How to File Form 8978: Partner's Additional Reporting Year Tax (BBA Audit Adjustments)

A partner opens their mail in 2026 and finds a statement from a partnership they invested in years ago. The IRS audited the partnership's 2022 return, adjusted several items, and the partnership chose to push those adjustments out to the people who were partners in 2022.

The partner now owes tax, and interest, on income from a year that closed long ago, and they have to report it on this year's return.

That's how the centralized partnership audit regime works for partnerships that don't elect out of it. The IRS audits and adjusts at the partnership level. By default, the partnership pays an imputed underpayment calculated at high rates.

Alternatively, the partnership can elect to push the adjustments out to its reviewed-year partners, who then take them into account on their own returns. Form 8978 is the form those partners use to calculate the resulting tax and interest.

The push-out also comes up outside audits. A partnership that corrects its own filed return through an administrative adjustment request can push those corrections out the same way. In either case, the partner doesn't amend the old return.

Instead, they recompute what their tax would have been and report the net change in the year they receive the statement. Understanding the timing, the interest, and the records involved makes a surprise statement much easier to handle.

This guide explains how the centralized partnership audit regime works, when adjustments are pushed out to partners, the key terms, how partners calculate their additional reporting year tax on Form 8978, how tiered partnerships are handled, and what records partners should keep.

What Is the BBA Centralized Partnership Audit Regime?

Form 8978 is filed by a partner to report and pay their share of 'imputed underpayment' resulting from a centralized partnership audit under the Bipartisan Budget Act (BBA) regime. When the IRS audits a partnership under BBA and determines an adjustment, each partner uses Form 8978 to calculate and pay the resulting tax on their individual or entity return for the year the audit is resolved, not the original year under audit.

The Bipartisan Budget Act of 2015 overhauled how the IRS audits partnerships. Under the BBA regime (effective for partnership tax years beginning after December 31, 2017):

• The IRS audits the partnership at the entity level, not at the individual partner level
• Any tax resulting from an audit adjustment is assessed against the partnership itself in the year the audit is resolved (the 'adjustment year') not in the original audited year
• The partnership designates a 'Partnership Representative' (PR) who has sole authority to act on behalf of all partners during the audit
• Default rule: the partnership pays the 'imputed underpayment', but partners can elect to 'push out' the adjustment to partners

How the Additional Reporting Year Tax Is Calculated

A partner doesn't simply pay their share of the partnership's imputed underpayment. Instead, they recompute their own tax as if the adjustments had been reported correctly in the first place.

Step 1: Recompute the First Affected Year

Using the adjustments on Form 8986, the partner recalculates tax for the first affected year, at their own tax rates, and determines the increase or decrease in tax.

Step 2: Recompute Intervening Years

Adjustments often ripple into later years. For example, an increase in depreciation in one year reduces depreciation available later, or a change in income affects a loss carryforward. The partner recomputes the tax for each intervening year to reflect those effects.

Step 3: Total the Changes

The increases and decreases for the first affected year and intervening years are totaled. A net increase is added to the partner's tax for the reporting year. A net decrease generally reduces the reporting year tax.

Step 4: Add Interest and Penalties

For audit push-outs, interest is generally calculated on each year's increase from the due date of that year's return, at the underpayment rate plus two percentage points. Penalties determined at the partnership level can also pass through to partners. Different interest and penalty rules apply to push-outs from administrative adjustment requests, so review the current instructions for the type of push-out you received.

The partner doesn't amend the returns for the reviewed year or intervening years. All of the recomputed tax, interest, and penalties are reported in the reporting year.

When Is Form 8978 Filed?

Form 8978 is used when the partnership elects to 'push out' audit adjustments to the partners rather than paying the imputed underpayment at the partnership level. Each affected partner:

• Receives a 'pull-in' statement from the partnership (similar to a Form K-1) showing their share of the adjustment
• Uses Form 8978 to calculate their 'additional reporting year tax', the tax owed by the partner on their share of the adjustment
• Files Form 8978 with their individual return for the year the partnership notifies them (not the originally audited tax year)
• Pays an interest charge from the original reviewed year to the filing date of the adjustment year return

Key Terms

Completing Form 8978

• Part I: Identify the partner and the partnership; list each reviewed year covered by the push-out statement
• Part II: Calculate the additional reporting year tax, the partner's allocable share of the imputed underpayment recalculated at the partner's actual tax rate (which may be lower than the highest rate used in the imputed underpayment calculation)
• Line 14: Transfer the additional tax to Schedule 2, Line 17 (Form 1040) for the adjustment year return
• Pay interest on the additional tax, interest runs from the due date of the reviewed year return to the due date of the adjustment year return

Why This Matters for Partners

Partners in BBA partnerships must understand that:

• They may receive a push-out statement years after the original tax year being audited
• Their cash flow obligations depend on whether the partnership elects to push out, if it does not, the partnership pays and may seek contribution from partners separately
• The Partnership Representative's decisions bind ALL partners, including those who disagree
• Interest accrues from the reviewed year, which may be 2 to 4 years before the adjustment year

Frequently Asked Questions

Written by

Ankit Sarawagi, CPA, CA, MBA

Ankit leads the finance team at Profitjets, where he has worked with 500+ businesses across the US on bookkeeping, tax and CFO-level strategy. He writes about the habits that keep small business books accurate all year. Connect on LinkedIn