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Partnership - Audit Technique Guide - Chapter 13 - TEFRA (Revised 10-2007)

NOTE: This guide is current through the publication date.  Since changes may have occurred after the publication date that would affect the accuracy of this document, no guarantees are made concerning the technical accuracy after the publication date.

Each chapter in this Audit Techniques Guide (ATG) can be printed individually. Please follow the links at the beginning or end of this chapter to return to either the previous chapter or the Table of Contents.

Chapter 9 | Table of Contents

Revised 10/2007

Chapter 13 - TEFRA


This chapter is designed to give the reader a basic understanding of TEFRA (the Tax Equity and Fiscal Responsibility Act of 1982) and is not intended to be a fully comprehensive work. Certain topics are covered by referencing statutes, regulations, or the Internal Revenue Manual (IRM) rather than by way of narrative text.

The Resources section lists several published sources which, when viewed together, should present a fully comprehensive and up-to-date picture of TEFRA.  In addition, there is a web-based self-study course, TEFRA Basics, which can be taken online at the Enterprise Learning Management System (ELMS) website. Once you have registered and created a profile on the ELMS website, TEFRA Basics can be found as ELMS Component Number: 11381.   Another important TEFRA tool for the examiner is the IRS Intranet consolidated TEFRA website.

This chapter will address TEFRA only as it applies to TEFRA partnerships and TEFRA related partners.  It is important to note that Limited Liability Companies (LLCs) and Real Estate Mortgage Investment Conduits (REMICs) that file a Form 1065, U.S. Return of Partnership Income, and their respective members are also subject to TEFRA administrative and judicial procedures and treated in a manner similar to TEFRA partnerships and their partners.  IRC section 6244 extended the TEFRA partnership provisions to S corporations for tax years beginning after 1982. The Small Business Job Protection Act of 1996 repealed the TEFRA administrative and judicial procedures for S corporations for tax years beginning after Dec. 31, 1996. 

TEFRA as it applies to S corporations and REMICs will not be covered in this chapter.  Non-TEFRA partnership statute considerations and procedures are also not covered in this overview.  The procedural differences between TEFRA and non-TEFRA are significant.  For non-TEFRA considerations, examiners should consult IRM 4.31.5 & 6 of the Pass-Through Entity Handbook, and IRM 4.29, Partnership Control System (PCS) Handbook.

IRC sections 6221 through 6234 govern audit, administrative, and judicial procedures, as well as certain filing requirements to be used by entities qualifying as TEFRA partnerships.  These procedures are commonly referred to as “unified proceedings”, “TEFRA proceedings”, and “partnership proceedings.”  These Code sections provide that examination, administrative, and judicial actions are to be conducted at the partnership-level.

Final Regulations were issued and are effective for taxable years beginning on or after October 4, 2001 (66 FR 50541, Treas. Reg. sections 301.6221-1 through 301.6233-1).  For taxable years beginning before October 4, 2001, the Temporary Treasury Regulations continue to govern (see Treas. Reg. section 301.6221-1(f)).  The Final Treasury Regulations are substantially similar to the temporary regulations.


It is critical to the examination of a partnership that the examiner recognize whether he or she is dealing with a TEFRA or non-TEFRA partnership.  Failure to properly identify a TEFRA pass-through entity in a timely manner will impact the statute of limitations, proper initiation of the examination, and other administrative considerations at both the entity and partner levels.

The identification of a TEFRA entity is essentially governed by IRC section 6231.  While this section of the Code addresses conditions under which the partnership return will be exempted from being considered a TEFRA entity; and therefore, exempt from TEFRA procedures, we will focus on what makes a partnership a TEFRA entity.

Generally, a partnership with 11 or more partners at any one time during the partnership’s tax year is a TEFRA partnership (Treas. Reg. section 301.6231(a)(1)-1(a)(1) and Temp. Treas. Reg. section 301.6231(a)(1)-1T(a)(1)).

CAUTION:  A TEFRA/non-TEFRA determination, often referred to as the small partnership exception test, must be made for each separate tax year being examined.  The phrase “tax year” is meant to encompass not only calendar and fiscal year tax periods, but also short tax periods that result from events such as technical terminations under Treas. Reg. section 1.708-1(b).  If an examiner finds one or more short periods when examining a partnership, they should consult with their local TEFRA coordinator.

CAUTION:  For the TEFRA/non-TEFRA determination, a husband and wife, each having their own partnership interest (i.e. separate Schedules K-1), are considered to be one partner, irrespective of their filing status, for the small partnership exception test.  A jointly held interest (one Schedule K-1) also qualifies as one partner for making this determination (see IRC sections 6231(a)(1)(B) and (12), Treas. Reg. 301.6231(a)(1)-1(a)(1), and Temp. Treas. Reg. 301.6231(a)(1)-1T(a)(1)).

CAUTION:  An individual who has died during the tax year and their estate, each of whom is represented by a separate Schedule K-1, are considered one partner for the TEFRA/non-TEFRA determination. 

