IRC 6225: Imputed Underpayment Calculation, Modification, and Push-Out

Under IRC Section 6225, the IRS calculates a partnership’s imputed underpayment after a BBA audit by grouping the audit adjustments by character, netting within each group, and applying the highest individual or corporate tax rate for the reviewed year to the result. That number is almost always higher than what the partners would owe if audited individually, which is why the statute also gives the partnership two ways to bring it down: request modifications within 270 days of the proposed adjustment notice, or push the adjustments out to the reviewed-year partners within 45 days of the final notice.

How the IRS Builds the Number

The calculation follows a fixed sequence. Every audit adjustment to a partnership-related item is sorted into a group based on its character. Ordinary income adjustments sit in one group, capital gain adjustments in another, and so on. Positive and negative adjustments net against each other within a group, but never across groups. Whatever is left in each group is the “total netted partnership adjustment.”¹

The IRS then multiplies those net adjustments by the highest individual or corporate tax rate in effect for the reviewed year.¹ For tax year 2026, that is 37% on the individual side.² A partnership whose partners are all in the 24% bracket still gets billed at 37% in the default calculation. The product is then adjusted for any net changes to creditable expenditures.

The bluntness is deliberate. The IRS built the formula to avoid digging into each partner’s personal tax situation during the audit. Partner-level attributes like net operating losses, deductions, and lower marginal rates are ignored. The imputed underpayment is essentially a worst-case number, and the modification process is the only route to a realistic one.

Penalties and Interest

The bill is not tax alone. Accuracy-related penalties are routine in partnership audits, though a partnership can seek relief by showing reasonable cause and good faith. The IRS looks at factors including the complexity of the issue, the partnership’s efforts to report correctly, and whether it relied on a competent advisor who had the relevant facts.³

Interest runs from the due date of the reviewed-year return until the partnership pays in the adjustment year. Audits routinely take multiple years, so accrued interest is often a real chunk of the total. For the quarter beginning April 1, 2026, the IRS underpayment rate is 6%, resetting quarterly and compounding daily.⁴

Cutting the Bill: Modifications Under Section 6225(c)

The IRS sends its proposed number in a Notice of Proposed Partnership Adjustment (NOPPA). That notice starts a 270-day clock during which the partnership can request modifications to the imputed underpayment. The window can be extended or partially waived by written agreement with the IRS.⁵ Miss the deadline and the default number stands.

Modification requests go in on Form 8980, and the partnership carries the burden of proving each requested reduction. Extensions of the 270-day window are requested on Form 8984 and require IRS agreement.⁶

Tax-Exempt Partner Modification

If part of an adjustment is allocable to a partner that would owe no tax because of its exempt status, the partnership can ask that the underpayment be recomputed without that share.¹ The certification runs on Form 8983. This only works when the adjustment does not relate to unrelated business taxable income for the exempt partner. A pension fund’s share of a routine income adjustment can be zeroed out; its share of an adjustment tied to a business it actively operates cannot.

Lower Rate Modifications

The 37% default is not fixed for partners who would be taxed at a lower rate. For adjustments allocable to a C corporation partner, the partnership can request the 21% corporate rate. For capital gains or qualified dividends allocable to an individual (including an S corporation partner, treated as an individual for this purpose), the partnership can request the applicable capital gains rate.¹ The rate applied cannot go below the highest rate for that category, so a corporate modification uses the flat 21% rather than any lower effective rate a specific corporation might have achieved.

Amended Returns From Reviewed-Year Partners

The most powerful lever is often the amended return route. A reviewed-year partner files an amended return for the year in question, reports the allocable share of the adjustments, and pays the tax, interest, and penalties. The partnership’s imputed underpayment is then reduced by what that partner paid.¹ The partner also files Form 8982 to certify the modification.⁶

This is especially valuable when a partner has unused net operating losses or other attributes that eliminate tax on the adjustment. That partner pays little or nothing, and the partnership’s bill drops by the full allocable share. The practical problem is cooperation: former partners may be hard to find, uninterested, or actively hostile, and the partnership cannot force them to file.

After the Final Notice: Pay or Push Out

When modifications wrap up, or if none were requested, the IRS issues a Notice of Final Partnership Adjustment (NFPA) setting the final imputed underpayment. The partnership then faces its central choice.

