Residency is often different from medical school. There are no more grades. We don't pass or fail anyone for any rotation -- that doesn't really make sense anymore, since it's a job.
As interns are in training, we assess their performance. In extreme cases where performance is incredibly poor, an intern might be terminated mid year. Usually, this requires a very poor performance and lack of improvement, actively endangering patients, or severe professionalism problems. Otherwise, we assess them throughout their 12 months of internship. For categorical interns, at 12 months we assess whether they are ready to promote to the PGY-2 level. Whether they "failed" anything is immaterial.
For prelims, the process is a bit different. Prelims need 12 months of credit / experience to progress to their advanced program, but will not be promoted into an IM PGY-2. If a prelim's performance is poor, we would document in their summary assessment that they completed 12 months of IM training but that we would not support them for an independent license without further experience. There would be no point to extending a prelim's training. If a prelim failed to show up for work or had some other major professionalism problem, then we might not give them a full 12 months of credit -- but in that case, I might not offer to make up the deficiency either (would depend upon circumstances).
Some advanced boards are very flexible. For example, a prelim that takes an LOA for some reason during their prelim year. Derm and Rads don't seem to care, they go on to PGY-2 right on time. Neuro cares quite a bit, usually the PGY-1 needs to be extended to make up the difference (but the boards are becoming more flexible about this)