A partnership containing fewer than 11 partners, commonly referred to as a small partnership, will qualify as a TEFRA partnership if it meets any of the following requisites:

It has as a partner any one of the following:

  • Partnership.
  • Limited liability Company (LLC) which files a Form 1065 or is treated as a disregarded entity (see Revenue Ruling 2004-88) for federal tax purposes.
  • Trust (any type, including Grantor Trusts and grantor type trusts, even if the Schedule K-1 contains the SSN of the grantor).
  • Nominee.
  • Nonresident alien individual.
  • S corporation.

CAUTION: For tax years ending on or before August 5, 1997, C corporations, as partners, make the entity they were invested in a TEFRA partnership. The Taxpayer Relief Act of 1997 (TRA ’97) changed the TEFRA/non-TEFRA criteria to allow C corporations to be partners without automatically making the partnership TEFRA.  This change became effective for tax years ending after August 5, 1997. 

CAUTION: For TEFRA/non-TEFRA determination purposes only, a C corporation is considered to be any corporate entity that is not an S corporation regardless of whether they are taxable under subchapter C.  As an example, a foreign corporation is usually considered a C corporation for this determination.

CAUTION:  If Schedule K-1 identifies the entity type of the partner to be a corporation, without specifying that the partner is an S corporation, the examining agent should secure an IDRS print to make this determination.   Since a partnership may be TEFRA one year and non-TEFRA the next, the tax year researched for the partner must be the same tax year as the partnership being examined.  This is also recommended where the partner is identified as an LLC in order to confirm whether the member has filed a Form 1120 (U.S. Corporation Income Tax Return), Form 1065, or is a disregarded entity for federal tax purposes.

Prior to enactment of TRA ’97, a partnership of fewer than 11 partners qualified as a TEFRA entity if it failed the “same share test,” (see Temp. Treas. Reg. section 301.6231(a)(1)T-1(a)(3)).  The same share test was repealed by TRA ’97 and no longer applies for tax years ending after August 5, 1997. 

A partnership that does not otherwise qualify for TEFRA treatment can elect to be treated as a TEFRA partnership (see IRC section 6231(a)(1)(B), Treas. Reg. section 301.6231(a)(1)-1(b), and Temp. Treas. Reg. section 301.6231(a)(1)-1T(b)). 

A small partnership can make this election by filing Form 8893, Election of Partnership Level Tax Treatment, or attaching an election statement to the partnership return for the first tax year for which the election is to be effective.  This election must be signed by all partners who were partners during the partnership’s tax year.  Once this election is made, it may not be revoked without IRS consent (see Form 8894, Request to Revoke Partnership Level Tax Treatment Election).  Even when the election is revoked, any prior tax years that were subject to TEFRA procedures remain subject to TEFRA.  

CAUTION:  For 2004 and subsequent tax years, checking the “yes” box on question #4 of Schedule B of Form 1065 which asks the question, “Did the partnership file Form 8893, Election of Partnership Level Tax Treatment, or an election statement under section 6231(a)(1)(B)(ii) for partnership-level tax treatment, that is in effect for this tax year?” does not constitute a TEFRA election.  For tax years prior to 2004, checking the “yes” box on question #4 of Schedule B of Form 1065 which asks the question, “Is this partnership subject to the consolidated audit procedures of sections 6221 through 6233?” also does not constitute a valid TEFRA election.  Nor does the identification of a TMP at the bottom of Schedule B, in and of itself, constitute a proper TEFRA election.

CAUTION:  In instances where the partnership would not appear to qualify as a TEFRA entity but still designates a TMP on the Form 1065 or responds positively to question #4 on Schedule B, the examiner should inquire as to whether there is a TEFRA election in effect.  The examiner should secure the partnership’s file copy of the election and determine if the election is valid under Treas. Reg. section 301.6231(a)(1)-1(b)(2).  If the election is determined to be invalid, the partnership is not a TEFRA entity.  If the election is determined to be valid, attach a copy of the election to the partnership tax return and document this fact in the case file.

For tax years ending on or before August 5, 1997, the Service could not rely solely on the information contained on the Form 1065 when making a TEFRA/non-TEFRA determination.  For tax years ending after August 5, 1997, information reflected on the Form 1065 can be relied on for determining if the TEFRA procedures apply.  Under the new rules, Service personnel must be reasonably assured that the information on the partnership return is correct (IRC section 6231(g)). 

To meet the reasonable determination standard and as a best practice, additional information should be secured whenever possible when making the TEFRA/non-TEFRA determination for each tax year.  This reasonability factor is likely to be a source of litigation; therefore, care should be taken when applying it.   If IRC section 6231(g) is used in the examiner’s TEFRA/non-TEFRA determination, it should be reviewed by the local TEFRA coordinator and clearly documented in the workpapers.

CAUTION:  Based on the changing number or type of partners within the partnership, as well as changes in the law, a partnership may qualify as a TEFRA partnership in one tax year, while being treated as a non-TEFRA partnership in another.  All qualifying tests should be applied to each tax year of the partnership.  As previously mentioned, this includes short tax periods.

