Checklist · Tax

Preparing for a Partnership Audit or Making a Push-Out Election: A Practical Checklist

26 U.S.C. § 701

Type: Checklist
Jurisdiction: National
Date: 2024-09-09
Topic: Tax

This checklist covers the four moments that determine how a partnership audit turns out: formation and annual filing, the arrival of an audit notice, the modification and election windows, and any transfer of a partnership interest. The formation track screens opt-out eligibility, designates a representative deliberately, and installs the four agreement provisions that reallocate a burden the tax law deliberately misassigns. The audit track begins the partner data collection that both modification and the push-out election depend on, years before the deadlines that require it. The election track walks the imputed underpayment computation, each available modification, and the push-out decision. The transfer track covers buying, selling, and redeeming interests. Each item names the authority and the document that proves it.

Preparing for a Partnership Audit or Making a Push-Out Election: A Practical Checklist

Tax > Partnership Audits, the Centralized Regime, and Push-Out Elections | Published 9 September 2024 - Updated 30 May 2026 | UpLaw - uplaw.us

How to use this checklist

Track A is formation and annual filing. Track B is the arrival of an audit notice. Track C is modification and the election. Track D is transfers. Track E is judicial review.

Track A is where the outcome is actually determined. By the time Track C arrives, the available choices are fixed by decisions made years earlier.

Authorities: 26 U.S.C. § 701, 26 U.S.C. § 702, 26 U.S.C. § 703, 26 U.S.C. § 704, 26 U.S.C. § 705, 26 U.S.C. § 706, 26 U.S.C. § 761 (subchapter K); 26 U.S.C. § 6221 (entity-level determination; opt-out); 26 U.S.C. § 6222 (consistency); 26 U.S.C. § 6223 (representative; binding effect); 26 U.S.C. § 6225 (imputed underpayment; modification); 26 U.S.C. § 6226 (push-out); 26 U.S.C. § 6227 (adjustment request); 26 U.S.C. § 6231 (notices); 26 U.S.C. § 6232 (assessment); 26 U.S.C. § 6234 (judicial review); 26 U.S.C. § 6241 (definitions); 26 U.S.C. § 6031 (returns); 26 U.S.C. § 6698 (late filing penalty); 26 U.S.C. § 6662, 26 U.S.C. § 6664 (penalties and reasonable cause); 26 U.S.C. § 7442, 26 U.S.C. § 7482 (Tax Court and appeal); 26 C.F.R. Part 301, 26 C.F.R. Part 1.

Track A, Step 1: Opt-out eligibility screen (run annually)

[ ] Count the statements required to be furnished for the year. One hundred or fewer?
[ ] List every partner and classify each:
- [ ] Individual — eligible
- [ ] C corporation — eligible
- [ ] Foreign entity treated as a C corporation — eligible
- [ ] S corporation — eligible (its shareholders count toward the statement total)
- [ ] Estate of a deceased partner — eligible
- [ ] Partnership — DISQUALIFYING
- [ ] Trust — DISQUALIFYING
- [ ] Disregarded entity — DISQUALIFYING
- [ ] Nominee — DISQUALIFYING
[ ] If eligible, make the election under 26 U.S.C. § 6221 on a timely filed return, disclosing each partner's name and identification number.
[ ] Notify each partner of the election.
[ ] Confirm the agreement prohibits transfers to ineligible partners without consent. One transfer destroys eligibility.
[ ] Record the trade-off in the file: partner-level examinations mean multiple proceedings and no global settlement.

Track A, Step 2: Partnership representative designation

[ ] Designate on the return under 26 U.S.C. § 6223. Do not default to the accountant without discussion.
[ ] Confirm substantial presence in the United States.
[ ] If the representative is an entity, name a designated individual.
[ ] Confirm the designation is valid; if it is not, the government may select one.
[ ] Record in the file that the representative has sole authority and that all partners are bound.
[ ] Identify conflicts: the representative is usually the sponsor, whose interests diverge from limited partners' on the push-out question.

Track A, Step 3: The four agreement provisions

Representative provisions

[ ] Who serves; qualifications; successor designation; removal.
[ ] Duty to notify all partners promptly of any notice under 26 U.S.C. § 6231.
[ ] Consent thresholds for: extending the limitations period; settling above a defined amount; making or declining the push-out election.
[ ] Standard of care and indemnification.
[ ] Obligation to pursue modification and to request partner information.

