The IRS created several new forms to implement the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA), including Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227).” Form 8986 is a BBA form used by a partnership to report each partner’s allocable share of partnership adjustments. Under IRC Section 6241(2), a partnership adjustment is any adjustment to a partnership-related item (PRI), and a PRI generally is defined as any item or amount with respect to a partnership that is relevant in determining the income tax liability of any person. The BBA rules are very complex, and the rules for recipients of Form 8986 are no exception. Here is a high-level overview of when a Form 8986 is used and what actions are required when the form is received.
I received a Form 8986. Now what do I do?
How are partnership adjustments made?
As a general matter, BBA partnerships cannot file amended returns or amended Schedule K-1s. Instead, they must file an administrative adjustment request (AAR) to make changes to an already-filed partnership return. Additionally, partnership adjustments are made by the IRS as part of a partnership examination. Part I.A of Form 8986 is used to identify if the Form 8986 received is issued as part of a partnership examination or if the partnership is voluntarily making adjustments. If box 1 or box 2 in Part I.A of the Form 8986 is checked, the partnership adjustments were made during an audit of a BBA partnership. If box 3 or box 4 in Part I.A of the Form 8986 is checked, the partnership adjustments were made by a partnership filing an AAR.
When does a partnership send Form 8986 to its partners?
Generally, a partnership can either pay the tax resulting from taking the partnership adjustments into account (referred to as the imputed underpayment), or it can push those adjustments out to the partners for the year to which the adjustments relate, referred to as a pushout. However, in the case of an AAR, a partnership is required to push out adjustments that do not result in an imputed underpayment. Form 8986 is one of the forms that is filed as part of a pushout. The partnership also must furnish a copy of the Form 8986 to the partner.
How does a Form 8986 recipient take the adjustments into account?
The year to which the adjustments relate is the reviewed year and is identified in box D of Part II of Form 8986. The year the Form 8986 is sent to the partner is the reporting year and is identified in box G of Part II of Form 8986. The rules for taking the adjustments into account are different for pass-through partners and for non-pass-through partners. Generally, a pass-through partner is a partner that is a partnership, S corporation, nongrantor trust, or estate of a decedent. All other partners, including individuals and C corporations, are non-pass-through partners.
Pass-through partners
Pass-through partners must determine whether taking the adjustments into account results in an imputed underpayment. Pass-through partners can either pay the imputed underpayment or push out the adjustments to their reviewed year partners. In either case, pass-through partners are required to file a Form 8985, “Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report (Required Under Sections 6226 and 6227),” with the IRS. If the pass-through partners push the adjustments out to their reviewed year partners, the pass-through partners also must file a Form 8986 with the IRS and furnish copies of the Form 8986 to the reviewed year partners. The pass-through partners have until the extended due date of the partnership that originally furnished the Form 8986 to file and furnish Form 8985 and Form 8986 to its partners. That date is identified in box F of Part II of Form 8986.
Non-pass-through partners
Generally, non-pass-through partners take the adjustments into account in the reviewed year and, if applicable, any year after the reviewed year and before the reporting year (intervening year) by preparing a pro forma return. The Form 8986 recipient does not amend any of its returns. Instead, the non-pass-through partner reports the total of the change in tax for the reviewed year and each affected intervening year on the partner’s tax return for the reporting year.
For example, assume that in 2021 a calendar year partnership with two individual partners (also using a calendar year) files an AAR to adjust its 2018 Form 1065 and pushes out the adjustments to its partners, furnishing Form 8986 to its partners on the same day the AAR is filed. The reporting year is 2021. The partners take the adjustments into account on a pro forma 2018 Form 1040 to determine the change in tax and, if applicable, interest attributable to any tax due. If taking the adjustments into account for 2018 results in a change in tax attributes that affect 2019 or 2020, a pro forma return must be prepared to calculate the resulting change in tax for each affected year. The total change in tax plus interest for 2018, 2019, and 2020 are reported on a Form 8978, “Partner’s Additional Reporting Year Tax,” filed with the partners’ 2021 Form 1040s.
The 2022 midterm elections created a lot of uncertainty and a divided Congress. How will that impact tax oversight and legislation?
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