Electing Large Partnerships (ELPs) file Form 1065B, U.S. Return of Income for Electing Large Partnerships.   ELPs and their partners are subject to a special form of unified proceeding.  They are not subject to TEFRA Code sections 6221-6234 (see IRC section 6240(b)(1)).  The TRA’97 established audit procedures for ELPs by creating new IRC Code sections 6240-6255.  These new sections are effective for partnership tax years beginning after December 31, 1997.  Due to the complex nature and potential administrative burden when examining an ELP, Examiners should review the provisions of IRC sections 771-777 and 6240-6255 before commencing an ELP examination.

CAUTION:  If an ELP is a partner in a TEFRA partnership which is itself not an ELP, the TEFRA Code sections will apply to items of the ELP investor which are partnership items with respect to the TEFRA partnership (see IRC section 6240(b)(2)).


The proper designation and identification of a qualified TMP is critical.   An improper designation or identification of the TMP can invalidate a statute extension or the binding effect of agreements on non-notice partners.  In short, an invalid TMP is the equivalent of no TMP.    It is not uncommon to see a non-TEFRA partnership list a partner as TMP on their Form 1065 Schedule B.  It is important to note that the position of TMP exists only for TEFRA entities; therefore, a non-TEFRA partnership cannot have a TMP.

A TMP can be designated by the partnership, the IRS, or the Tax Court.  The process by which a TMP is designated is covered in section 301.6231(a)(7)-1 of the Treasury Regulations. The process by which a TMP is designated for an LLC is covered by section 301.6231(a)(7)-2 of the Treasury Regulations.

When the partnership fails to designate a TMP, or the designation has been terminated and the partnership has not made a subsequent designation, a new TMP should be solicited from the partnership.  If the partnership cannot or will not designate a new TMP, IRC section 6231(a)(7)(B) and Treas. Reg. section 301.6231(a)(7)-1(m) provide that the general partner having the largest profits interest is the TMP.  This is commonly referred to as the largest profits interest rule.  Paragraph (m)(2) of this section contains instructions for calculating the profits interest of the general partners and provides that when more than one partner has an identical interest, the TMP will be the partner whose name appears first alphabetically (see IRM

When it is impracticable to apply the largest profits interest rule, the Commissioner will select as TMP any person who was a general partner at any time during the taxable year and owned a profits interest.  If a general partner cannot be selected, the Commissioner will select any partner who was a partner in the partnership at the close of the taxable year under examination. 

The Service’s selection of the TMP is covered by Treas. Reg. sections 301.6231(a)(7)-1(n) through (r) and Temp. Treas. Reg. section 301.6231(a)(7)-1T(p)(2) and (r)(1).   The examiner should also refer to IRM   The criteria for selection is contained in Treas. Reg. section 301.6231(a)(7)-1(q).  Note that 30 days prior to making the TMP designation, the Service must notify the partnership by mail of the intent to select a TMP (see Treas. Reg. section 301.6231(a)(7)-1(r)(2)).  This notification is designed to give the partnership a window of opportunity to designate their own TMP.

The qualifications required to be designated by the partnership as the TMP are set forth in Treas. Reg. section 301.6231(a)(7)-1(b).

Events which serve to terminate the TMP designation are listed in Treas. Reg. sections 301.6231(a)(7)-1(l) and 301.6231(c)-4 through 301.6231(c)-8 and Temp. Treas. Reg. section 301.6231(c)-4T through 8T.

CAUTION:  When a terminating event occurs, the partner's status as TMP terminates.  All acts performed by the TMP prior to the occurrence of the terminating event remain valid; however, any subsequent actions are not.  The designation of a new TMP will be required before securing statute extensions from a new TMP.

CAUTION:  Though statute extensions and waivers executed by the prior TMP remain effective subsequent to the termination event, when a TMP’s status has terminated, the examiner should secure new Powers of Attorney (POA), Forms 2848, Power of Attorney and Declaration of Representative), from the replacement TMP.

CAUTION:  As previously mentioned, the TMP designation entered on Schedule B of Form 1065 should not be accepted automatically.  For each separate tax year, the examiner must verify that the TMP designated is qualified and that no terminating event has occurred.

CAUTION:  The TMP designation is made on a tax year basis; therefore, in a multiple year examination, the examiner should not assume that the TMP for one tax year is necessarily the TMP for another.  The examiner must verify and validate the TMP designation for each tax year.


In a TEFRA examination, the IRS deals primarily with the TMP for all administrative and judicial proceedings.  The TMP is the main conduit of contact between the Service and the partners.

The authority and responsibilities of the TMP are set forth in Treas. Reg. sections 301.6223(g)-1 and 301.6230(e)-1.

CAUTION:  Generally, the IRS prefers the authority and responsibilities of the TMP not be delegated to a POA.  The execution of a standard Form 2848, will typically limit the POA’s role in a TEFRA exam to only providing and receiving information.  However, Treas. Reg. section 301.6229(b)-1 allows the partnership to authorize any person to extend the period described in IRC section 6229(a) – Period of Limitations for Making Assessment.  In such cases, the examining agent must verify that the partnership has complied with all of the requirements of Treas. Reg. section 301.6229(b)-1.

