High-income individuals and partnerships present some of the most complicated federal tax returns the IRS examines. They often involve multiple businesses, pass-through entities, investments, related-party transactions, complex basis calculations, and tax positions that cannot be evaluated by simply comparing a Form W-2 against a Form 1040.
Government data initially showed a substantial increase in IRS examination activity involving partnerships and high-income taxpayers. A 2025 Treasury Inspector General for Tax Administration report found that partnership examination starts increased 63%, from 4,106 in FY 2020 to 6,709 in FY 2023. Over the same period, the share of the individual examinations analyzed by TIGTA involving returns reporting more than $400,000 increased from 5.2% to 8.8%.
The enforcement picture has changed materially since then. Treasury’s latest performance data show that partnership examination starts fell to 2,285 in FY 2024 and 1,589 in FY 2025, a roughly 76% decline from FY 2023. High-income individual examination starts likewise declined from 4,326 in FY 2023 to 3,692 in FY 2025, while large-corporation examination starts increased from 1,400 in FY 2023 to 1,483 in FY 2025.
The decline reflects an important reality for taxpayers in 2026: the IRS is operating with substantially reduced enforcement resources. TIGTA reported that the IRS Pass-Through Entities program lost more than 20% of its staff during 2025 and concluded that the agency would need to reassess its large-partnership examination coverage goals.
But fewer audit starts should not be mistaken for abandoning high-income or partnership enforcement. The IRS continues to maintain specialized procedures for high-income and high-wealth enterprise examinations, active compliance campaigns addressing partnership issues, and a dedicated centralized partnership audit regime. TIGTA also reported that 82 of the largest U.S. partnerships were selected for examination, with 43 of those examinations still open.
For high-income individuals and partnerships, therefore, the critical question is not whether a particular year’s headline audit rate increased or decreased. It is what happens if the IRS selects your return and whether you are prepared for an examination that can reach multiple entities, multiple partners, and multiple tax years.
Why Are IRS Audits of High-Income Taxpayers Different?
A high-income individual rarely presents the IRS with only an individual income tax return.
A sophisticated examination can extend to the taxpayer’s interests in partnerships and S corporations, closely held businesses, trusts, investment entities, real estate, capital transactions, and related entities. The IRS’s current high-income and high-wealth procedures expressly recognize that these taxpayers may operate through interconnected business entities and investments.
The stakes can also increase because one disputed issue may affect several returns. A partnership deduction can change an individual partner’s taxable income. An adjustment to a partner’s outside basis can determine whether partnership losses were deductible. The sale of a partnership interest can involve both capital and ordinary-income components. Self-employment tax may turn on whether a partner actually qualifies for the limited-partner exception.
These are not merely theoretical examination issues. Current IRS Large Business and International compliance campaigns expressly address partnership losses exceeding partner basis, sales of partnership interests, and self-employment tax positions involving limited partners, among other partnership issues.
At the Tax Law Offices of David W. Klasing, our dual-licensed tax attorneys have substantial experience representing both high-income individuals and partnerships in sophisticated civil tax examinations, exactly the categories of taxpayers implicated by these enforcement efforts.
Experienced representation can matter from the first Information Document Request. The factual record developed during an audit can determine not only whether a proposed adjustment survives, but also whether the Revenue Agent expands the examination to additional tax years, related entities, or additional issues.
Partnership Audits Changed Fundamentally Under the BBA
Partnerships require an additional level of caution because Congress fundamentally changed how the IRS examines them.
The Bipartisan Budget Act of 2015 created the centralized partnership audit regime, generally applicable to partnership taxable years beginning after December 31, 2017. Unless an eligible partnership properly elects out of the regime, partnership-related adjustments generally are determined at the partnership level.
Most importantly, any resulting imputed underpayment generally is assessed and collected from the partnership itself in the adjustment year, together with applicable penalties, additions to tax, and interest.
That is a significant departure from the traditional concept of partnership taxation. Partnerships ordinarily pass their taxable items through to their partners instead of paying federal income tax on operating income at the entity level. Under the BBA audit regime, however, the partnership itself can receive the tax bill resulting from an IRS adjustment to an earlier partnership year.
That creates potentially significant economic consequences for every person with an interest in the partnership.
How Can an IRS Partnership Audit Lead to a Capital Call?
Suppose the IRS audits a partnership’s 2023 return several years later and determines that the partnership materially understated taxable income.
Under the BBA’s default rules, the resulting imputed underpayment can become an obligation of the partnership in the adjustment year rather than an immediate assessment against each person who was a partner during 2023.
If the partnership does not have sufficient cash to pay that liability, it must obtain the funds somehow.
Depending on the partnership agreement and financial circumstances, the partnership might use operating cash, borrow money, reduce or suspend distributions, or make a capital call on its partners.
