When the Bill Comes Due: The IRS Collection Process for Partners Following A Partnership Examination
A court’s final decision in a partnership-level proceeding may feel like the end of the road. But for the individual partners, the conclusion of a partnership examination often marks the beginning of a new and equally consequential phase: the IRS’s effort to collect the resulting tax from each partner individually. Although the partnership dispute has been resolved, the IRS must still comply with procedural requirements when turning to individual taxpayers for payment. At that stage, partners retain meaningful rights to challenge IRS computations, to seek interest abatement, and to pursue collection alternatives. Understanding those rights is essential to navigating what comes next.
Assessment of a Tax Liability to Partners in a Partnership
TEFRA Partnerships
The framework for post-proceeding collection depends on the partnership tax year being examined. For members of a TEFRA partnership (pre-2018 tax years), the IRS generally has one year (plus any time remaining on the partnership’s statute when the IRS issued its FPAA) from the final decision to issue a Notice of Computational Adjustment.[1]
The Notice of Computational Adjustment (Letter 4735) quantifies each partner’s share of the tax, penalties, and interest resulting from the partnership-level adjustment.[2] If a partner disagrees with the IRS’s proposed computations, they generally have six months from the Notice of Computational Adjustment to file an administrative abatement or refund claim.[3] This deadline is of particular importance for any partners who wish to seek interest abatement/refund related to the COVID-19 period, as is described in more detail below.
Where a partner made a federal tax deposit under Section 6603 during the partnership examination or related litigation, the Notice of Computational Adjustment may reflect a zero balance. In that case, the IRS will issue either a zero-balance notice[4] or a refund notice[5] if the deposit resulted in an overpayment.
BBA Partnerships – Push Out Procedures
The collection framework for BBA proceedings (post-2017 tax years) differs from TEFRA proceedings because the IRS generally assesses and collects tax at the partnership level. However, if a partnership elected to “push out” adjustments to its partners under Section 6226 adjustments are applied at the partner level.
A decision becomes final after a 90-day period following the Court’s entry of decision. Once the decision is final the Partnership Representative has 60 days to provide statements to the IRS and partners regarding the allocation of the adjustment. For partners, the statement showing their allocated share will be on a Form 8986 (Partner’s Share of Adjustments to Partnership-Related Items).[6]
Form 8978 is attached to the partner’s return for the reporting year and due on the due date of the reporting year tax return (i.e., the year that the Form 8986 was furnished) and any resulting liability should be paid with that return.[7] For example, a partner who receives a Form 8986 for the 2018 tax year in 2026, will use it to prepare and file the Form 8978 and remit payment with their 2026 return by that year’s filing deadline.
Notably, if a partner of a BBA partnership made a deposit to suspend the running of interest, a statement requesting the payment be applied to the underpayment must be submitted with Form 8978. The statement must include the date and amount of the deposit, the name and TIN of the partnership, as well as the Audit Control Number of the partnership. The statement should also be separately submitted to the BBA Operations unit based out of Ogden, Utah.[8]
The IRS Collection Process
If a balance remains due following the Notice of Computational Adjustment (TEFRA partnerships) or the filing of Form 8986 (BBA partnerships), the IRS will begin its standard collection sequence. It will first issue an initial Balance Due notice (typically a CP22A),[9] followed by a Balance Due Reminder (typically a CP501),[10] signaling that the account is moving toward active collections. The IRS will then issue additional demand notices (e.g., CP503)[11] as the matter progresses.
The collection sequence culminates in a notice of the IRS’s intent to take enforcement action, typically a notice of intent to levy (CP504).[12] The specific action the IRS may pursue, such as offsetting federal or state tax refunds, filing a federal tax lien, levying financial accounts or wages, or initiating passport revocation, depends on the amount outstanding and the taxpayer’s overall circumstances.
Before taking any lien or levy action, however, the IRS is required to issue a final notice offering Collection Due Process (“CDP”) rights (e.g., Letter 3172, Letter 1058, or LT11)[13]. A CDP hearing is conducted before the IRS Independent Office of Appeals and provides a critical opportunity for taxpayers to contest the proposed collection action. The CDP process affords taxpayers two important options. For taxpayers that have an argument that they do not owe the liability shown on the notice, they may be able to use the CDP process to contest their underlying liability.[14] This includes the ability to raise partner-level defenses that could not be raised by the partnership.[15] Taxpayers may also use the CDP process to request collection alternatives such as an offer-in-compromise, an installment agreement, or a determination that they are in currently-not-collectible status based on financial hardship.[16]
The right to a CDP hearing must be exercised promptly; a request must be filed within 30 days of the date on the CDP notice.[17] A timely CDP request generally stays all collection action until Appeals has reviewed the matter. If the taxpayer disagrees with Appeals’ determination, they have the right to Petition the United States Tax Court for review of that determination.[18] This is a primary reason that the 30-day deadline be followed and that all correspondence be sent to the IRS via certified mail, to maintain those rights.
