What does the IRS intend it to mean? In other words, what rule is a partnership supposed to follow in deciding whether to check it or not?
If the partnership will not file another tax return in the future, the return itself is marked "Final." This designation also checks the "Final K-1" box on the partner's Schedule K-1. The IRS is then aware that no future tax returns are expected from the partnership.
If only Schedule K-1 is marked "final," the partner will not receive this form in the future. The IRS is aware that the partner has left the partnership.
How are partnerships observed to use it in the wild? In other words, do they sometimes get it wrong?
Yes, partnership returns are prepared by humans using software. Errors can and do occur but not often.
How, if at all, should I allow it to influence my responses in the TurboTax K-1 interview? Does TurboTax refrain from asking the user about it because (see second bullet) it is unhelpful? What does TurboTax mean by "This partnership ended in ...."?
TurboTax uses check the box "This partnership ended..." in place of "Final K-1" The interpretation is that the partner's investment in the partnership has ended. Perhaps the wording of this option could be improved in the future.
@skywire
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