2017 K-1 error issued to me

[CONFUSEDBYTAXES]

Apparently I was issued a K-1 for 2017 that they have now discovered was in error as described below. I did deduct the amount. Their error - what options do I have to avoid a tax bill or interest and penalties?: 

"you owned Class B Units of, and were incorrectly allocated, the ordinary income tax losses listed below. The Class B Units that you held were classified as “profits interests” for federal and state income tax purposes and you did not have any federal income tax basis in these units that would have permitted an allocation or your utilization of the ordinary income tax losses that were reported on the Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc. issued to you for these years. XXX Partnership is now in the process of correcting its tax and accounting records. To finalize this process, we request information from you to determine if you have utilized any of the erroneously allocated ordinary income tax losses during the years that they were reported to you or in subsequent tax years. If so, XXX Partnership will correctively allocate ordinary income to you in the amount of the losses that you report that you have utilized."

It is not clear to me if they will allocate in current year or prior years... or if they will report to IRS.

Hmm - thanks

[ToddL99]

Based on the information you provided,  you should inform the XXX Partnership that you claimed (utilized) the losses and wait for their response. Based on their decision, you will know whether an amended return is necessary (or even possible) or if you can report the correction in a current year. 

If they issue a correction that results in additional tax for a prior year, it is unlikely that you will be assessed any penalties since the error was not of your making. If penalties are assessed you can appeal them. 

Interest is likely to be charged, but not at a punitive rate. The IRS pays taxpayers interest on late-arriving refunds, so they charge interest when they get tax payments later than expected.

You are right to question whether they will allocate the correction to the current year or a prior year. Once they make that decision, they should provide you with the necessary tax form (K-1) to report the correction.