The IRS has issued draft instructions for Form 8978, Partner’s Audit Liability Under Section 6226 and Schedule A (Form 8978), Schedule of Adjustments. Partners (other than pass-through partners such as partnerships or S corporations) use Form 8978 and Schedule A (Form 8978) to report adjustments shown on a Form 8986 received from a partnership that has elected to push out an imputed underpayment to its partners.
Background.
The centralized audit regime was enacted as part of the Bipartisan Budget Act (BBA, PL 114-74) to replace the TEFRA rules for auditing partnerships. Under the centralized audit regime, for tax years beginning on or after January 1, 2018, adjustments to a partnership’s reported items of income, gain, loss, deduction, and credits as well as penalties, additions to tax, or additional amounts that relate to those adjustments, are determined at the partnership level. (Code Sec. 6221(a))
Also, any tax attributable to the above adjustments is assessed and collected at the partnership level in the form of an imputed underpayment, which is paid by the partnership. (Reg §301.6221(a))
However, instead of paying the imputed underpayment, a partnership may elect to “push out” the audit adjustments (reviewed year adjustments) to each person who held an interest in the partnership (reviewed year partner) during the tax year that was audited (reviewed year). (Code Sec. 6226(a))
If a partnership makes a push-out election, it must report to the IRS, and to each reviewed year partner, each partner’s share of any reviewed year adjustments and any penalties. (Code Sec. 6226(b)) The partnership reports a partner’s share of any reviewed year adjustments and penalties on Form 8986, Partner’s Share of Adjustment(s) to Partnership Related Item(s).
The reviewed year partners report their share of the reviewed year adjustments on Form 8978 and Schedule A (Form 8978). Schedule A (Form 8978) lists all the adjustments a partner receives on Form 8986. Schedule A (Form 8978) is also used to report any related amounts and adjustments not reported on Form 8986, which may result from changes to partner-level tax attributes as a result of adjustments from Form 8986. See Draft of new partnership audit liability form and schedule released (08/20/19).
Form 8978 draft instructions
Generally, every partner (except pass-through entity partners) that receives a Form 8986 from its partnership must file a Form 8978 to report any additional tax due as a result of accounting for the partner’s share of the reviewed year’s adjustments.
When to file. A reviewed year partner or affected partner must file Form 8978 with a timely filed federal income tax return for the partner’s reporting year. A partner’s reporting year is the partner’s tax year that includes the date the audited partnership furnished the Form 8968 to its partners (this date is found on Form 8986, Part II item G). Thus, a calendar year partner who receives a Form 8968 dated 6/30/2021, must report the adjustments on his 2021 federal income tax return.
What to report on Form 8978 and Schedule A (Form 8978) . The specific adjustments listed on Form 8986 received by a reviewed year partner, and other adjustments from partner-level tax attributes that have changed as a result of a partnership audit, or a partnership’s request for an administrative adjustment (AAR), should be listed on the partner’s Schedule A, lines 1, 3, and 5 for income, deductions, and credits, respectively, for the applicable tax year. The totals on lines 2, 4, and 6 of Schedule A are reported on lines 1b, 3b, and 9b of Form 8978.
Years to include and exclude on Form 8978 and Schedule A . Only applicable years need to be shown on Form 8978 and Schedule A. An applicable year is any tax year that is impacted by the audit adjustments shown on Form 8986. A year that is not impacted does not have to be shown on Form 8978 or Schedule A.
Tax calculations. Taxes should be figured and shown on a separate statement. In general, non-pass-through partners that receive adjustments on a Form 8986 should figure the additional tax or decrease in tax as if the adjustments had been included on the partner’s affected year return using a statement attached to Form 8978. This increase or decrease is then reported on the partner’s reporting year income tax return.
Receipt of multiple Forms 8986. If a partner receives multiple Forms 8986 for different years, a column on Form 8978 and Schedule A could be both an affected year and an intervening year. If a partner receives multiple Forms 8986 for different years, a given column on Form 8978 and Schedule A could be both an affected year and an intervening year.
For example, a partner receives a Form 8986 for first affected year 2020 and another Form 8986 for first affected year 2021. Both Forms 8986 are with respect to reporting year 2022. 2021 is an intervening year that is an applicable year due to the 2020 Form 8986. In this example, column (a) of Schedule A would be used for 2020 adjustments and column (b) for 2021 adjustments. Column (a) should include the adjustments from the 2020 Form 8986 as well as any adjustments from changes to the partner-level tax attributes resulting from Form the 2020 Form 8986. Column (b) should include the adjustments from the 2021 Form 8986 as well as any adjustments from changes in partner-level tax attributes resulting from the 2021 Form 8986 and the intervening year adjustments such as adjustments from changes in partner-level tax attributes resulting from the 2020 Form 8986.
More than four applicable years. If there are more than four applicable years, additional Forms 8978 should be prepared for the additional years. The first Form 8978 should include the total of all additional tax, penalties, and interest for all Forms 8978.
For example, if a partner has 7 applicable tax years, years 1-4 should be shown on the first Form 8978, years 5-7 should be shown on a second Form 8978. On the first Form 8978, lines 14, 16, and 18 should include the total amount of all lines 13, 15, and 17 from both Forms 8978. On the second Form 8978, lines 14, 16, and 18 should be left blank. A Schedule A should be included for both Forms 8978.
Adjustments on Schedule A. The taxpayer must enter the description of the item that corresponds to the Schedule K line number and title as reflected on Form 8986, Part V. For adjustments due to changes in partner tax attributes, use the description of that item the partner used on his return.
Audit tracking number. The tracking number column should be completed if an adjustment on a Form 8986 relates to an audited partnership. The tracking number can be found at the top of the Form 8986. If the tracking number is not on Form 8986, the partner should use the audit control number at the top of the Form 8986. The tracking number column should be left blank for all adjustments on a Form 8986 that relate to an AAR partnership or for adjustments to partner-level attributes.
Reporting amounts from Form 8986 on Schedule A (Form 8978). All adjustments (positive and negative) from a Form 8986 should be shown on Schedule A as reported on that form. When entering adjustments from a Form 8986, enter amounts from Form 8986, Part V, column (h), which reflect the adjustments net of any approved modifications (column (g) of Form 8986). These amounts should be entered in the applicable columns (a) through (d) that correspond to the partner’s affected year.
However, if Form 8986 is a result of an AAR partnership (and not an audited partnership), no modifications should be shown on Part V, column (g), of that Form 8986 and no modifications should be reported on Schedule A.
Reporting positive and negative amounts on Schedule A (Form 8978). Increases to net taxable income, such as increases to income and decreases to deductions and credits, should be shown as positive amounts. Decreases to net taxable income, such as decreases to income and increases to deductions or credits, should be shown as negative amounts.
For example, if an audited partnership adjustment increases income, this would be a positive adjustment on line 1 of Schedule A and if this, in conjunction, increases the amount of charitable deductions that can be claimed by the partner, this should be listed as a negative adjustment to deductions on line 3 of Schedule A.
The draft instructions also include a comprehensive example of how items should be reported.
To continue your research on payment of imputed partnership underpayment by partners, see FTC 2d/FIN ¶T-2424; United States Tax Reporter ¶62,214.14.
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