Amending 1065 -- Do I issue amended K-1s or Form 8986?

[SunnyTX]

I am amending our 2022 Form 1065 to reflect an incorrect expense amount.  I read through the IRS instructions and searched online, and it appears the process is much more complicated than I was expecting.

I used TurboTax to amend the 1065, and TurboTax creates a 1065-X, an amended 1065, and amended K-1s for me to file by mail.

However, I'm confused if I should be using Form 8986 to let the two partners know of the change in ordinary business income, or if using the amended K-1s TurboTax made is okay?  TurboTax did not mention Form 8986 at all when I went through the steps of amending the 1065.

I marked that this is a BBA-AAR in Part 1, and I don't believe this results in an imputed underpayment for the partnership--the partners just need to use the revised K-1s when filing their personal income tax returns this week.  (I believe we are a BBA partnership because we did not elect not to be.)

[AliciaP1]

Form 8986 is to report changes to the partner's share of partnership items when the partnership is audited by the IRS.  In your case, since you found the error and are proactively reporting, the amended partnership return and the amended K-1s are the correct routes to take.

Per the IRS:

Who Should Prepare Form 8986

The following persons or entities should prepare Form 8986.

Audited partnerships that have made an election under section 6226.

Direct or indirect pass-through partners that receive a Form 8986 related to an audited partnership if they choose to furnish statements to their partners to further push out the adjustments.

Partnerships that file an AAR under section 6227 and either elect to push out the resulting adjustments to their partners or have adjustments that do not result in an IU.

Direct or indirect pass-through partners that receive a Form 8986 related to an AAR partnership, if the direct or indirect pass-through partner chooses to furnish statements to its partners to further push out adjustments or have adjustments that do not result in an IU.

[SunnyTX]

Thank you so much, Alicia! If my error is that I need to decrease an expense, does that result in an IU that I should be paying at the partnership level instead of sending out amended K-1s?  No partner has filed their personal tax returns yet, so it seems so easy to just send out amended K-1s, but I'm unsure if this error creates an IU that the partnership should pay instead?

[AliciaP1 · Accepted solution]

No, it would not result in an Imputed Understatement of tax due.  If you overstated net income (because the expense is missing to reduce income) it would have resulted in an overstatement of tax due for your partners individually.  Again, the choice of form stems from who found the error, you or an IRS auditor, and then whether or not the tax due was understated.  Since it is you, and not a formal IRS audit, you just need to file the amended return and the amended K-1s and you'll be good to go!

@SunnyTX 

[SunnyTX]

Thank you so much for all of your help, Alicia!  Income is understated on the original return because I overstated an expense (and now need to reduce the expense), so that's why I was wondering if it creates an Imputed Understatement of tax that should be paid at the partnership level instead of sending out amended K-1s.

The partners should owe MORE tax, but I'm unsure if we fix this by paying an IU on the 1065-X or by issuing amended K-1s that the partners use to file their 2022 personal tax return (also the tax year of the mistake).

[AliciaP1]

An Imputed Understatement of tax is an audit finding - meaning you can't find one, only the IRS can find one during a formal tax audit.  As I said, (even though I misunderstood the direction of the expense adjustment) you can file the amended 1065 and amended K-1s and you'll be good to go!

@SunnyTX 

[retiredtaxguy1]

This is wildly incorrect advice.  Amending a BBA partnership requires a LOT more than just filing an amended return with an amended K1, even if it is not audited.  These are called AAR's and you have to file an 8082, 8986 and 8985 at minimum.  

[pafish]

You are absolutely correct.  The previous responses are just plain wrong. Jeepers.

If partnership did NOT elect out of CPAR on its adjustment year return - then it needs to file form 1065X-AMENDED RETURN OR ADMINISTRATIVE ADJUSTMENT REQUEST.  Along with the form 1065X it must submit form 8985 and 8986 and provide Form 8986 to the partners (assuming it "pushes out" the adjustments".  Based on the Form 8986 they receive, the partners then file form 8978 with their 1040 in order to pick up the adjustments in the year that they receive form 8986.  As opposed to receiving an amended k-1 where they have to go back and amend their 1040 for the partnership's adjustment year.  An 8082 is not required unless a partnership is electronically filing or claiming inconsistent treatment.  Typically the partners don't have to go back and file amended returns for BBA Partnerships.

[pafish]

Alicia not correct -  imputed underpayment also needs to be calculated on an AAR if the partnership is not pushing out the adjustments.

[pafish]

Alicia wrong - see instructions for Form 1065X - BBA partnerships