The IRS in 2005 sends a partnership a notice that they have no record of their 2001 income tax return being filed. The taxpayer’s accountant, in response to the notice faxes a signed copy of the Form 1065 to the IRS at the response number in the notice along with a certified mail receipt to show timely filing. A month later the IRS began an examination of the partnership. As part of the examination, in July 2007 the partnership’s counsel mailed another signed copy of the return and certified mail receipt to an IRS attorney.

In October of 2010, the IRS issued the partnership a Final Partnership Administrative Adjustment, more than three years after the second signed copy of the tax return had been provided to IRS personnel per their requests. While you might be thinking that the IRS is too late now, since the statute for issuing the FPAA was three years after the return was filed, the IRS argued that the FPAA was timely as the return was never filed in accordance with the regulations, so the statute never began to run.

The IRS has released drafts of two new partnership tax forms for 2020 partnership returns, adding new Schedules K-2[1] (20 pages) and K-3[2] (22 pages) along with draft instructions for Schedules K-2[3] (25 pages) and K-3[4] (11 pages). The IRS announced these new forms on their website on July 14, 2020.[5]

The IRS in the announcement provides the following reason for issuing these new forms:

The Treasury Department and the IRS are proposing updates to the partnership form for tax year 2021 (filing season 2022). The updates will provide greater clarity for partners on how to compute their U.S. income tax liability with respect to international tax matters, including how to compute deductions and credits. The redesigned form and instructions also give useful guidance to partnerships on how to provide international tax information to their partners. This proposed form would apply to a partnership required to file Form 1065, but only if the partnership has items of international tax relevance (generally foreign activities or foreign partners). The proposed changes would not affect domestic partnerships with no items of international tax relevance.

The IRS, in releasing the drafts for the 2019 Form 1065 and related instructions, indicated that all partnerships would have to provide information on tax basis capital accounts on Schedules K-1 prepared for 2019 and later years. The IRS in the end decided to remove the requirement from the 2019 Form 1065 Schedule K-1s after receiving a number of comments indicating that providing that information would be very difficult or impossible for many partnerships. The agency indicated that it would be providing additional information on the calculation of partner tax capital.

In Notice 2020-43[1] the IRS indicated the agency had decided that, in lieu of providing that information the agency would propose to offer two proposed methods for partnerships to comply with the tax capital reporting requirement. The agency is using the notice to request comments on these proposed methods.

Note: On March 7 , 2019 the IRS provided temporary relief for partnerships unable to timely provide this information. See our article at this link.

An article published in Tax Notes Today on February 15[1] highlighted a change in the 2018 Form 1065 instructions that will impact partnerships reporting partners’ capital accounts on Schedule K-1 using other than tax basis capital account reporting.

The new instructions, found in the instructions for Schedule K-1, Item L in the Form 1065 instructions at page 30 reads as follows:

If a partnership reports other than tax basis capital accounts to its partners on Schedule K-1 in Item L (that is, GAAP, 704(b) book, or other), and tax basis capital, if reported on any partner's Schedule K-1 at the beginning or end of the tax year would be negative, the partnership must report on line 20 of Schedule K-1, using code AH, such partner's beginning and ending shares of tax basis capital. This is in addition to the required reporting in Item L of Schedule K-1.

For these purposes, the term “tax basis capital” means (i) the amount of cash plus the tax basis of property contributed to a partnership by a partner minus the amount of cash plus the tax basis of property distributed to a partner by the partnership net of any liabilities assumed or taken subject to in connection with such contribution or distribution, plus (ii) the partner's cumulative share of partnership taxable income and tax-exempt income, minus (iii) the partner's cumulative share of taxable loss and nondeductible, noncapital expenditures.