Now that the Sept. 15 filing deadline has passed, many partnerships face a familiar question: What should they do about errors discovered on returns that were already filed? Following are some reminders to consider with respect to federal tax returns when thinking through potential solutions. Partnerships also should consider state rules when determining how best to move forward.
AARs
- As a general matter, a partnership subject to the centralized partnership audit regime enacted by the BBA cannot file amended returns or amended Schedule K-1s, “Partner’s Share of Income, Deductions, Credits, Etc.” Instead, it must file an AAR to make a change to an already-filed partnership return. Although the American Institute of Certified Public Accountants and other organizations have pressed the IRS to create an “EZ” process for simple adjustments or omitted forms and elections, currently no relief is on the horizon.
- A partnership with fewer than 100 eligible partners that properly elects out of the BBA on its timely filed original return can file an amended partnership return for the year to which the election applies.
- A partnership generally has three years from the date the Form 1065, “U.S. Return of Partnership Income,” is filed to file an AAR. However, once a partnership’s tax year has been selected for audit and the IRS mails a statutory notice of administrative proceeding (NAP), an AAR no longer can be filed. Therefore, a partnership that wants to file an AAR should do so as soon as possible, so it is not precluded from doing so by being selected for audit and receiving a NAP.
- An AAR is filed electronically by attaching a Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” to a Form 1065 with box G, “Amended return,” checked or on paper using the Form 1065-X.
- The partnership representative or, in the case of a partnership representative that is an entity, the designated individual must sign the AAR.
- If the partnership is pushing out adjustments to the partners for the year to which the AAR relates, the Form 8985, “Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227),” and Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227),” are attached to the AAR filed with the IRS. Additionally, copies of the Form 8986 are furnished to each partner.
- A pass-through partner that receives a Form 8986 must submit Form 8985 and Form 8986 to the IRS and furnish Form 8986 to the pass-through partner’s owners no later than the extended due date for the tax year in which the partnership filed the AAR. For example, if a pass-through partner that is a partnership receives a Form 8986 from a calendar year partnership that filed an AAR in 2024, the pass-through partner has until Sept. 15, 2025, to submit Form 8985 and Form 8986 to the IRS and furnish a Form 8986 to each partner, though it might want to furnish the Form 8986 as soon as possible so its owners can take timely action required under the BBA regime. S corporations and certain trusts are treated as pass-through partners and, therefore, must follow these rules.
Crowe observation
A partnership claiming the employee retention credit (ERC) might file an AAR for the corresponding tax period to reduce the previously taken deduction for wages paid or, if applying for the ERC voluntary disclosure program, to reverse that prior AAR.
Late-election and penalty relief might be available
If a regulatory election was not timely made, late-election relief might be available. In some cases, relief is automatic and involves taking corrective action within six or 12 months of the late election. For six- and 12-month automatic relief, the regulations require filing an amended return as part of taking corrective action. These regulations have not been updated for the BBA rules, which do not allow partnerships to file amended returns. Partnerships should discuss with their tax adviser how to take corrective action in light of the BBA rules. Other opportunities for automatic late-election relief might be available under certain revenue procedures. If a taxpayer is not eligible for automatic late-election relief, it might be eligible for relief by filing a request for a private letter ruling with the IRS Office of Chief Counsel.
If a partnership discovers that an intended request for extension of time to file the Form 1065 was not filed on or before the original due date, if not already filed, the partnership should file the delinquent return as soon as possible and request relief if penalties are imposed. First-time abatement or reasonable cause relief might be available depending on the particular facts and circumstances.
