How to Modify the Imputed Underpayment Under IRC 6225(c)

A partnership can modify the imputed underpayment under IRC 6225(c) by filing Form 8980 within 270 days of the Notice of Proposed Partnership Adjustment, submitting documentation that fits one or more of the statutory modification categories, and proving that the partners’ actual tax positions call for a lower number than the default 37% calculation produced.¹² Miss the 270-day window and the default amount locks in.

Why the Default Number Is Usually Too High

The IRS calculates the imputed underpayment by taking the total net positive adjustments and multiplying by the highest tax rate in effect under Section 1 or Section 11, whichever is higher.³ For reviewed years after 2017, that is 37%.⁴

That formula treats every dollar as if it belongs to a top-bracket individual. It does not. A partnership may include C corporations taxed at 21%, tax-exempt investors that owe nothing on ordinary income, and individuals whose share of the adjustment is capital gain taxed at 20% or less. Modification is the mechanism for pushing the partnership-level bill down toward what the partners would actually owe.

The Modification Categories That Reduce the Bill

Section 6225(c) sets out specific grounds the IRS must accept when supported by adequate documentation.⁵ A single request can combine several. Which ones fit depends on who the partners are and what the adjustments touched.

Amended Returns Filed by Partners

When a partner files an amended return that picks up their share of the adjustments and pays the resulting tax, interest, and penalties, that portion drops out of the partnership-level calculation.⁵ The amended returns must cover the reviewed year and any later year where tax attributes changed as a result.

This works best when the partner’s effective rate sits well below 37%, because the partner pays less on the amended return than the partnership would have paid at the default rate. The amended returns must be filed inside the 270-day modification window, and the normal statute of limitations does not apply to returns filed for this purpose.

The Pull-In Procedure

Under Section 6225(c)(2)(B), a partner can accomplish the same result without filing a formal amended return. The partner pays the tax owed, agrees to adjust tax attributes going forward, and provides the financial information that would have appeared on an amended return; the partnership submits it on the partner’s behalf.⁵⁶

The IRS treats a pull-in the same as an amended return for modification purposes. One limit matters: a pull-in submission is not a claim for refund, so a partner who overpaid in an earlier year cannot use this route to recover it.

Reallocated Income

When an adjustment moves income from one partner to another rather than increasing total partnership income, every partner whose share changed must file an amended return or use the pull-in procedure before the reallocation qualifies for modification. The partnership cannot claim a reduction for just one side.

Tax-Exempt Partners

Any portion of the adjustment allocable to a tax-exempt partner is excluded from the imputed underpayment. The statute defines “tax-exempt entity” by reference to Section 168(h)(2), which reaches beyond charities to include governmental entities, pension trusts, and other entities that owe no federal income tax on ordinary income. The partnership has to show that the partner would not have owed tax on the income if it had been reported correctly. For funds with significant tax-exempt investors, this one category can wipe out a large share of the default liability.

Rate Modifications

Section 6225(c)(4) lets the partnership request a lower rate on any portion of the adjustment where a lower rate actually applies. The common cases:

Income allocable to a C corporation partner taxed at 21% rather than 37%.
Long-term capital gains allocable to individual partners at the applicable 0%, 15%, or 20% rate.
Qualified dividends taxed at the preferential rate.

The partnership has to identify how much of the adjustment goes to each rate category and document each partner’s tax status. Moving the corporate share from 37% to 21% on a large adjustment changes the math substantially.

Other Modifications Under 6225(c)(6)

Section 6225(c)(6) is the catch-all. Treasury Regulation 301.6225-2 uses it for situations like partners with suspended passive activity losses that would have offset the adjustments in the reviewed year, provided the partnership can show the losses existed and were available to that partner for that year.⁶

Foreign partners entitled to reduced rates under an income tax treaty can also qualify. The partnership documents the amount allocable to the foreign partner and the partner’s entitlement to a treaty-reduced rate on the specific type of income involved.⁷ The IRS has also considered modifications tied to the portfolio interest exemption and to capital gains exemptions available to certain foreign persons.