CAUTION:   A TEFRA Form 2848 is completed in a different manner than for non-TEFRA cases.  Treas. Reg. section 301.6223(c)-1(e) requires that a POA specify that it is for TEFRA purposes (see IRM for required TEFRA language used on TEFRA Forms 2848).


  • Partnership items:A partnership item is an item that is more appropriately determined at the partnership-level than at the partner-level (see IRC section 6231(a)(3)).
  • Non-partnership items:A non-partnership item is an item that is not a partnership item or is treated as other than a partnership item (see IRC section 6231(a)(4)).
  • Affected items:An affected item is a special type of non-partnership item that is affected by a partnership item (see IRC section 6231(a)(5)).

Partnership Items

Treas. Reg. section 301.6231(a)(3)-1 provides a listing of partnership items.

Partnership items are comprised of:

  • Items which appear on the partnership tax return.
  • Other issues which are more appropriately determined through an examination of the partnership’s books and records.

Items appearing on the partnership return are more or less obvious and can consist of items other than distributive share items of the partnership such as liabilities.  This includes determinations with respect to the amount of the liabilities, whether the liabilities are recourse or non-recourse, and changes from the preceding tax year.  Partnership items also include items which are utilized by the partners for computational purposes only. 

Some of these are:

  • Tax preference items used in the computation of alternative minimum tax.
  • Items entering into the partner’s calculation of the current deduction for investment interest.
  • Net earnings from self-employment used in the calculation of the partner’s liability for self-employment tax.

Other issues may consist of the identification of the character of a distribution.  Is it a distribution that is the equivalent of a withdrawal or is it a liquidating distribution or debt-financed distribution?  If property has been distributed, does it consist of “hot” and/or “cold” assets?  Without these characterizations being determined at the partnership-level, the partner would have no basis for characterizing the tax consequences of the distribution.

Partnership items can only be adjusted through a TEFRA partnership proceeding.  The TEFRA assessment statute, IRC section 6229, only applies to partnership items, affected items, and items which were once partnership items (converted items). 

Affected Items

As mentioned, an affected item is a special type of non-partnership item that is affected by a partnership item.  Examples of affected items are provided in Treas. Reg. section 301.6231(a)(5)-1.  Since an affected item is defined as any item which is affected by a partnership item, the path to identifying these items lies in an understanding of how partnership items can affect a partner’s tax return and tax liability.

A computational affected item is directly assessed where the effect of the partnership item on the partner’s tax liability can be computed mathematically without further determinations at the partner-level.  As an example, if the adjustment to a partnership item results in an increase to the partner’s adjusted gross income (AGI), any items on the partner’s tax return, the threshold for deductibility of which is governed by the reported amount of AGI, will be affected items. 

Directly assessed computational adjustments are also appropriate when items such as tax preference items, investment income, deductions, and interest are used for the calculation of alternative minimum tax and the currently allowable deductions for investment interest expense. 

If an affected item adjustment requires additional partner-level determinations before an assessment can be computed, that affected item is known as a non-computational affected item.  Non-computational affected items that are unagreed must be assessed through an affected item statutory notice of deficiency once the partnership proceedings are complete.

For taxable years ending on or before Aug. 5, 1997, penalties are affected items.  This type of affected item is subject to deficiency procedures (see IRC section 6230(a)(2)).

The Revenue Reconciliation Act of 1989 (RRA’89) consolidated penalties for negligence (see IRC section 6653), overvaluation (see IRC section 6659) and substantial understatement (see IRC section 6661) into IRC section 6662 referred to as the “accuracy related” penalty. 

Under TRA ’97, for partnership years ending after August 5, 1997, the applicability of penalties that are attributable to partnership items are treated in a manner similar to partnership items.  These penalties are reflected on Form 1065-A, and if unagreed, on Letter 1830, Notice of Final Partnership Administrative Adjustment (FPAA) (see Treas. Reg. section 301.6221-1(c) and (d)).  With regards to these penalties, partner-level defenses can only be raised through refund claims.

Innocent spouse relief is also an affected item.  Innocent spouse requests for relief from TEFRA proceedings will be considered only after there is a final determination concerning the treatment of partnership items (e.g. a settlement is entered into or the decision of the court becomes final). In addition, an innocent spouse request for relief will be considered for each assessment made, rather than limiting requests to one for each tax year (see IRM and

Section 1237 of the TRA’97 created a prepayment forum for raising the innocent spouse rules after a TEFRA proceeding, see IRC section 6230(a)(3). However, this provision is no longer operable, with the repeal of IRC section 6013(e). Subsequently, the RRA’98 also allowed spouses to raise innocent spouse defenses as part of IRC section 6015.

An adjustment in a TEFRA entity examination may have components that are both partnership and affected item in nature.  This kind of adjustment with multiple components is known as a bifurcated item.  The partnership components must be reflected on the Form 4605-A; and if unagreed, on the FPAA.  The affected item components must be reflected on an Affected Item Report (see IRM; and if unagreed, raised in an affected item statutory notice of deficiency once the partnership proceedings are completed.  

The following are examples of bifurcated items: 

Outside basis


  • Cash contributions.
  • Distributive items of income, losses and deductions.
  • Distributions.
  • Partner’s basis in contributed property (that is, IRC sections 704(c) and 722).


