The deregulation and burden reduction section of the 2025-2026 priority guidance plan could present both a problem and an opportunity for taxpayers and their advisers. On the one hand, a favorite regulation — or at least one most often relied upon — possibly being deemed unnecessary or altered in the name of deregulation could raise concern.
On the other hand, reopening finalized regulations for burden reduction could be a welcome surprise, at least to some taxpayers. What Treasury plans for the regulations under the Bipartisan Budget Act of 2015’s centralized partnership audit regime probably falls into the latter category. If that’s the case, it’s a reminder of the importance of comment letters.
After years of work by the IRS and Treasury, the BBA’s audit regime has in place most, if not all, of the regulations it needs to function efficiently. Even so, it has been in the priority guidance plan’s tax administration section for almost five years running, having fallen off the plan only once, in the 2021-2022 plan. The last time the IRS specified what it was working on regarding the BBA was in the 2020-2021 plan.
Reading the tea leaves suggests that — between the nearly consistent appearance of BBA guidance in recent guidance plans, the “skinny” nature of the 2025-2026 plan, and the designation under the new deregulation and burden reduction category — the guidance has probably been underway for a while. The influence of the One Big Beautiful Bill Act (P.L. 119-21) on the guidance plan coupled with the intentional reduction in the number of projects in the plan seems to have knocked projects of lower priority or those further from completion off the list. That the BBA survived is a sign that it’s likely a high priority for the IRS.
Treatment of Non-Income Adjustments
Taxpayers and their advisers who have been through the centralized partnership audit process, filed administrative adjustment requests, or worked on push-out elections have distinct ideas about what they would like to see in new rules.
Although the guidance plan doesn’t hint at what Treasury and the IRS intend to work on regarding the audit regime, one option has generated a considerable amount of interest. Reg. section 301.6225-1(d)(2)(iii) treats non-income adjustments as positive adjustments in computing the imputed underpayment. And it’s not particularly popular. It isn’t clear that the priority guidance plan item addresses the treatment of non-income adjustments, however.
Many comment letters have asked for changes to the treatment of non-income adjustments. The American Bar Association Section of Taxation listed amending the section 6225 regulations as a high priority and wrote that “the inclusion of non-income adjustments in the imputed underpayment is burdensome for the taxpayer and the Service to resolve using modifications or a push-out election.” (Letter to Acting Commissioner Michael Faulkender (May 30, 2025).)
The recommendation was based on a 2021 comment letter from the ABA that suggested revising the proposed regulations to “disregard all adjustments to non-income items for purposes of computing the imputed underpayment.” (Letter to Commissioner Charles P. Rettig from Julie A. Divola (Oct. 8, 2021).) The ABA explained that “an imputed underpayment that took into account adjustments to non-income items as positive adjustments would fail to reflect accurately the tax impact of the adjustments.” And the resulting “unrealistically high imputed underpayment” or uncertainty about the IRS’s later determination that non-income items should have been included could discourage partnerships from filing administrative adjustment requests, the ABA wrote.
The IRS’s interpretation that adjustments to non-income items are positive adjustments can distort the amount of income that should be recognized, said Rochelle Hodes of Crowe LLP. Changing the rules so that the imputed underpayment is less distorted would simplify and accelerate resolution and collection by the IRS of any taxes due, she added. The American Institute of CPAs noted in a June 2024 comment letter that “in many cases, inclusion of non-income items in the calculation of the imputed underpayment results in a tax liability when one would not normally exist or a tax liability that is much larger than would result under the application of general income tax principles.” (Letter to Aviva Aron-Dine, Marjorie A. Rollinson, and Daniel I. Werfel (June 28, 2024).) The AICPA asked for the revision of reg. section 301.6225-1 to exclude adjustments of non-income items in determining the imputed underpayment when there would be no current tax impact under substantive provisions of the tax law.
It’s also possible that the priority guidance plan reflects the argument that Treasury’s position on non-income adjustments runs afoul of the best-reading requirement of Loper Bright Enterprises Inc. v. Raimondo, 603 U.S. 369 (2024), by including unrealized partnership gains, which is beyond Treasury’s authority under the statute. (Prior coverage: Tax Notes Federal, Aug. 4, 2025, p. 745.) The April White House memorandum on repealing unlawful regulations identified Loper Bright as the first in a list of Supreme Court decisions under which existing regulations should be evaluated.