A capital call is not itself a penalty imposed by the Internal Revenue Code, and the BBA does not automatically require individual partners to contribute additional capital. Whether the partnership can compel contributions depends on the partnership agreement and applicable law.
But the practical problem is straightforward: if the partnership receives the tax bill, somebody must fund it.
The situation becomes particularly contentious when ownership has changed.
The IRS adjustment may concern partners who owned the business during the audited year, also called the reviewed year, while the resulting partnership-level tax becomes payable several years later when different partners own the partnership.
Absent appropriate contractual provisions or use of available BBA procedures, current partners can therefore bear the economic consequences of historical tax positions attributable to former partners.
That is why sophisticated partnership agreements should address responsibility for taxes arising from examinations of prior years.
A Partnership Does Not Always Have to Pay the Proposed Imputed Underpayment
The partnership-level imputed underpayment is important, but it is a default mechanism, not necessarily the final result of every BBA audit.
After the IRS issues a Notice of Proposed Partnership Adjustment, or NOPPA, the partnership representative generally has 270 days to submit permitted modifications to the proposed imputed underpayment. The IRS and partnership can agree to extend that period, and the partnership representative can waive it.
Depending on the facts, the modification procedures may substantially reduce the partnership’s ultimate imputed underpayment.
There is also the critical push-out election under Internal Revenue Code section 6226.
After the IRS issues the Final Partnership Adjustment, the partnership representative has 45 days from the date of the FPA to make a valid push-out election. The 45-day push-out election period cannot be extended.
If the partnership validly makes the election, it does not pay the imputed underpayment to which the election applies. Instead, the relevant adjustments are pushed out to the reviewed-year partners, who generally must account for their shares of those adjustments under the statutory rules.
If the partnership fails to make a valid and timely push-out election, it generally remains responsible for the imputed underpayment.
This is why describing the BBA regime simply as “the IRS assesses the partnership, and then the partnership calls its partners for money” would be incomplete. Modification and push-out procedures can materially alter the liability amount and who ultimately bears its economic burden.
Those procedures, however, involve strict substantive requirements and deadlines. Waiting until the partnership needs cash to consider them can be far too late.
Your Partnership Representative Has Enormous Authority
One of the most consequential features of the BBA regime is the partnership representative.
The partnership representative has sole authority to act on behalf of the partnership under the centralized audit regime, and both the partnership and its partners generally are bound by the representative’s actions.
Those actions can include extending the statute of limitations, entering settlements, agreeing to proposed adjustments, requesting modification of an imputed underpayment, waiving or extending certain procedural periods, agreeing to a Final Partnership Adjustment, and making a section 6226 push-out election.
Individual partners do not possess the same statutory participation rights that partners had under the former TEFRA regime. Current IRS procedures expressly recognize that partners other than the partnership representative have no independent statutory right to participate in the BBA examination or challenge partnership adjustments merely because the eventual adjustment affects them.
That can create serious problems where the interests of:
- current partners;
- former partners;
- management;
- reviewed-year partners; and
- the partnership representative do not align.
A partnership should therefore treat its choice of partnership representative as an important tax-risk and governance decision, not merely an administrative box to check on Form 1065.
Can a Partnership Elect Out of the BBA Audit Regime?
Some partnerships can.
An eligible partnership generally may elect out of the centralized partnership audit regime for a particular taxable year if it has 100 or fewer partners under the applicable counting rules and every partner is an eligible partner.
Eligible partners generally include individuals, C corporations, eligible foreign corporations, S corporations, and estates of deceased partners.
By contrast, partnerships with partners that include other partnerships, trusts, disregarded entities, and certain other persons generally cannot elect out. Special counting rules also apply where an S corporation is a partner because the S corporation’s shareholders count toward the 100-partner limitation.
The election must be made properly and timely with the partnership’s return for the particular tax year.
A partnership that could have elected out but failed to do so should not assume that it can simply reverse that decision after receiving an IRS examination notice.
Do Not Treat a BBA Partnership Audit Like an Ordinary Individual Audit
A centralized partnership examination requires counsel to analyze both the substantive tax controversy and the procedural consequences of any adjustment.
Winning or narrowing the underlying tax issue remains the priority. But effective representation can also require analysis of:
- the computation of the imputed underpayment;
- modification opportunities;
- the push-out election;
- partnership-representative authority;
- penalties and interest;
- reviewed-year versus adjustment-year partners;
- tiered partnership structures;
- current and former partner conflicts; and
- the partnership agreement’s allocation of audit-related liabilities.
The IRS maintains detailed field examination procedures for the centralized partnership audit regime, confirming that BBA examinations remain a specialized part of the agency’s field-examination structure.
For a partnership receiving an IRS audit notice, the time to begin planning for those consequences is at the beginning of the examination, not after the IRS issues its Final Partnership Adjustment.
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David Klasing is the founder of the Tax Law Offices of David W. Klasing, P.C.
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