  • Price paid if interest purchased from another partner and no section 754 election.



  • Partner’s share of liabilities.
  • Nature of liabilities (recourse and non-recourse).


  • Partner’s obligation in respect of borrowed funds used in acquiring the partnership interest.
  • Outside basis determined at partner level.

Passive losses


  • Activity engaged in by the partnership (whether it is a rental activity).
  • Portfolio income.


  • Material participation.
  • Real estate professional.

Cancellation of indebtedness (COD)


  • Income from COD.


  • Exclusion under IRC section 108 -- For example, a determination of the extent to which the partner is insolvent, bankrupt, or elects to reduce basis can only be made at the partner-level.

In Roberts v. Commissioner, 94 T.C. 853 (1990), the issue was at-risk.  The Service had failed to examine the partnerships involved and the statute of limitations under IRC section 6229(a) had expired.  An examination at the partner-level revealed that the partner had entered into a series of side agreements which limited the exposure to debt/loss.  The partner took the position that the determination of amount at-risk under IRC section 465 was exclusively a partnership item (see Treas. Reg. section 301.6231(a)(3)-1(a)(1)(vi)(C)). 

The partner further stated that, as a consequence, the issue should have been raised in a TEFRA partnership proceeding.  The Service conceded the partnership-level components since the period for conducting a partnership proceeding had expired.  Nevertheless, the Service argued that it could still adjust the partner-level components through a statutory notice of deficiency.  The Service argued that “the existence of a partner-level, third party side agreement and its effect on a partner’s amount at-risk may be adjudicated as a partner-level determination in an affected item deficiency proceeding.”  The Court held that “the partner’s amount at-risk under IRC section 465 was not an item required to be determined by the partnership and, therefore, is not a “partnership item” within the meaning of IRC section 6231(a)(3).”  The Court also held that the Government’s “notice of deficiency making the at-risk disallowance at the partner level was appropriate.”

Non-Partnership Items

Partnership items become non-partnership items for any partner as a result of the occurrence of a conversion event (see IRC section 6231(b) and (c)).  Non-partnership items resulting from a conversion event, other than a settlement agreement, are assessed under normal deficiency procedures applied at the partner-level.  Once a partner’s partnership items convert to non-partnership items, the partner is no longer part of the TEFRA proceeding.  The statute of limitations for converted items is controlled under IRC section 6229(f) and/or section 6501.


Briefly, the statute of limitations for the TEFRA entity key case becomes the minimum period for assessing all of its partners for the related partnership and affected items.  This statute concept extends to direct investors and also extends to indirect investors through their interests in any pass-through entity that stands between the investor and the key case TEFRA entity.  The pass-through entity that is a direct or indirect investor in a TEFRA key case is commonly known as a tier

It is important to note, the statute of limitations established at the key case-level does not extend to independent issues raised on a tier entity’s own tax return.   For this situation, separate statute consideration must be given to the tier return as its own key case.  If the tier is itself a TEFRA entity, the statute of limitations will be extended at the entity-level under IRC section 6229.  If the tier partnership is not a TEFRA entity, separate statute extensions will be required for its investors under IRC section 6501. 

IRC section 6229 contains the rules for the TEFRA assessment statute as well as deviations which apply under a variety of circumstances.  In the case of a false or fraudulent partnership return, IRC section 6229(c)(1)(A) provides for an unlimited statute of limitations for any partner who signed, participated directly, or participated indirectly in the preparation of the return.  All other investors have a 6-year statute. 

In the case of a substantial omission of income (see IRC section 6229(c)(2)), a 6-year statute exists in place of the normal 3-year statute for all partners.  IRC sections 6229(c)(1)(A) and 6229(c)(3) and (4) provide for no limitation on the TEFRA assessment statute for certain partners responsible for the filing of a false return and all partners when the partnership fails to file a return.   

IRC sections 6229 and 6501 are not considered to be mutually exclusive.  The Service’s position is that IRC section 6229 was meant to extend and not shorten a partner’s IRC section 6501 statute. 

It is important to note that the Service takes a conservative approach to protecting statutes when working with TEFRA entitiesWhenever possible, the examiner should always protect the IRC section 6229 statute as if it were a separate statute.  This is usually accomplished with Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items, executed by the TMP on behalf of the TEFRA partners. 

In a recent court case, Ginsburg v CIR (127 T.C. No. 5), the court determined that IRC section 6229(b)(3)’s definition of tax attributable to partnership items included affected items when applied to IRC section 6501(c)(4). 

Based on this case and the Service’s conservative approach when securing statute extensions, examiners should use Form 872-I, Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, and Form 872-IA, Special Consent to Extend the Time to Assess Tax As Well As Tax Attributable to Items of a Partnership, in place of the more common Forms 872, Consent to Extend the Time to Assess Tax, and 872-A, Special Consent to Extend the Time to Assess Tax, when working with a taxpayer that has one or more investments (directly or indirectly) in an entity that files a Form 1065. 

