IRS Creates Additional Time-Consuming Compliance Obligations
The purpose of this blog is to highlight an area of change (and delayed change) to tax compliance related to partnerships. While its impact is limited to partnerships, it does highlight the “behind the scenes” compliance burden the IRS is placing on affected taxpayers and their tax preparers. And of course many individual taxpayers are partners in partnerships and are therefore indirectly affected.
Changes to Form 1065 and Reporting of Partners’ Capital Accounts
There has been a great amount of confusion recently surrounding the reporting requirements of capital accounts for partnerships. The continual changes by the IRS in reporting requirements has created additional compliance obligations, which often take a great deal of time to implement. The following is a summary of the changes that have occurred:
2018 Tax Year Returns
In February of 2019, the IRS announced a change to the 2018 form 1065. The change requires partnerships that report partners’ capital accounts on a basis other than tax basis to provide beginning and ending tax basis capital accounts on Schedule K-1 for any partner with negative “tax basis capital.” This requirement was introduced because the IRS is interested in identifying situations where partners will likely have to recognize future income or gain.
Certain partnerships indicated to the IRS that they would not be able to provide the required information in a timely manner on the 2018 tax returns. In response, the IRS issued Notice 2019-20 in March of 2019, which provided penalty relief regarding the requirement for the 2018 tax year. Penalty relief is provided until May of 2020, given that the 2018 tax return was filed on time, or within the extension period, and the partnership provided a schedule to the IRS detailing the partners with negative tax basis. If a tax return was filed without the tax basis for partners’ with negative tax basis capital accounts, the taxpayer may file a supplemental schedule with the tax basis captioned “file under notice 2019-20”. This statement must be filed no later than one year after the original, unextended due date of the form (i.e., March 16, 2020).
2019 Tax Year Returns
The initial instructions for the 2019 form 1065 required that all partners’ capital accounts be reported on a tax basis, regardless of whether the capital account was positive or negative. Again, the IRS provided temporary relief regarding this requirement. Notice 2019-66 said “This notice provides that the requirement to report partners’ shares of partnership capital on the tax basis method will not be effective for 2019 (for partnership taxable years beginning in calendar 2019) but will be effective beginning in 2020 (for partnership taxable years that begin on or after January 1, 2020).”
For the 2019 tax year, partners’ capital accounts must be reported consistent with the 2018 forms and instructions, which includes the requirement to report negative tax basis capital accounts on a partner-by-partner basis.
2020 Tax Year Returns
As the reporting requirements currently stand, all partnership returns for the 2020 tax year will require partners’ capital accounts to be reported on a tax basis. For partnerships who have historically reported partners’ capital accounts on a basis other than tax basis, a tax basis calculation will need to be performed to fulfill the IRS’ reporting requirements for the tax year beginning January 1, 2020 or after. Any partnerships in which it is suspected that some partners may have a negative tax basis should have a calculation completed for the 2019 tax return year to ensure compliance.
To discuss how these reporting requirements might impact you and your partners, or if you have other tax questions, please contact us through our website (www.pricecpas.com) or call 615.385.0686 to schedule an appointment. We look forward to making a positive difference in your financial experience.
Ashley Keen, CPA