The IRS has made partnership compliance one of its top enforcement priorities, and 2025 is shaping up to be a watershed year for passthrough entity audits. The agency's expanded funding under the Inflation Reduction Act, combined with the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA), has given the IRS both the resources and the legal framework to pursue partnership-level examinations at a scale that was not previously feasible. For businesses operating as partnerships or multi-member LLCs, understanding the current enforcement landscape is essential.

The Centralized Partnership Audit Regime

The BBA replaced the prior TEFRA partnership audit rules with a streamlined centralized audit regime, effective for tax years beginning after December 31, 2017. Under the new regime, the IRS audits partnerships at the entity level and assesses any resulting tax adjustments—called "imputed underpayments"—directly against the partnership in the year the adjustment is finalized (the "adjustment year"), rather than requiring the IRS to assess and collect from each individual partner for the year under audit (the "reviewed year").^[1]

This is a fundamental shift in the economics of partnership audits. Under the old rules, the IRS had to pursue each partner individually—an administratively burdensome process that effectively insulated many partnerships from audit. Under the BBA, the IRS can assess the full tax liability at the partnership level in a single proceeding, making partnership audits far more efficient from the government's perspective.

The Partnership Representative

Every partnership subject to the BBA regime must designate a "partnership representative" who has sole authority to bind the partnership and all of its partners in any IRS examination or judicial proceeding. The partnership representative does not need to be a partner—the role can be filled by any person with a substantial presence in the United States. This is a significant departure from the old "tax matters partner" concept, because the partnership representative's authority is broader and the other partners have no statutory right to participate in the audit or to receive notice from the IRS.^[2]

The designation of the partnership representative is made on the partnership's annual tax return (Form 1065). If the partnership fails to designate a representative, the IRS can select any person as the partnership representative—a situation that no partnership should allow to occur. The operating agreement or partnership agreement should address the selection, authority, and removal of the partnership representative, and should establish obligations to keep the partners informed of any audit proceedings.

Imputed Underpayments and the Push-Out Election

When the IRS determines that a partnership underpaid tax for a reviewed year, the default rule is that the partnership pays an "imputed underpayment" in the adjustment year, calculated at the highest individual tax rate (currently 37 percent). This can produce a harsh result, because the tax is computed at the highest rate regardless of the partners' actual tax situations, and the current partners bear the economic burden of a tax liability that relates to a prior year when different partners may have been involved.^[3]

To mitigate this, the BBA provides two alternatives. First, the partnership can request modifications to the imputed underpayment calculation—for example, by demonstrating that certain partners are tax-exempt entities, that the partners' actual tax rates are lower than the highest rate, or that partners have already filed amended returns reflecting the adjustments. Second, the partnership can elect to "push out" the adjustments to the reviewed-year partners, who then file amended returns and pay the tax (plus interest) at their own individual rates.^[4]

The push-out election must be made within 45 days after the date of the final partnership adjustment. If the election is not timely made, the partnership is liable for the imputed underpayment at the highest rate. This is an extremely tight deadline, and failure to meet it can have significant financial consequences.

What Partnerships Should Do Now

The IRS's increased focus on partnership compliance means that well-organized partnerships will be better positioned to respond to examinations and minimize their tax exposure. Several steps can be taken now to prepare.

First, review the partnership or operating agreement to ensure it addresses the BBA audit regime. Many agreements drafted before 2018 do not contain provisions for the partnership representative, the push-out election, or the allocation of imputed underpayment liability among the partners. These provisions should be added or updated.

Second, ensure that the partnership representative designation on Form 1065 is current and that the designated individual understands the scope of the role. The partnership representative should be someone who will act in the best interests of all partners, not just the managing partner or majority owner.

Third, maintain thorough records. The ability to request modifications to an imputed underpayment depends on having documentation of partners' tax situations, including tax-exempt status, applicable tax rates, and any amended returns filed. Without adequate records, the partnership may be stuck paying at the highest rate.

Finally, consider whether the partnership's risk profile warrants obtaining a tax opinion or engaging a tax controversy advisor before an audit begins. The IRS's partnership audit initiative is not limited to large partnerships or those with complex transactions—it extends to the routine passthrough entities that are the backbone of the American business economy.^[5]