Paying at the Entity Level

The default is that the partnership pays the imputed underpayment itself in the adjustment year.¹ The payment is nondeductible, and it cannot be capitalized. The economic hit falls on whoever the current partners are in the adjustment year, even if they were nowhere near the partnership during the reviewed year when the underlying items were reported. That mismatch is the feature of the BBA regime that catches partners off guard most often.

The Push-Out Election Under Section 6226

The alternative is the “push-out” election, which shifts the tax off the partnership and onto the reviewed-year partners. The partnership representative files Form 8988 electronically, and the election must be made no later than 45 days after the NFPA is mailed.⁷⁵ Once made, it can only be revoked with IRS consent.

If the election is valid, the partnership owes nothing on the imputed underpayment. It furnishes each reviewed-year partner with a Form 8986 detailing their share of the adjustments and files the forms with the IRS. Each partner then recalculates tax for the reviewed year and any affected intervening years, reports the results on Form 8978, and pays the tax, interest, and penalties with the current-year return.

The trade-off is a higher interest rate. Section 6226 replaces the standard three-percentage-point add-on to the federal short-term rate with a five-point add-on — two points higher than the normal underpayment rate.⁷ For the quarter beginning April 1, 2026, the normal rate is 6%, so push-out partners face 8% for that period.⁴ The premium is Congress’s way of discouraging routine push-outs.

The 45-Day Deadline Does Not Move

There is no extension, no late-filing exception, and no cure for missing the 45-day window. A partnership representative who lets it lapse has locked the current partners into paying the full imputed underpayment. In partnerships where the current partners differ substantially from the reviewed-year partners, that mistake can generate serious disputes and litigation among the partners themselves.

Tiered Partnerships

When a reviewed-year partner is itself a partnership, the push-out cascades. The upper-tier partnership receives its Form 8986 and must decide whether to pay the imputed underpayment on its allocated share or make its own push-out election. This can continue through several tiers until the adjustments reach individual or corporate taxpayers who file returns and pay tax. Each tier has its own 45-day deadline and its own interest computation.

Who Actually Makes These Decisions

Every BBA partnership designates a partnership representative on its annual Form 1065, and that representative has sole authority to bind the partnership and every partner during the audit. That includes agreeing to adjustments, requesting modifications, choosing between entity-level payment and the push-out election, and settling with the IRS.⁸

Because the representative’s decisions bind everyone with no statutory override, the partnership agreement is the practical brake. Well-drafted agreements require the representative to consult with or obtain approval from the partners before agreeing to adjustments, choosing between entity payment and push-out, or settling. They also address who bears the economic cost of an entity-level payment, indemnification by former partners, and how a replacement is selected. Partnerships that leave these terms out of their operating agreements are trusting that their representative will make the right call under pressure, and that trust is not always rewarded.

One Boundary Worth Knowing

Section 6225 only applies to partnerships inside the BBA regime. A partnership that is required to furnish 100 or fewer Schedules K-1 for the year and whose partners are all eligible partners — individuals, C corporations, S corporations, certain foreign entities that would be C corporations if domestic, and estates of deceased partners — can elect out under Section 6221(b) by filing Schedule B-2 with a timely Form 1065.¹¹¹² The election is annual, not permanent. Partnerships that have elected out are audited at the partner level and never face an imputed underpayment.

1
Office of the Law Revision Counsel. 26 USC 6225 – Partnership Adjustment by Secretary
2
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
3
Internal Revenue Service. Penalty Relief for Reasonable Cause
4
Internal Revenue Service. Internal Revenue Bulletin: 2026-08
5
Internal Revenue Service. BBA Partnership Audit Process
6
Internal Revenue Service. About Form 8980, Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c)
7
Office of the Law Revision Counsel. 26 USC 6226 – Alternative to Payment of Imputed Underpayment by Partnership
8
Internal Revenue Service. 26 USC 6223 – Partners Bound by Actions of Partnership
10
Internal Revenue Service. Form 8979 – Partnership Representative Designation or Resignation
11
eCFR. 26 CFR 301.6221(b)-1 – Election Out for Certain Partnerships with 100 or Fewer Partners
12
Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime