What Is an Administrative Adjustment Request (AAR)?

An Administrative Adjustment Request, or AAR, is the form-and-process a partnership uses to correct a previously filed Form 1065 under the centralized audit regime created by the Bipartisan Budget Act of 2015. For tax years beginning after December 31, 2017, partnerships subject to the BBA cannot file a traditional amended return once the original due date has passed.¹ They file an AAR instead, and the corrections are either paid at the partnership level or pushed out to the partners who were in the partnership during the year being fixed.²

The authority sits in 26 U.S.C. § 6227, which lets a partnership request an adjustment to one or more “partnership-related items” for any taxable year. That phrase sweeps in nearly everything on the return: income, deductions, credits, allocations, and partner-level information.³

Who Files an AAR

Only the partnership representative designated on the return for the year being corrected can file and sign the AAR. That person has sole authority to act for the partnership in BBA proceedings, and both the partnership and its partners are bound by what the representative does.⁴ A partner cannot file an AAR on their own to fix their individual share. If the designated representative is no longer available, the partnership has to resolve that before anything else moves.

Partnerships That Can Skip the AAR

Not every partnership is locked into the BBA system. A partnership with 100 or fewer partners can elect out of the centralized regime for a given year if every partner is an individual, a C corporation, an S corporation, a foreign entity that would be treated as a C corporation domestically, or an estate of a deceased partner.⁵ Partnerships, trusts, and disregarded entities as partners disqualify the election, and S corporation shareholders count individually toward the 100.⁶ A partnership that elects out on a timely filed return files a standard amended return when it needs to correct something, and the partners handle the follow-up on their own returns the traditional way.

When It Has To Be Filed

An AAR must be filed within three years of the later of the date the partnership return was actually filed or the last day for filing the return, determined without extensions.³ A calendar-year partnership that filed its 2023 Form 1065 on March 15, 2024, has until March 15, 2027.

There is one hard cutoff that overrides the three-year window. A partnership cannot file an AAR after the IRS mails a notice of administrative proceeding (NAP) for that tax year. The NAP opens an audit, and once it arrives the AAR option closes permanently for that year.³ Partnerships that know they need to correct something should not sit on it, because the NAP is not something they control.

How To Prepare and File

The preparation work is the same regardless of filing method: identify every item that needs correction, calculate the effect on each partner’s share, and determine whether the net adjustment creates an imputed underpayment.

Partnerships filing electronically attach Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, to Form 1065.⁷ The IRS directs BBA partnerships to IRS.gov/BBAAAR for electronic submission instructions. BBA partnerships do not attach amended Schedules K-1 to the AAR.⁸

Partnerships that file on paper use Form 1065-X, Amended Return or Administrative Adjustment Request, mailed to the service center where the original return was filed.⁹

Either way, the AAR package has to include:

A supporting schedule explaining each position taken in the AAR.
Documentation showing how the imputed underpayment was calculated, including the grouping, subgrouping, and netting of adjustments.
Forms 8985 and 8986 when adjustments are being pushed out to partners or when adjustments do not produce an imputed underpayment.
Form 8980 if the partnership is modifying the imputed underpayment before paying it.⁸

When the Corrections Increase Tax

The biggest decision in the whole process comes when the adjustments, grouped and netted, result in an imputed underpayment. The imputed underpayment is calculated by applying the highest individual or corporate tax rate in effect for the reviewed year to the net adjustment amount.¹⁰ That rate is unforgiving because it assumes every dollar of adjustment belongs to a partner in the top bracket. Section 6227(b) gives the partnership two paths.³

Pay at the Partnership Level

The partnership pays the imputed underpayment, with any applicable interest and penalties, when it files the AAR.² This is the default and the simplest option. It can also be the most expensive, because the top-rate calculation ignores partners who are tax-exempt, in lower brackets, or sitting on offsetting losses, unless the partnership modifies the imputed underpayment first.

