IRS waives tax penalties for some partnerships

An IRS office building in East Harlem
An IRS office building in the East Harlem neighborhood of New York

The Internal Revenue Service has issued a notice waiving tax penalties for certain partnerships that file K-1 schedules failing to report information about the partners’ negative tax basis capital accounts for the partnerships’ 2018 tax year. However, the relief is conditioned on the partnerships providing the missing information in a separate schedule by March 15, 2020.

Notice 2019-20 provides penalty relief under Sections 6722 (failure to furnish correct payee statements) and 6698 (failure to file partnership return) of the Tax Code to certain partnerships that file and furnish Schedules K-1 for Form 1065, reporting partnership income, while failing to report information about partners’ negative tax basis capital accounts for the partnership’s taxable year that started after Dec. 31, 2017, but before Jan. 1, 2019.

The penalty relief promises to give partnerships extra time to provide the negative tax basis capital account information within that period of time.

In the notice, the IRS pointed out that Item L of Schedule K-1 to Form 1065 requires reporting of a partner’s capital account. Generally speaking, a partnership can report partner capital to a partner using tax basis, GAAP, Section 704(b) book or some other accounting method. The updated 2018 Instructions for Form 1065 and Partner’s Instructions for Schedule K-1 (Form 1065) to Item L now require a partnership that doesn’t report tax basis capital accounts to its partners to report, on Line 20 of Schedule K-1 using Code AH, the amount of that partner’s tax basis capital at both the beginning and end of the year if either amount is negative. But the Treasury Department and the IRS have learned that certain partnerships might not be able to comply on a timely basis with the new requirement, so they are offering them penalty relief. Under the terms of the relief, the IRS will waive tax penalties under Section 6722 for furnishing a partner a Schedule K-1 and section 6698 for filing a Schedule K-1 with a partnership return that fails to report negative tax basis capital account information, but only if both the following conditions are met:

  • The partner Schedules K-1 are timely filed, including extensions, with the IRS and furnished to the partners and contain all other required information.
  • The partnership files with the IRS no later than 180 days after the six-month extended due date for the partnership’s Form 1065 or, for a calendar year partnership, no later than March 15, 2020, a schedule setting forth, for each partner for whom the partnership is required to furnish negative tax basis capital account information, the partner’s name, address, taxpayer identification number, and the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue in accordance with instructions and additional guidance posted by the IRS on IRS.gov.

Whether or not a partnership files a Form 7004, "Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns," it can use the six-month extended due date in calculating the due date for filing the required schedule described above. The schedule should be sent to:

1973 North Rulon White Blvd.
Ogden, UT 84404-7843
MS 4700
Attn: Ogden PTE

The IRS noted that the penalty relief applies only for a partnership’s taxable year beginning after Dec. 31, 2017, but before Jan. 1, 2019.

To receive a waiver of the tax penalty, a partnership isn’t required to furnish amended Schedules K-1 to its partners or to file an administrative adjustment request under Section 6227.

The IRS plans to post instructions and more information about the relief in the coming weeks on IRS.gov, where forms, instructions and other tax help will also be available.

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