In these situations, the examiner must first attempt to extend the statute of limitations using a Form 872-I or 872-IA.  If a taxpayer with partnership and/or LLC investment(s) refuses to sign a Form 872-I or 872-IA, the examiner should document this fact in the case file and immediately consult with both the local TEFRA coordinator and Counsel before securing a standard statute extension.


It is important to note that the examiner and their manager cannot make the decision to rely on the position that IRC sections 6229 and 6501 are not considered mutually exclusive.  Only Counsel can approve taking this position.  Therefore, it is critical when soliciting statute extensions where a taxpayer is an investor in one or more pass-through entities, that Forms 872-I or 872-IA should be used instead of the Forms 872 or 872-A.  Forms 872-I and 872-IA protect the partner’s IRC section 6501 and 6229 statutes simultaneously.


An Administrative Adjustment Request (AAR) can be either a claim or an amended return (also referred to as substitute for return treatment) for partnership items.  AARs are filed using Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, and checking Part I, Line 1, Box (b).  The TMP may file a partnership-level AAR and an investor may file a partner-level AAR.

IRC section 6227 contains the authority and procedures for AARs.  IRC section 6228 provides for judicial review where the AAR is not allowed in full. 

The period within which an AAR must be filed is governed by IRC sections 6227(a), (b) and (e).

Aside from statutory parameters, the AAR cannot be filed after the mailing of an FPAA to the TMP for the tax year in question (see IRC section 6227(a)(2)).

A superseding return is an amended return received on or before the due date of the original return.   An AAR cannot be treated as a superseding return.

TMP Filed AAR on Behalf of the Entire Partnership

As previously stated, an AAR can be filed by the TMP for the entire partnership.  This type of  AAR must be filed by the TMP on behalf of the partnership (see Treas. Reg. section 301.6227(c)-1(a)). Treas. Reg. section 301.6227(c)-(1)(a)(3) provides additional filing instructions and requires that the AAR be accompanied by revised schedules showing the effects of the proposed changes on each partner and an explanation of the changes.  An AAR package must also include the amended partnership return and revised Schedules K-1 for the affected partners.

As previously mentioned, the TMP may request that the AAR receive substituted return treatment (see IRC section 6227(c)(1)(A)).  When the AAR is filed in this manner, the Service may treat the changes shown on the AAR as corrections of mathematical or clerical errors appearing on the partnership return (see IRC section 6227(c)(1)(B)).  The IRS may credit or refund any overpayment of tax to the affected partner(s) based on the AAR or assess any resulting tax without a deficiency or partnership-level proceeding as long as no partner formally objects.

When an AAR is filed requesting substituted return treatment and a partnership proceeding under IRC section 6223 is not initiated, partner tax assessments can only be made after the affected partners are mailed a notice of the correction for the error; and no partners, within the allotted 60-day period, request that the correction not be made (see IRC section 6230(b)).  The receipt of an objection from one or more of the partners should be resolved through initiation of a partnership TEFRA proceeding.

CAUTION: When an AAR is filed with tax assessment consequences (meaning a tax increase for at least one partner), failure to request substituted return treatment will mean that the Service cannot assess tax without a partnership-level proceeding.

If the AAR does not have tax assessment consequences for any of the partners, requesting substituted return treatment will not be necessary.  If the AAR is accepted as filed, refunds can be made to partners without a partnership-level TEFRA proceeding.

When the AAR is not treated as a substituted return, the Service has three options under IRC section 6227(c)(2):

  1. Accept the AAR as filed and allow any refunds or credits due to the affected partners arising from the adjustments shown on the AAR (see IRC section 6227(c)(2)(B) for partners with converted items.).
  2. Conduct a partnership-level proceeding wherein nomal TEFRA procedures will apply.
  3. Take no action on the AAR 

If an AAR filed by a TMP is not allowed in full, or alternately, the Service takes no action on the AAR, IRC section 6228(a) provides for the filing of a petition by the TMP for an adjustment with respect to the partnership items reflected in the AAR.

IRC section 6228(a)(2) provides a time frame for filing the petition and can be extended by execution of Form 9248, Agreement to Extend the Time to File a Petition for Adjustment by the Tax Matters Partner (Person) With Respect to Partnership or Subchapter S Items.   Form 9247, Agreement to Extend the Time to File a Civil Action for Refund by Notice Partner (Shareholder) With Respect to Partnership or Subchapter S Items, would be used for a partner-level AAR.

Under IRC section 6228(a)(2)(B), a petition cannot be filed once Letter 1787, Notice of Beginning of Administrative Proceeding (NBAP), has been mailed to the partnership with respect to the tax year covered by the AAR.  In this case, the petition would then be filed under the provisions of IRC section 6226 once an FPAA is issued.

The partnership’s failure to keep the period for filing a petition open under IRC section 6228 will jeopardize the partners’ rights to receive refunds or credits (see IRC section 6230(d)).

The right to petition under IRC section 6228(a) is also available for AARs requesting substituted return treatment when the Service has either not granted the request for such treatment or has failed to take timely action on the request (see Treas. Reg. section 301.6227(c)-1(b)).