Filing the Request

The partnership representative submits the request on Form 8980, which organizes the claims by modification category and is filed electronically.¹ Publication 5346 has the detailed instructions.²

Documentation is what carries the request. The package needs:

For amended return modifications, copies of the partners’ filed amended returns and proof of payment of tax, interest, and penalties.
For pull-in modifications, payment confirmation and the partner’s signed agreement to adjust tax attributes going forward.
For tax-exempt partner modifications, documentation of each partner’s exempt status and the allocation to that partner.
For rate modifications, evidence of each partner’s tax classification and the allocation of the specific income types eligible for the lower rate.

The package also needs taxpayer identification numbers and ownership details for every affected partner so the IRS can cross-reference against its records, plus calculation schedules that walk from the original imputed underpayment through each category of modification to the proposed reduced figure.

The 270-Day Clock

The clock starts on the date the IRS mails the Notice of Proposed Partnership Adjustment. The representative has 270 days from that date to submit a complete request.² Extensions exist but are not automatic; the IRS grants them based on the facts of the case, and the partnership has to ask before the original window closes. The representative can also waive the modification period entirely.⁸

Collecting amended returns from dozens of partners, documenting exempt status for institutional investors, and tracing ownership through tiered structures all take time. Partnerships that wait until month eight to start assembling the package tend to run into problems. Start when the NOPPA arrives.

Tiered Partnerships

When one partnership owns an interest in another, indirect partners in the chain can participate in the modification process, but every partnership in the chain has to satisfy the amended return or pull-in requirements. The IRS can require detailed ownership information tracing the adjustment from the audited entity up through each layer to the partner who ultimately bears the tax. S corporations and their shareholders are treated the same as partnerships and partners for these purposes.

Tiered structures often need more time to gather documentation from entities that may not know they are indirectly involved in an audit. This is one of the most common reasons partnerships request extensions.

Who Actually Files: The Partnership Representative

Every partnership subject to the BBA regime designates a partnership representative on its annual return. That person or entity has sole authority to request modification, extend or waive the modification period, and make decisions that bind all partners.⁸ Partners cannot individually negotiate with the IRS during the audit or override the representative’s decisions.

The representative must have a substantial U.S. presence: a U.S. taxpayer identification number, a U.S. street address, a U.S. phone number, and availability to meet with the IRS in person. If the representative is an entity, the partnership also appoints a designated individual who meets those requirements. Changes are made on Form 8979.

After the Request Is Filed

The IRS has 270 days after the modification period closes to review the request, approve or deny each item, and issue a determination. The determination package includes Letter 5975 and Form 15027, which shows the computation of the final imputed underpayment with all approved modifications reflected. Denials come with the IRS’s reasoning.

The Notice of Final Partnership Adjustment follows and fixes the amount owed. From there the partnership can pay, elect to push the adjustments out to the reviewed-year partners under Section 6226, or petition a court within 90 days.

What Modification Is Not

Two adjacent tools get confused with modification. The push-out election under Section 6226 does not reduce the tax; it shifts who pays it, moving the liability from the partnership to the reviewed-year partners, and it has its own 45-day and 60-day deadlines after the FPA that cannot be extended. A partnership can modify first and then push out whatever remains, but the two decisions answer different questions.

Electing out of the centralized regime altogether is available only to partnerships with 100 or fewer partners where every partner is an eligible type (individuals, C corporations, S corporations, foreign entities that would be treated as C corporations domestically, and estates of deceased partners), and the election is made annually on a timely-filed return.⁹ A partnership cannot retroactively opt out once an audit begins. If you are already looking at a NOPPA, modification is the tool.

1
Internal Revenue Service. About Form 8980 Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c)
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Internal Revenue Service. BBA Partnership Audit Process
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Internal Revenue Service. How to Figure an Imputed Underpayment
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026 Including Amendments From the One Big Beautiful Bill
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Office of the Law Revision Counsel. 26 USC 6225 Partnership Adjustment by Secretary
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eCFR. 26 CFR 301.6225-2 Modification of Imputed Underpayment
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Federal Register. Centralized Partnership Audit Regime International Tax Rules
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Internal Revenue Service. Designate or Change a Partnership Representative
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Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime