IRS BBA Partnership Audit Rules: What’s New in 2025?

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Understand how the Bipartisan Budget Act (BBA) audit rules impact partnerships in 2025, what IRS enforcement changes mean, and how to stay audit ready.

Since 2018, partnerships have been subject to the Bipartisan Budget Act (BBA) audit rules, which allow the IRS to audit and assess tax at the partnership level rather than individually auditing each partner.

Here’s what is new in 2025 about IRS BBA Partnership Audit Rules

1. Centralized Audit Procedures Continue Under the BBA regime, the IRS can now assess and collect taxes directly from the partnership entity. This means any underpayment can be taxed at the entity level unless the partnership opts out or makes a push-out election.

2. The IRS is doing fewer audits, but with the use of AI. In early 2025, the IRS announced that while it’s reducing the number of overall audits due to staffing challenges, it is now prioritizing higher-risk partnerships and using artificial intelligence to detect reporting errors. This change means that although fewer partnerships may be audited, those that are selected are going to face more detailed reviews.

3. Election Options Still Available: Push-Out vs. Modification

   • Push-Out Election (Section 6226): The partnership can shift the audit-adjusted tax liability to the individual partners. Each partner pays their share based on their prior-year return rather than having the partnership entity cover the full tax bill. Alternatively, eligible partnerships with 100 or fewer qualifying partners can choose to elect out of BBA audit rules entirely by filing the election annually with Form 1065
   • Modification Request (Section 6225): The partnership can reduce the amount of audit-related tax due by submitting partner-level tax information. This often results in a lower effective tax rate than the default BBA rules apply.

Example:

A three-partner consulting firm was audited under the BBA rules. Initially, the IRS planned to assess $90,000 in underpaid tax at the entity level. By opting for a push-out election, each partner became responsible for $30,000 based on individual tax rates. One partner, who had lower taxable income that year, successfully reduced their liability to $21,000. This flexibility helped the firm avoid a higher collective tax burden.

IRS Penalties and Compliance Risks for Partnerships in 2025

Penalties are on the rise in 2025 as the IRS steps up enforcement and increases fines for non-compliance.

Common Penalties include:

• Late Form 1065 Filing: $220 per partner per month (max 12 months).
• Missing or Inaccurate Schedule K-1s: $290 per K-1 not issued or corrected.
• Incorrect or Incomplete K-1 Data: This can lead to IRS review or partner-level penalties.
• Failure to File Schedules K-2/K-3: Especially for partnerships with international dealings, particularly penalized if international activity exists.

Compliance Mistakes to Avoid

• Misreporting partnership income or expense allocations
• Not identifying foreign partners properly
• Filing incorrect EINs or missing foreign informational returns (e.g., Form 5472)

Best Practices To ensure compliance and avoid IRS Penalties

• Reconcile books quarterly, not just at year-end
• Double-check partner information (TINs, addresses, roles)
• Use automation tools to track capital accounts and K-1 generation
• Review audit readiness annually, especially for multi-tiered partnerships

How to Prepare for 2025 Partnership Tax Changes

Staying compliant with IRS rules is easier when you plan. Here is how to prepare for 2025 partnership tax changes:

1. Review and Update Partnership Agreements: Ensure your agreement reflects the current BBA audit rules and clearly defines income allocation, partner responsibilities, and how to handle audit situations, especially under BBA rules.
2. Monitor Changes in Partnership Composition: Adding new partners, especially foreign or entity partners, can affect your eligibility to opt out of BBA rules. So, you have to Stay proactive with documentation.
3. Use Tax Software with Audit Support: Many tax software tools now offer BBA audit modeling and K-1 review features reducing the risk of human error and last-minute scrambling. Choose a solution that allows you to flag inconsistencies before filing.
4. Hire a Tax Expert: With audit risks on the rise and reporting standards tightening, working with a CPA or tax attorney familiar with partnership taxation is one of the best investments you can make.

FAQs: BBA Audit Rules and International Considerations

1. How does the BBA audit rule affect my partnership? Under BBA, the IRS can audit and assess tax at the partnership level unless you elect to push liability to partners or request modifications.
2. What penalties apply if I file late or incorrectly? You may face up to $290 per Schedule K-1 not issued and $220 per partner, per month for late Form 1065 filings. Higher penalties apply for failing to file foreign-related forms.
3. Can I opt out of BBA audit procedures? Yes, you can opt out of BBA audit procedures if you have fewer than 100 eligible partners and file the election on a timely Form 1065.
4. What happens if I have foreign partners in 2025? You must complete additional reporting (K-2/K-3) and may be ineligible to opt out of BBA rules. Consult a tax advisor to structure accordingly.
5. Should I amend my partnership agreement for 2025? Yes, it’s advisable to amend your partnership agreement to reflect the latest updates on audit procedures, election rights, and how tax liabilities will be handled after audit.

Conclusion

Partnership tax compliance is evolving, and 2025 brings several important updates. From revised deadlines to expanded audit strategies and increased penalties, partnerships must stay proactive to avoid costly mistakes. To recap, partnerships should file Form 1065 by March 17, 2025, send out accurate Schedule K-1s (and K-2/K-3 if needed), understand their options under the BBA audit rules, avoid common compliance mistakes that lead to penalties, and use the right tools, along with expert guidance to stay accurate and ahead.

Whether you’re running a small partnership or managing a larger firm, staying on top of these 2025 changes can help you remain compliant and save thousands in potential penalties and taxes.

The content published on this website is for general informational purposes only. While we strive to ensure the accuracy and timeliness of the information presented, no rights can be derived from the content. We do not accept any liability for errors, omissions, or inaccuracies in the information provided. The content does not constitute professional advice, and readers are strongly encouraged to consult a qualified advisor before making any decisions based on the information shared on this website.

For an overview of 2025 partnership tax filing requirements, including Form 1065 and Schedule K-1 updates, read our companion article here