Cooperation covenant

[ ] Binds partners and former partners.
[ ] Requires the specific data: entity type, rate status, tax-exempt status, character, passive loss position, willingness to file amended returns.
[ ] States a deadline measured from the request.
[ ] Supplies a remedy: indemnity, offset against distributions, or liquidated damages.
[ ] Survives transfer, withdrawal, redemption, and dissolution.

Allocation covenant

[ ] States who bears an imputed underpayment paid at the partnership level.
[ ] Chooses a mechanism: charge against reviewed-year capital accounts; former partner indemnity; withholding from distributions; adjustment of current accounts.
[ ] Says something. The statutory default charges current partners.

Push-out covenant

[ ] Required, permitted, or subject to consent.
[ ] Consider requiring a push-out unless a defined supermajority agrees otherwise.

Conforming documents

[ ] Transfer agreements, redemption agreements, and subscription documents incorporate the cooperation and indemnity obligations.
[ ] Tax distribution provisions address funding partner-level push-out liabilities.

Track A, Step 4: Every filing season

[ ] Re-run the opt-out eligibility screen.
[ ] Confirm the representative designation is current and valid.
[ ] File on time — 26 U.S.C. § 6698 penalties are computed per partner per month.
[ ] Confirm statements to partners under 26 U.S.C. § 6031 are complete and timely.
[ ] Confirm allocations satisfy 26 U.S.C. § 704 and that the substantial economic effect analysis is documented.
[ ] Maintain the 26 U.S.C. § 6664 reasonable cause record at the partnership level — written advice, facts disclosed to the adviser, contemporaneous memoranda, valuations, substantiation.

Track B: On the notice of administrative proceeding

Day 1–5

[ ] Confirm which year is under examination and identify the reviewed year and the likely adjustment year under 26 U.S.C. § 6241.
[ ] Confirm the representative designation for the reviewed year.
[ ] Notify all current partners and all reviewed-year partners, whether or not the agreement requires it.
[ ] Engage counsel; confirm who communicates with the examiner.
[ ] Review the partnership agreement. If the four provisions are missing, amend for future years now.
[ ] Confirm whether an administrative adjustment request under 26 U.S.C. § 6227 is still available. It is not, once this notice has issued for the year.

Week 1–4 — the partner data request

[ ] Build the reviewed-year partner roster with ownership percentages and dates.
[ ] For tiered partners, obtain the full organizational chart and each tier's partner roster.
[ ] Send the data request to every reviewed-year partner and every tier:
- [ ] Entity type
- [ ] Tax-exempt status
- [ ] Marginal rate for the reviewed year
- [ ] Character utilization (capital gain, qualified dividends)
- [ ] Passive activity position
- [ ] Willingness to file amended returns
- [ ] Current contact information
[ ] Invoke the cooperation covenant, citing the remedy.
[ ] Track responses; escalate non-responders early.
[ ] This is the single highest-value step in the entire process, and its runway is now, not at the proposed adjustment.

Ongoing

[ ] Assemble the 26 U.S.C. § 6664 reasonable cause record: written advice, evidence that full facts were disclosed to the adviser, contemporaneous memoranda, valuation reports and appraiser qualifications, substantiation, and any disclosure filed with the return.
[ ] Note that 26 U.S.C. § 6662 penalties and the reasonable cause defense are determined at the partnership level — individual partner reliance does not help.
[ ] Track any request to extend the limitations period; confirm the agreement's consent threshold before the representative agrees.
[ ] Anticipate an alternative determination that no partnership exists; assemble evidence of real capital, risk, activity, and participation per Commissioner v. Culbertson and Commissioner v. Tower.

Track C, Step 1: Compute the imputed underpayment

[ ] Group the adjustments under 26 U.S.C. § 6225: reallocation, credit, creditable expenditure, residual.
[ ] Subgroup by character and by partner-level limitations.
[ ] Apply netting only within groupings and subgroupings. A decrease in one grouping does not offset an increase in another.
[ ] Flag reallocation adjustments: moving income between partners produces an imputed underpayment on the increase with no offset for the decrease.
[ ] Multiply the net increase by the highest rate in effect for the reviewed year.
[ ] Add or subtract credit adjustments.
[ ] Add 26 U.S.C. § 6662 penalties and interest from the reviewed year's due date.
[ ] Record the gross number and identify every element that modification can reduce.