Push Out to the Reviewed-Year Partners

The partnership can instead elect to push the adjustments out to the partners who were in the partnership during the reviewed year. The partnership furnishes each of those partners a Form 8986 showing their share of the adjustments, and the partners account for them on their own returns for the year the AAR is filed, paying any additional tax plus interest.¹¹ The push-out often produces a lower total bill because each partner’s actual rate applies, but it demands more coordination with the partner group.

Modifying the Imputed Underpayment

A partnership paying at the entity level is not stuck with the raw calculation. Several modifications can reduce it. Partners can file amended returns taking their share of the adjustments into account, which reduces the partnership-level liability. Adjustments allocable to tax-exempt partners can be excluded. Rate modifications bring the calculation down when partners were actually taxed at lower rates. Treaty-based reductions can apply to adjustments allocable to qualifying foreign partners. The partnership and IRS can also enter a closing agreement on specific adjustments. Modifications are requested on Form 8980 filed with the AAR.⁸ For partnerships with significant tax-exempt or lower-rate partners, skipping this step is one of the most expensive mistakes available.

When the Corrections Decrease Tax

Not every AAR increases tax. When corrections cut income or add deductions, they may not produce an imputed underpayment at all. In that case the statute is specific: adjustments that do not result in an imputed underpayment must be pushed out to the reviewed-year partners.³ The partnership cannot take a refund at the entity level. The partners receive statements and claim the benefit on their own returns.

When a single AAR mixes favorable and unfavorable adjustments, the pieces that fall outside the imputed underpayment calculation still have to be pushed out separately.² Forms 8985 and 8986 carry those adjustments to the partners.¹²

Tiered Partnerships

Things get more complicated when a reviewed-year partner is itself a partnership, S corporation, or other pass-through. A pass-through partner that receives a Form 8986 must either pay an imputed underpayment on the adjustments or push them further down to its own partners. The downstream reporting has to be completed by the extended due date of the pass-through partner’s return for the adjustment year. For a calendar-year partnership, that is typically September 15.

Each tier prepares its own Forms 8985 and 8986 for the next tier. If the combined package runs over 100 pages, the IRS requires it to be printed and mailed rather than filed electronically.¹² Multi-tier structures should plan the chain of filings in advance, because every level has its own filing and payment obligations with their own deadlines.

Two Side Effects To Weigh Before Filing

Filing an AAR extends the IRS’s own window to adjust the same tax year. Under the regulations, the IRS’s three-year limitations period runs from the latest of the date the return was filed, the return due date, or the date the partnership filed an AAR.¹³ An AAR filed near the end of the original three-year window gives the IRS a fresh three years from the AAR date to examine the return. That is not a reason to skip a needed correction, but it is a reason to think carefully about timing when a return has other soft spots.

A federal AAR also often triggers state reporting. Many states require partnerships and partners to report federal adjustments, including those from AARs, within a set period after the adjustments become final. Check each state where the partnership files for notification deadlines and payment requirements, because a missed state deadline can carry separate penalties even when the federal AAR goes in cleanly.

1
Internal Revenue Service. Centralized Partnership Audit Regime (BBA)
2
Internal Revenue Service. File an Administrative Adjustment Request for a BBA Partnership
3
Office of the Law Revision Counsel. 26 USC 6227 – Administrative Adjustment Request by Partnership
4
Internal Revenue Service. Designate or Change a Partnership Representative
5
Office of the Law Revision Counsel. 26 USC 6221 – Determination at Partnership Level
6
Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime
7
Internal Revenue Service. About Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR)
8
Internal Revenue Service. Instructions for Form 8082
9
Internal Revenue Service. About Form 1065-X, Amended Return or Administrative Adjustment Request (AAR)
10
GovInfo. 26 USC 6225 – Partnership Payment of Imputed Underpayment
11
Office of the Law Revision Counsel. 26 USC 6226 – Alternative to Payment of Imputed Underpayment by Partnership
12
Internal Revenue Service. About Form 8985, Pass-Through Statement Transmittal/Partnership Adjustment Tracking Report
13
eCFR. 26 CFR 301.6235-1 – Period of Limitations on Making Adjustments