If no timely request is made, the IRS will proceed with enforcement. Taxpayers who miss the CDP window may still request an Equivalent Hearing, but that request must be made within one year of the lien or levy notice date and does not automatically suspend collection. It also does not afford the taxpayer the ability to take the CDP determination to Tax Court, if they disagree.
Interest Abatement and/or Refund
Partnership examinations routinely span several years, and interest runs from the original return due date through the date of payment.[19] For partners involved in BBA proceedings in which the partnership made a push-out election, the applicable interest rate is further increased by two percentage points.[20] The resulting interest burden can be substantial, making the availability of interest abatement and refund claims a critical consideration in post-proceeding planning.
Recent court decisions interpreting the COVID-era disaster relief provisions of Section 7508A(d) have opened a meaningful avenue to challenge interest that accrued during the approximately 42-month period from January 20, 2020, through July 10, 2023.[21] Partners whose tax liabilities include interest accrued during that window should carefully evaluate whether abatement or refund claims are available, even where the underlying tax liability itself is not in dispute.
Abatement or refund claims are typically made on Form 843 (Claim for Refund and Request for Abatement) and must be filed separately for each affected tax year.[22] The timing of these claims is linked to the Notice of Computational Adjustment: from the date of that notice, individuals generally have a six-month window to seek abatement or refund. For example, a Notice of Computational Adjustment dated in August 2026 would generally allow until February 2027 to file a claim.[23] Taxpayers and their advisors should carefully calendar these deadlines.
If the IRS denies a refund claim or fails to act within six months of its filing, the taxpayer may pursue the claim in federal district court or the Court of Federal Claims. Where the tax, penalties, or interest remains unpaid, such claims may also be raised before Appeals through the CDP process described above.
Limiting Interest Accrual: Deposits and Designated Payments
Section 6603 Deposits
Partners in an ongoing partnership examination or related proceeding may stop the running of interest by making a cash deposit with the IRS under Section 6603. A Section 6603 deposit is not a payment of tax; rather, it is held by the IRS and applied against any final liability. If the deposit exceeds the final adjustment, the excess is returned to the taxpayer, and if the deposit was “reasonably calculated” to approximate the disputed amount, it will be returned with interest at the federal short-term rate. Partners who anticipate a significant tax liability should consider whether a deposit is prudent before a decision is entered.
Designated Payments
Once a liability has been assessed, partners who wish to contest the IRS’s computations or seek interest abatement may face the dilemma of continued interest accrual while those challenges are pending. To limit additional interest during that period, taxpayers may make voluntary payments toward the assessed liability. Where a remittance is treated as a payment—rather than a deposit—the taxpayer may direct its application under Revenue Procedure 2002-26, including designating the payment first to tax, rather than penalties or interest.[24] Strategic use of designated payments can prevent interest from compounding on the highest-rate components of the liability while individual challenges proceed.
State Tax Implications
Partnership adjustments made by the IRS rarely end at the federal level. Upon making final federal adjustments, the IRS routinely notifies the taxpayer’s state tax authorities, which in turn may initiate corresponding state-level adjustments based on changes to the taxpayer’s federal adjusted gross income. The resulting state exposure can be significant, particularly for partners who reside in high-tax states or who claimed flow-through deductions across multiple years.
Many states offer voluntary disclosure programs that provide meaningful relief for partners who come forward before being contacted by state authorities. These programs typically offer penalty forgiveness, and in some cases a limited “look-back” period that restricts how far back the state can reach in adjusting prior-year returns. Georgia, for example, allows taxpayers who proactively request a Voluntary Disclosure Agreement (“VDA”) before being contacted by the Department of Revenue to qualify for penalty forgiveness and, at the Department’s discretion, a three-year limitation on the look-back period. That limitation may be especially valuable for partners who claimed carry-forward deductions or who invested in similar transactions across four or more tax years.