Track C, Step 2: Request modification

[ ] Calendar the modification window from the notice of proposed partnership adjustment. It is short and extendable only with consent.
[ ] Amended returns — identify partners willing to file for the reviewed year and pay; confirm the reduction.
[ ] Alternative procedure — partners pay and provide statements without full amended returns.
[ ] Tax-exempt partners — remove the allocable portion.
[ ] C corporation partners — substitute the lower rate.
[ ] Character — substitute lower rates for capital gain and qualified dividend income allocable to individuals.
[ ] Partner-level limitations — passive activity and similar.
[ ] Closing agreements with specific partners.
[ ] Tiered structures — obtain information from every tier; an uncooperative upper tier defeats modification for everyone below.
[ ] Assemble and submit supporting statements within the window.
[ ] Record which partners did not cooperate and the cost of their non-cooperation; invoke the covenant remedy.

Track C, Step 3: The push-out decision

[ ] Calendar the election window from the notice of final partnership adjustment under 26 U.S.C. § 6226. Short, and irrevocable without consent.
[ ] Model Path A — partnership pays the modified imputed underpayment; borne by adjustment-year partners.
[ ] Model Path B — statements to reviewed-year partners; each computes the correction to the reviewed year plus intervening years, at a higher interest rate.
[ ] Compare aggregate tax, interest, and — critically — who bears it.
[ ] Confirm whether the agreement requires, permits, or conditions the election.
[ ] Obtain any required partner consent before the window closes.
[ ] If electing, prepare statements for every reviewed-year partner and file them.
[ ] For tiered partners, confirm each tier's own push-out deadline and notify them in writing. A tier that fails to act pays.
[ ] Confirm basis and intervening-year effects under 26 U.S.C. § 705 and 26 U.S.C. § 706.
[ ] If not electing, confirm the allocation covenant's mechanism for charging the payment to the right partners.
[ ] Confirm assessment and collection posture under 26 U.S.C. § 6232.

Track C, Step 4: Consistency issues

[ ] Confirm every partner is reporting consistently with the partnership return under 26 U.S.C. § 6222.
[ ] If a partner disagrees with a statement, advise that the only options are (a) report consistently and seek correction through the partnership, or (b) file a notice of inconsistent treatment.
[ ] Warn that a silent inconsistency produces a computational adjustment assessed without deficiency procedures.
[ ] Where a corrected statement is issued, confirm partners amend or that the correction is handled through 26 U.S.C. § 6227.

Track D: Transfers

Buying an interest

[ ] List open years and their limitations periods, including any extension granted by the representative.
[ ] Confirm whether any notice of administrative proceeding has issued.
[ ] Confirm whether an opt-out election is in place, and whether the buyer's own status (trust, disregarded entity, partnership) would destroy eligibility.
[ ] Identify the partnership representative and review the agreement's constraints.
[ ] Confirm the allocation covenant charges pre-admission adjustments to reviewed-year partners.
[ ] Confirm the cooperation covenant binds the sellers after exit.
[ ] Review any administrative adjustment request filed or contemplated.
[ ] Negotiate a holdback or specific indemnity for pre-closing adjustments.
[ ] Confirm basis and capital account under 26 U.S.C. § 705.

Selling an interest

[ ] Confirm what cooperation obligations survive, and for how long.
[ ] Confirm who pays the cost of any amended returns you may be asked to file.
[ ] Confirm whether a push-out statement can reach you after exit; price it.
[ ] Do not rely on a general release; the redemption or transfer agreement must address the regime expressly.

Redemptions

[ ] Address whether the departing partner remains liable for imputed underpayments attributable to their reviewed-year income.
[ ] Address cooperation and indemnity survival.
[ ] The most common failure in practice is a redemption agreement that releases everything, leaving remaining partners to absorb the adjustment.

Fund-of-funds investments

[ ] Obtain, in writing, how each tier handles the regime.
[ ] Confirm lower-tier agreements contain cooperation covenants.
[ ] Build the reviewed-year organizational chart before investing.