The survival of BBA guidance in the slimmed-down guidance plan was generally met with enthusiasm. Lee Meyercord of Holland & Knight LLP said she hoped the project showed that the officials in the IRS Office of Chief Counsel “are invested in a functioning, efficient BBA that produces an imputed underpayment that taxpayers are willing to pay because it is not significantly higher than what the partners would have paid.” She added that the burdens of time and expense imposed on taxpayers by the amended return modifications and processes for push-out elections can be dramatic compared with the size of adjustments. Meyercord said she hopes that the IRS is planning to address the problems in the calculation of imputed underpayments.
But a significant question remains if the IRS and Treasury change the treatment of non-income adjustments: What should they replace it with? “The IRS has to have a way to meaningfully adjust those items,” said Jennifer M. Black of Citrin Cooperman, adding that there hasn’t been a satisfactory alternative proposed by commentators. “If the non-income adjustments are not treated as positive and don’t result in an imputed underpayment, there are specific rules for adjustments that do not result in an imputed underpayment that don’t work well for non-income item adjustments,” Black said.
Other Candidates for Burden Reduction
There are other options for reducing administrative burdens as well. The AICPA’s June 2024 letter explained that the regime “has created an extreme administrative burden for the IRS, taxpayers and practitioners,” and identified multiple areas where regulations or procedural changes would help to alleviate the burden. The spring 2025 unified agenda of regulatory and deregulatory actions from the Office of Management and Budget’s Office of Information and Regulatory Affairs includes proposed regulations under section 6232 relating to the centralized partnership audit regime and basis and capital account guidance under sections 6225 and 6226 issued in 2018 (REG-118067-17). OIRA’s website lists an apparent placeholder date of May 2026 for both sets of guidance.
Black suggested that the IRS might choose to require push-out statements only for partners that have an allocable share of an adjustment, rather than all partners from the reviewed year. She added that the change would be a big burden reduction for partnerships and partners in some instances. For example, if a 50-person partnership had a reallocation between two partners but no change for anyone else, removing the requirement that push-out statements be issued to the other 48 partners would result in a much lighter burden, Black said.
Meyercord said that regulations that permit netting between positive and negative adjustments would also be a welcome addition. “Right now, taxpayers can net if both items are on the same line of the return,” she said, but added that this can result in situations in which netting is appropriate but not permitted. The restrictions on netting can lead to situations in which the overall result should be taxpayer-favorable, but taxpayers instead end up with an imputed underpayment and proposed penalties. “I would like to see rules that allow you to net positive and negative adjustments as long as you are not playing games with the rate,” Meyercord said.
There is a lack of guidance about what to do when the partnership is no longer in existence or a partner has died. Those questions and related ones should be clarified in regulations, Hodes said. “What do you do if the partner is dead? They don’t file a Form 1040, but a Form 8986 is issued to them — what is the rule?” she asked. Another point for clarification is what happens if a company that should get a Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s),” no longer exists. Similarly, the rules about what not-for-profit entities should do with a Form 8986 that shows an adjustment that is not unrelated business income is unclear. “There is no place to put it on their return,” Hodes said.
Changes could also be made to forms and instructions that would result in the reduction of burdens for taxpayers, Black said. The requirement in the instructions to Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request,” to calculate the imputed underpayment in an administrative adjustment request if the partnership is electing to push out the adjustments is one option. “I think they could remove that requirement — calculating the imputed underpayment causes anxiety,” Black said.
Other recent developments show that the IRS has continued working on projects to refine the partnership audit regime. As recently as the end of August, the IRS published updated post-field-examination procedures for the centralized partnership audit regime in the Pass-Through Entity Handbook in Internal Revenue Manual 4.31.13.
Given the pared-down nature of this year’s priority guidance plan, it’s relatively surprising that the BBA audit regime was included at all. Guidance for it has largely been released, and practitioners generally weren’t expecting more. And although the BBA regime has been a source of consternation for the taxpayers who have gone through the audit process, few have actually done so. Hodes noted that the audit rate is still very low; for example, in 2024 over 5 million partnership returns were filed, but only 5,225 audits were completed. “A lot more people have seen the non-income item treatment” because of the administrative adjustment request process, she said.