Timing is critical because voluntary disclosure programs are generally available only to taxpayers who have not yet been contacted by the relevant state authority. Partners and their advisors should promptly assess state exposure following a federal partnership proceeding and consult with tax counsel regarding the options available in each applicable jurisdiction.
Conclusion
The conclusion of a partnership-level proceeding is not the end of the tax controversy. It is the beginning of the partner-level controversy. Understanding the sequence of IRS notices, the timing of CDP rights, the availability of interest abatement claims, and the tools available to limit accruing interest is essential for partners navigating what comes next. State tax exposure adds another layer that should be assessed promptly and strategically. Partners facing these issues should consult with experienced tax counsel to ensure that all available rights and remedies are preserved and pursued on a timely basis.
Footnotes:
[1] I.R.C. § 6229(d) provides that if a Notice of Final Partnership Administrative Adjustment (“FPAA”) is mailed, the statute is tolled until the partnership adjustments are made final and for one year thereafter. Importantly, that section tacks one year on to the existing statute of limitations. Therefore, if an FPAA is issued with time remaining on the statute of limitations, that additional time remaining plus one year is the statute for making any computational adjustments following the final decision.
[2] I.R.M. 4.31.3.13.6.3(6) (04-30-2026).
[3] I.R.C. §§ 6230(c)(1)(A), (C) and 6230(c)(2)(A) (a claim for refund based upon an erroneously computed computational adjustment or imposition of any penalty, addition to tax, or additional amount which relates to an adjustment to a partnership item “shall be filed within 6 months after the day on which the Secretary mails the notice of computational adjustment to the partner.”).
[4] IRS Notice CP13 or CP131A. https://www.irs.gov/individuals/understanding-your-cp13-notice; https://www.irs.gov/individuals/understanding-your-cp131a-notice.
[5] IRS Notice CP21B. https://www.irs.gov/individuals/understanding-your-cp21b-notice.
[6] https://www.irs.gov/businesses/partnerships/bba-partnership-audit-process (“Push out process”). Non pass-through partners (such as individuals and C-corporations) use Form 8986 to prepare and file Form 8978 (Partner’s Additional Reporting Year Tax) and Schedule A to compute and report “additional reporting year tax” attributable to the adjustments reflected on the Form 8986.
[7] Treas. Reg. § 301.6226-3(a); see also https://www.irs.gov/businesses/partnerships/bba-partnership-audit-process (“Partner push out procedures as a result of partnership examination”).
[8] https://www.irs.gov/businesses/partnerships/bba-partnership-audit-process (“Deposit under IRC 6603 made by (terminal) partner”).
[9] https://www.irs.gov/individuals/understanding-your-cp22a-notice.
[10] https://www.irs.gov/individuals/understanding-your-cp501-notice.
[11] https://www.irs.gov/individuals/understanding-your-cp503-notice.
[12] https://www.irs.gov/individuals/understanding-your-cp504-notice.
[13] I.R.C. §§ 6330(a)(1) and 6320(a)(3)(B). See also I.R.M. § 5.19.4.3.1, Pre-levy Requirements (07-10-2023); and I.R.M. § 5.12.6.3, Collection Due Process for NFTL Filing (01-19-2018).
[14] McNeill v. Commissioner, 148 T.C. 481, 489 (2017); see also McNeill v. Commissioner, T.C. Memo. 2017-206, at *8.
[15] Id.
[16] See I.R.M. § 8.22.7.5, Installment Agreements (08-26-2020); I.R.M. § 8.22.7.7, Currently Not Collectible (09-23-2014); and I.R.M. § 8.22.7.10, Offers in Compromise (08-26-2020).
[17] I.R.C. §§ 6330(a)(2) and 6320(a)(3)(B).
[18] I.R.C. §§ 6330(d) and 6320(c).
[19] Treas. Reg. § 301.6226-3(c)(4); see also I.R.C. § 6226(c) (adding 2 percentage points to the underpayment rate applicable to amounts determined under a push-out election).
[20] I.R.C. § 6229(d).
[22] See I.R.M. § 4.10.11.6.6, Claims for Refund and Request for Abatement of Interest and/or Penalties (09-29-2022); see also Instructions for Form 843, Separate Form Required (12/2024).
[23] I.R.C. § 6320(c)(2)(A).
[24] Bulletin No. 2002-15, Rev. Proc. 2002-26.
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