CAUTION:  A partnership-level AAR that the Service concludes should be accepted as filed must have a Partnership Control System (PCS) package submitted to link the affected partners.  If there will be no partnership proceeding, the examiner should use Form 8341, PCS Establish or Add Without Notice Generation, instead of Form 8340, PCS Establish or Add with Notice Generation.  The reason for this is that the NBAPs normally generated by PCS should not be mailed since there will be no partnership proceeding.  Failure to link the affected partners on PCS will result in inactivity at the partner-level.  No assessments, refunds, or credits will be made and this will give the appearance of “no action taken” on the AAR.

When working this type of AAR, an “in-house” Revenue Agent Report (RAR) should be prepared.  The RAR takes the partnership from the original return presentation to the amended return amounts as reflected in the AAR.  The RAR will become the basis for the closing package submitted to the TEFRA Campus Function (CTF).  Your CTF may allow you to attach the amended Schedules K-1 to the RAR in lieu of completing Form 886-Z, Partners or S Corporation Shareholders Shares Income.

CAUTION:  Prior to TEFRA, each partner was required to file an amended return to reflect changes made by the partnership on its amended return.  Under TEFRA, IRC section 6227 provides for a direct change to the tax liability of the partners by the filing of an AAR at the partnership-level.

Partnership-level AARs with tax assessment consequences are of special concern since the affected partners are not required to file their own amended tax returns (see IRC section 6230(d)(5)).  The examiner should not rely on the partners filing amended returns for tax increases related to a partnership-level AAR.   IRC section 6227 allows for assessments against the partners either through a partnership proceeding or substituted return treatment. 

CAUTION:  Allowance of an AAR that merely reallocates partnership items between the partners should not be treated as a “no-change,” especially in a partnership proceeding.  Partnership items include the partnership's aggregate and each partner’s share of items of income, gain, loss, deductions, or credits of the partnership, etc. (see Treas. Reg. section 301.6231(a)(3)-1(a)).  

AAR Filed by a Partner

A partner can also file an AAR.  If the partner’s AAR is based on the partnership having already filed an AAR of its own, the partner’s AAR should be suspended and the issues in the AAR addressed at the partnership-level through the partnership-level AAR.   

Optionally, the Service may:

  1. Treat a partner-level AAR as a non-TEFRA claim for refund;
  2. Assess any additional tax that results from the AAR;
  3. Mail to the partner a notice that all partnership items of the partner for the year to which such AAR relates shall be treated as non-partnership items (see IRC section 6231(b)(1)(A)), but only if no TEFRA proceeding has been initiated; or
  4. Conduct a TEFRA partnership-level proceeding. 

Once a notice of conversion is mailed, the related AAR is treated as a claim for credit or refund of an overpayment attributable to non-partnership items (see IRC section 6228(b)(1)(A)).  The request to have partnership items converted to non-partnership items should be routed to local Counsel by way of the local TEFRA coordinator.  The authority for granting the conversion is addressed in Delegation Order 4-19 and delegated to: SB/SE Area Directors of Compliance; LMSB Industry Directors; Appeals Director, Technical Services; and Appeals Directors, Field Operations.


IRC section 6222(a) requires that the partner’s treatment of partnership items be consistent with the treatment of that item by the partnership in all respects including the amount, timing and characterization of the item (see Treas. Reg. section 301.6222(a)-1(a)).  If a partner files a return which is not consistent with the partnership, the partner must inform the Service of the inconsistency (see IRC section 6222(b)).  The notice is given using Form 8082 by checking the Part I, Line 1, Box (a).  The form must identify all partnership items that are treated inconsistently.  If any item is omitted from Form 8082, that item will be subject to the treatment for non-notification inconsistent items (see Treas. Reg. section 301.6222(b)-2(b)).  Form 8082 must be attached to the partner’s tax return for the tax year in which they are treating a partnership item inconsistently. 

When the partner has given the Service proper notification of inconsistent treatment, an assessment of tax relating to the inconsistent item can only be made as a result of a partnership proceeding or by notifying the partner that all partnership items arising from that partnership will be treated as non-partnership items followed by the issuance of a statutory notice of deficiency (see Treas. Reg. section 301.6222(b)-2(a)) and IRC section 6231(b)(2)(A).   

If the partner has treated a partnership item inconsistently with the partnership and fails to notify the Service of the inconsistent treatment, the tax attributable to the inconsistent treatment can be directly assessed by computational adjustment if the computation is purely mathematical.  The partner may also be subject to a negligence penalty (see IRC section 6222(d)).  An indirect partner can be inconsistent with the pass-through partner (tier) as long as the indirect partner is consistent with the source/key case partnership (see Treas. Reg. section 301.6222(a)-2)).

CAUTION:  IRC section 6222(b)(1)(A)(ii) allows the partner to file a Form 8082 when the related partnership has not filed a return (which means the partner has not received a Schedule K-1).  In most instances the partner will report zero distributive items pending receipt of the Schedule K-1; however, some taxpayers will estimate the amounts they expect to see reflected when the Schedule K-1 is finally received. 

