The Tax Times: Major Tax Court Decision Narrows IRS Powers Under Partnership Audit Rules

Monday, July 28, 2025

Major Tax Court Decision Narrows IRS Powers Under Partnership Audit Rules

In early 2025, the U.S. Tax Court issued a decision in JM Assets, LP v. Commissioner that has important implications for partnerships, the IRS, and how federal partnership audits are handled. The case challenges how and when the IRS must close partnership audits under the rules created by the Bipartisan Budget Act of 2015 (BBA).

Background: What Happened in JM Assets, LP?

JM Assets, LP, a partnership, was audited for its treatment of certain real estate sales as installment sales on its 2018 tax return. When the IRS reviewed the return, it issued a Notice of Proposed Partnership Adjustment (the first official signal that the IRS believed changes were necessary). As part of the audit process, partnerships can request to modify the IRS’s calculation of what’s owed. JM Assets made such a request in February 2023 and provided all the required materials. The IRS approved these changes in June 2023, but it delayed issuing its final adjustment notice until December—months after reviewing and approving the modifications.

The Legal Issue

Under the BBA rules, once a partnership requests a modification and provides all required information, there’s a ticking clock: the IRS typically has 270 days from when the partnership completes its submission to issue a Final Partnership Adjustment (FPA). However, the Treasury had issued a regulation that interpreted this deadline much more loosely, allowing the IRS to wait until the very end of the entire 270-day modification period—even if the partnership submitted everything earlier.

The Court’s Decision

The Tax Court strongly disagreed with the Treasury’s interpretation. The court found that Congress intended for the 270-day countdown to begin when a partnership actually submits all required modification materials—not at the end of a theoretical “modification period.” By holding that the IRS missed the deadline in issuing its final adjustment, the court invalidated the regulation and protected the rights of the partnership.

Why This Matters

This case is a big win for partnerships facing IRS audits under the BBA regime. It sets a clear, firm timeline that the IRS must follow once a partnership has met its obligations in the modification process. If the IRS is too slow, the partnership can challenge the audit results and potentially avoid additional tax.

More broadly, the decision is an example of the courts pushing back against agency rules that overstep the authority granted by Congress. This ruling will give partnerships more certainty, and likely force the IRS to move more quickly and carefully during BBA audits.

Conclusion

The JM Assets, LP case is a key reminder that even well-established IRS procedures must be grounded in the law as written by Congress. For partnerships, it creates a more predictable audit process. For the IRS, it’s a call to respect statutory limits and operate within the deadlines set by Congress.

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