Track E: Judicial review

[ ] Calendar the petition period from the notice of final partnership adjustment under 26 U.S.C. § 6234.
[ ] Choose the forum: Tax Court, district court, or the Court of Federal Claims.
[ ] Note that filing outside the Tax Court requires depositing the imputed underpayment.
[ ] Confirm the partnership petitions through its representative; individual partners have no independent right and are bound under 26 U.S.C. § 6223.
[ ] Review 26 U.S.C. § 7442 for jurisdiction and 26 U.S.C. § 7482 for appellate review.
[ ] If a deadline has passed, evaluate Boechler, P.C. v. Commissioner — a Tax Court filing deadline held non-jurisdictional and subject to equitable tolling.
[ ] Evaluate penalty issues in light of United States v. Woods, which permits partnership-level determination of a penalty's applicability.
[ ] Evaluate limitations arguments in light of United States v. Home Concrete & Supply, LLC, holding a basis overstatement is not an omission from gross income.
[ ] Evaluate whether any adverse position rests on regulatory rather than statutory text; under Loper Bright Enterprises v. Raimondo courts exercise independent judgment on statutory meaning, and Mayo Foundation for Medical Education & Research v. United States supplied the prior framework.
[ ] Where the government asserts the partnership was a sham, marshal evidence under Gregory v. Helvering, Frank Lyon Co. v. United States, Knetsch v. United States, and Moline Properties, Inc. v. Commissioner.
[ ] Address realization and character questions travelling with the adjustments under Cottage Savings Assn. v. Commissioner and Arkansas Best Corp. v. Commissioner.

Deadline card

Fill in as each notice arrives and circulate to the representative and counsel.

Event	Deadline	Action required
Notice of administrative proceeding (26 U.S.C. § 6231)	—	Notify partners; send data request; 26 U.S.C. § 6227 window now closed
Notice of proposed partnership adjustment	modification window	Request modification under 26 U.S.C. § 6225
Notice of final partnership adjustment	push-out window	Election under 26 U.S.C. § 6226
Same notice	petition period	Judicial review under 26 U.S.C. § 6234
Any limitations extension request		Agreement consent threshold

Note. The modification and election windows are short and are measured from notices that arrive without warning. The work that fills them — partner data collection — must already be done.

Partner data request template

To: [Reviewed-year partner] Re: [Partnership], tax year [__] — request for information under the partnership agreement

The Partnership has received notice that its [__] tax year is under examination. Under [Section ] of the Partnership Agreement, partners and former partners are obligated to provide the information below within [] days. This information may substantially reduce the tax the Partnership owes, and may reduce your own exposure.

Please provide:

Your entity type for the [__] tax year (individual, C corporation, S corporation, partnership, trust, exempt organization, other).

Whether you were exempt from tax on partnership income for that year, and the basis.

Your marginal federal rate for that year.

Whether you used capital gain or qualified dividend character from the Partnership that year.

Whether passive activity or other limitations applied to your share.

Whether you are willing to file an amended return for [__] if requested, and to pay the associated tax.

Current address, telephone, and email.

If you held your interest through another entity, please forward this request to that entity and provide its contact information.

Imputed underpayment worksheet

Grouping	Net adjustment	Netting permitted within?	Amount subject to tax
Reallocation		separate — no offset
Credit
Creditable expenditure
Residual — ordinary
Residual — capital
Total

Line	Amount
Total subject to imputed underpayment
× highest reviewed-year rate
Gross imputed underpayment
Less tax-exempt partner share
Less C corporation rate differential
Less character rate differential
Less amended returns filed
Modified imputed underpayment
Plus 26 U.S.C. § 6662 penalties
Plus interest from the reviewed year due date
Path A total (partnership pays)
Path B total (push-out, higher interest)
Who bears each	A: adjustment-year partners · B: reviewed-year partners

Final verification

[ ] Opt-out eligibility screened this year and the election made or consciously declined.
[ ] Representative designation valid, with a designated individual if an entity.
[ ] All four agreement provisions present and current.
[ ] Transfer restrictions in place if opt-out matters.
[ ] Partner data collection started at the notice of administrative proceeding.
[ ] 26 U.S.C. § 6664 reasonable cause record built at the partnership level.
[ ] Modification requested within the window.
[ ] Push-out decision modeled and made within the window.
[ ] Tiered partners notified of their own deadlines.
[ ] Redemption and transfer documents carry the covenants forward.

Preparing for a Partnership Audit or Making a Push-Out Election: A Practical Checklist

How to use this checklist

Track A, Step 1: Opt-out eligibility screen (run annually)

Track A, Step 2: Partnership representative designation

Track A, Step 3: The four agreement provisions

Track A, Step 4: Every filing season

Track B: On the notice of administrative proceeding

Track C, Step 1: Compute the imputed underpayment

Track C, Step 2: Request modification

Track C, Step 3: The push-out decision

Track C, Step 4: Consistency issues

Track D: Transfers

Track E: Judicial review

Deadline card

Partner data request template

Imputed underpayment worksheet

Final verification

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