In cases where the partner has estimated the Schedule K-1 items, they will normally “true-up” those estimates at a later date.  Subsequent Schedule K-1 true-ups are AARs and covered under TEFRA partnership procedures and should not be worked under normal deficiency procedures.  If the examiner determines a taxpayer is involved in K-1 true-ups, they should contact their local TEFRA coordinator.


  • Usually, a TEFRA examination or partnership proceeding cannot be initiated (by the issuance of the TMP NBAP) if there are less than 12 months remaining on the TEFRA key case IRC section 6229 statute. This 12 month period includes any TEFRA statute extensions.If less than 12 months remains on the IRC section 6229 statute, approval by the examiner’s LMSB Director of Field Operations or SB/SE Area Director is required before the TEFRA examination can be initiated (see IRM is important to note the 12 month period relates to the issuance of the TMP NBAP and not when the examiner moved the case out of inventory into active status.
  • If the case is closed no-change within 45 calendar days of the issuance of an NBAP to the TMP, certain procedural requirements, such as linking the case on PCS and writing an RAR, can be avoided (see IRM and Treas. Reg. section 301.6223(a)-2(a)).
  • An FPAA should not usually be mailed when there has been less than 120 days from the date the last NBAP was mailed to a notice partner (see IRC section 6223(d)(1)). The 120 day statutory notification period begins with the issuance of the NBAP to the last identified notice investor. If this 120 day “waiting period” cannot be met, the Service must issue what are called Untimely Notice Letters.Letter 3857, Untimely Notice Letter (TEFRA Proceedings Ongoing), and Letter 3858, Untimely Notice Letter (TEFRA Proceedings Complete), will allow the affected notice partners the option of electing out of the TEFRA proceeding and worked under normal deficiency procedures (see IRM
  • An FPAA must be mailed to each notice partner no later than 60 days from the date the FPAA is mailed to the TMP (see IRC section 6223(d)(2)).

Mandatory Use of TEFRA Check Sheets

A requirement was put in place for the mandatory use of TEFRA Check Sheets for examination of any entity that filed a Form 1065.  These check sheets are designed to assist examiners and promote compliance with TEFRA procedures.   Examiners are required to prepare up to four check sheets to document the actions taken on a partnership examination.

Form 13813, Partnership Procedures Check Sheet is required to be completed as part of every partnership examination.  This form is used by the examiner to ensure proper TEFRA procedures are followed in a timely manner, and documents the determination of the TEFRA/Non-TEFRA status of the entity.

If the entity is determined to be subject to TEFRA procedures, the following check sheets also must be completed:

  1. Form 13814, TEFRA Linkage Package Check Sheet.This form is used by the examiner to initiate linking the TEFRA key case on the Partnership Control System (PCS).
  2. Form 13827, Tax Matters Partner (TMP) Designation Check Sheet. This form is used by the examiner in following proper procedure when a new TMP must be designated by the TEFRA entity or by the Service. This form may need to be used in conjunction with the TMP Qualification Check Sheet (Form 13828).
  3. Form 13828, Tax Matters Partner (TMP) Qualification Check Sheet.This form is used by the examiner to ensure the general partner or member manager identified as the TMP is properly qualified and his/her status as TMP has not terminated.

These check sheets can be accessed from the IRS Intranet consolidated TEFRA website. 


Supporting Law

IRC sections 771-777
IRC sections 6221 through 6234
IRC sections 6241-6245 (repealed by the Small Business Job Protection Act of 1996)
IRC sections 6240-6255 (current)
IRC section 6501
IRC sections 6653, 6659, 6661, 6662

Supporting regulations (not listed).

Tax Equity and Fiscal Responsibility Act of 1982
Subchapter S Revision Act of 1982
Small Business Job Protection Act of 1996
Taxpayer Relief Act of 1997
Revenue Reconciliation Act of 1989

Litigation Sources

LexisNexis, a division of Reed Elsevier Inc., Copyright © 2006
Westlaw, a Thomson West Product, Copyright © 2006

Research Materials

External Source Materials:

Audit Procedures for Pass-Through Entities: BNA Tax Management Portfolios No. 624-1st, U.S. Income Series Procedure and Administration, Copyright © 2005 Tax Management, Inc.

Partnerships -- Conceptual Overview: BNA Tax Management Portfolios No. 710-2nd, U.S. Income Series: Partnerships, Copyright © 2005 Tax Management, Inc.

IRS Source Materials:

Office of Chief Counsel, TEFRA UPDATE 1998, Tax Equity and Fiscal Responsibility Act, Document 10808 (4-98).

Kelly, Dennis M., as updated by Ransick, Mark, An Overview of TEFRA Partnership Proceedings, Including the Taxpayer Relief Act of 1997, and Restructuring and Reform Act of 1998, (October 1998).

IRM 4.29, Partnership Control System (PCS) Handbook.

IRM 4.31, Pass-Through Entity Handbook.

IRM 25.15, Relief from Joint and Several Liability

Revenue Ruling 2004-88

Delegation Order 4-19

Instructions to Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request.

Instructions to Form 1065, U.S. Return of Partnership Income.

Chapter 9 | Table of Contents


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Page Last Reviewed or Updated: 17-Oct-2016