By Christopher Johnson, JD, LLM, CPA, MBA, Steven J. Eller, CPA, JD and Nicholas Rochedieu, JD
Key Takeaways
1. New York adopts federal partnership audit rules with strict state and city reporting deadlines.
Recent legislation aligns New York state and New York City tax law with the federal centralized partnership audit regime, establishing 90-day and 180-day deadlines for filing, payment and reporting of adjustments under Internal Revenue Code Section 659-a.
2. Partnerships may elect to pay audit-related liabilities on behalf of partners.
Affected partnerships can make an alternative payment election, remitting imputed tax based on the highest applicable rate. This relieves partners of separate reporting responsibilities but may result in different outcomes depending on each partner’s tax attributes.
3. Transition rules, elections and deadlines require careful planning and documentation.
Partnerships should assess prior adjustments, update compliance timelines and evaluate tiered structures to determine whether elections at one or more levels could simplify obligations or reduce risk under the new audit framework.
Our recent article New York Budget Highlights briefly discussed the budget establishing a comprehensive New York state and city framework governing the treatment of federal partnership adjustments under Internal Revenue Code (IRC) Section 659-a. The section covers audits conducted under the centralized partnership audit regime (CPAR) and taxpayer-initiated administrative adjustment requests (AAR), both created by the Bipartisan Budget Act of 2015 (BBA).
The budget incorporates federal rules into New York state and city law, creating strict 90- and 180‑day deadlines for reporting and payments related to adjustments.
This article summarizes the new procedures, key deadlines and elections, highlights material city differences and provides an illustrative example. We conclude with practical planning considerations.
Overview of New State Partnership Audit Procedures
Key Terms
These new laws apply to an “impacted partnership.” Under the new law, an impacted partnership has completed one of the following:
- Received a final federal adjustment under IRC Section 6225 (IRS-imposed audit changes under federal BBA rules).
- Made a federal alternative‑payment election under IRC Section 6226 (federal “push out” election made by the partnership).
- Filed an administrative adjustment request under IRC Section 6227 (taxpayer-imposed federal changes filed by the partnership).
“Final federal determination date” mirrors the federal IRC Section 6203 assessment dates.
Default Partnership and Partner-Level Reporting [Section 659‑a(a), (c)]
The reporting requirements for impacted partnerships and their partners are strict, with different rules applying for each.
- Impacted Partnerships: Partnerships must file a Federal Adjustments Report and amended state filings within 90 days of the final federal determination or AAR filing. Each adjustment must be described in sufficient detail to allow for the calculation of the New York state tax changes for Articles 9‑A (corporations), 22 (resident individuals), 30 (NYC resident individuals) and 33 (trusts).
- Direct and Indirect Partners: Partners must file their own federal adjustments report and amended state filings and remit additional New York state tax, penalties and interest (if any) within 180 days of the final determination date.
Alternative Payment Election [Section 659‑a(d)(3)]
Partnerships may elect to pay “in lieu” of partner‑level filings by:
- Filing the Federal Adjustments Report and election notice within 90 days.
- Paying the aggregate computed underpayment within 180 days, based on each partner’s distributive share, multiplied by the highest applicable New York state tax rate plus interest and penalties.
The election is binding, subject to commissioner discretion for reversal.
If this election is made, partners have no filing or reporting obligations and may not claim subsequent deductions or credits for the imputed tax.
PKF O’Connor Davies Observation: The total tax payable generally is intended to be the same whether paid by the partners or the partnership itself. Since the partnership election takes into account the tax status of the direct and indirect partners (as outlined by the example below), however, each situation should be examined in detail to determine if certain unique partner attributes (e.g., special credits, partner tax rates or net operating losses) may result in material differences between the default treatment and the partnership payment election.
Retroactivity and Transition
Any federal BBA audit or AAR with a final determination date prior to May 9, 2025, must be reported within one year of enactment rather than the 90‑day standard. Interest does not accrue for these pre‑enactment adjustments.
Although the BBA rules generally were effective starting with the 2018 tax year, partnerships were eligible to voluntarily opt-in early for any taxable year beginning after November 2, 2015.
Exceptions, Extensions, Estimates and Refunds
- De Minimis Exception: An impacted partnership may request a waiver of any obligations related to aggregate federal adjustments below a de minimis threshold. The New York State Commissioner of Taxation and Finance will set the threshold.
- Tiered Partnership Alternative Payment Election: Tiered partnerships and their partners may elect alternative payment treatment, with reporting deadlines tied to the furnishing of federal statements under the BBA rules.
- Extensions
- 60-day automatic extension for partnerships with 10,000 or more partners.
- Up to 30-day discretionary extensions (for partners and partnerships) for “good cause” (currently undefined).
- Estimates: Estimated payments are allowed during pending federal audits.
- Refunds: Partners who are entitled to a net overpayment refund may claim that refund until the later of:
- The normal three-year refund statute under Article 22.
- One year after the 180-day partner-level reporting deadline.
Aligning New York City with State Partnership Audit Rules
Along with the state changes, the NYC Administrative Code was amended to similarly integrate federal adjustment partnership reporting at the city level. Mirroring the new state provisions, partnerships and partners must report changes in federal, state or New York City taxable income within 90 days of the applicable federal adjustment. Partnership payment elections, de minimis exceptions and estimate payments—all of which correspond to those at the state level—are included for New York City.
A major difference from the state law is the effective date of August 7, 2025 (90 days after passage), compared to the state’s effective date on passage, May 9, 2025. In addition, pre-enactment adjustments must be reported to NYC by February 3, 2026 (270 days after enactment), as opposed to 180 days after the determination date.
Tiered Partnership Example
Background
- Partnership Y (upper-tier) has two partners: Partner D (corporation, 70%) and Partner E (nonresident individual, 30%).
- Partnership X (lower-tier) has two partners: Partner C (nonresident individual, 50%) and Partnership Y (50%).
A federal audit of Partnership X’s 2023 tax year results in a $200,000 increase to federal taxable income, finalized June 30, 2025. Partnership X’s New York state apportionment factor is 60%. The highest New York state tax rates are 6.85% for individuals and 6.5% for corporations. The table below outlines the tax and reporting outcomes under three different partnership election scenarios following a federal audit adjustment.
Summary of Tiered Partnership Audit Adjustment Scenarios (New York State Example) | |
| Election Scenario | Tax and Reporting Outcome |
| No Elections at Either Tier |
|
| Election at Lower Tier |
|
| Election at Upper Tier |
|
Important Next Steps
The new partnership audit procedures highlighted above are intended to provide clarity and consistency for reporting changes to New York state and New York City partnership tax returns.
Partnerships with New York state and city filings should:
- Create an inventory of pre-enactment adjustments subject to reporting.
- Update compliance schedules for new state/city reporting/payment deadlines.
- Model the potential impacts of the new state and city elections.
Contact Us
As we await further guidance on thresholds, new forms and other procedural nuances, proactive planning, particularly regarding pre-enactment adjustments, will be essential.
PKF O’Connor Davies is here to help. If you have any questions on how these new rules may impact you, reach out to your client service team or:
Christopher Johnson, JD, LLM, CPA, MBA
Partner
cjohnson@pkfod.com
Steven J. Eller, CPA, JD
Partner
seller@pkfod.com
Nicholas Rochedieu, JD
Partner
nrochedieu@pkfod.com