On October 1, 2025, it files an AAR for the 2022 tax year and pays an IU of $X. At this point, the period of limitations on making adjustments expires on October 1, 2028. Assume the IRS opens an audit of the 2022 tax year (which would include any adjustments made on the AAR) on March 14, 2026, and the audit takes exactly three years to complete. If the IU on the AAR is reduced as part of the audit, could it be refunded or credited? Under section 6511, a claim for refund would have to be filed by October 1, 2028, in order for it to be timely (three years from
10 The BBA did not have the ability for partners to reduce their chapter 1 tax as the result of a push out (exam or AAR). The ability to get decreases was added as part of the Tax Technical Corrections Act of 2018 and made retroactive to the effective date of BBA.
11 Section 6231(b)(2).
when the AAR was filed). In this example, the audit was not complete until March 14, 2029, which is after the section 6511 period expired.12
But section 6511 only requires a claim to be filed within three years of when the return was filed or within two years of the date the tax was paid. So . . . can the partnership file a claim for refund related to a reduction in the prior IU during the audit? I don’t see why not. It obviously could not be contained on an AAR, as an AAR cannot be filed once the NAP has been issued at the beginning of the audit. But remember what I said before — the IRS makes adjustments to PRIs as part of an audit by issuing an FPA. Therefore, if the partnership made a claim for refund during the audit (while the section 6511 period was open), the IRS could include the adjustment to the prior IU in the FPA. This would make both the claim for refund and the adjustment timely. Booyah! But, if the partnership failed to make a timely claim for refund during the audit, there is an argument the section 6511 period would be closed, and no refund could be given. Don’t be that person.
As you can see, there are many unanswered questions regarding how to correct an IU on a previously filed AAR, including whether another AAR must be filed, what year the AAR would be for, and what happens if the time to file a second AAR or make a claim for refund is closed. The IRS and Treasury should consider issuing guidance in this area and Congress should consider adding a provision addressing this (and cleaning up some of the language in other statutes; I’m happy to provide them with a list). The guidance could be a revenue procedure or even just updating the instructions to the forms to inform partnerships as to what they need to do if they paid too much (or too little!) on their prior AAR. After all, this would be far more effective than chasing someone down and demanding your two dollars.13
12 Under section 6511(c), the time to file a claim for refund is extended if the taxpayer extends the period of limitations on assessment under section 6501(c)(4). As we’ve been discussing, what’s being extended in a BBA audit is the section 6235 period of limitations on adjustment. So not the same thing. Although Congress could change this by amending section 6511(c) to include section 6235, I would not hold my breath on this.
13 Better Off Dead (1985).