Passive Loss error in an earlier year

[abhishtu2]

I exited my holdings in a partnership in 2023 and have just received Final K1.

The partnership incurred losses in a majority of its fifteen years

My exit was at a loss (in relation to tax-basis partner's capital)

While finalizing my Return for 2023 (I have requested extension of time), I see that TurboTax shows an unusually high passive loss in 2017.

My tax liability is not affected.

Two doubts: 1. Do I have to file amended Returns for the previous six years even though there is no change in my tax liability even if a lower loss is allowed to be carried forward

                        2. Can I complete 2023 Return merely correcting (with a lower figure) of passive loss to be applied.

Advice would be appreciated. Thanks in advance.

[tagteam]

I'll page @Mike9241. Please check back later.

[AmeliesUncle]

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@abhishtu2 wrote:

While finalizing my Return for 2023 (I have requested extension of time), I see that TurboTax shows an unusually high passive loss in 2017.

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Can you clarify?  You said it was unusually high, but you didn't say it was wrong.  Was the loss incorrect in 2017?

*IF* it was wrong, would any of the years between 2017 and 2023 have changed?  In other words, with a lower carryforward, would the carryforward been used up and there would have been taxable income any of those years?

[Mike9241]

i have no way to know if the loss shown on the 2017 return was proper.  Was it deducted? Next, whether, if proper, that loss created an NOL. if it did, without a c/f election that NOL: would have had to been carried back to a prior year and only the unused portion carryforward.  next, it's probably too late to amend any year later than 2021 due to the general 3-year statute of limitations. 

also unknown is how you exited the partnership? did the partnership terminate?

not sure why there would be any amount is your ending tax basis

Without seeing all the k-1's and the reporting on your 1040s, I can't give you an answer. There are too many unknowns. 

you'll have to either decided what to do or consult a pro to go over your filings 

i would say this but it's a generality and based on correctly completing the k-1s in Turbotax for all those years.  it should have only carried forward the unallowed passive losses.  

[abhishtu2]

Thanks for the quick response.

I believe, the large loss (139K) that TT calculated for 2017 is wrong. While the partnership was incurring losses year after year, it was never that high.  I am unable to understand how TT arrived at that figure - I have rechecked the inputs from K1. Unfortunately, I overlooked this figure and noted it only when I sold my share in 2023. That is when I detected the error.

Since, the losses accumulated over earlier years (prior to 2017), were over 150K, it did not affect any other incomes significantly. Most of my income is from interest and dividend (mostly qualified).

Hope this helps.

Thanks again.

[abhishtu2]

Thanks for the quick response.

I believe, the large loss (139K) that TT calculated for 2017 is wrong. While the partnership was incurring losses year after year, it was never that high.  I am unable to understand how TT arrived at that figure - I have rechecked the inputs from K1. Unfortunately, I overlooked this figure and noted it only when I sold my share in 2023. That is when I detected the error.

I exited the partnership by selling my share. It was at a loss. Since the partnership had incurred losses for several years, my tax basis capital was less than my investment. And the sale proceeds are even lower than the tax basis capital account balance.

The loss  and small gain (in recent years) did not materially change the tax, as the losses brought from earlier years prior to 2016 exceeded 150K.

.Most of my income is from interest and dividend (mostly qualified).

Hope this helps.

Once again, my thanks.

[abhishtu2]

1. The passive loss shown by TT in 2017 is very high (139K) Line 3b of Form 8582 . It is probably wrong but TT does not show how that number was arrived at.

2. The partnership incurred losses earlier too and the accumulated losses carried forward till 2017 was in excess of 150K; consequently, it did not affect taxation as a whole.

3As I wrote, I exited the partnership in 2023 at a loss (in relation to my capital)

Do let me know your views and advise. Thanks. 

[AmeliesUncle]

You said you "believe" it is wrong and that it is "probably" wrong.  You can't do anything until (1) you find out IF it is wrong or not, and (2) IF it is wrong, what the correct amount should be.  You can't file an accurate tax return until you figure that out.

That means you need to look at the K-1 to figure it out on your own (or with TurboTax) or go to a tax professional for some assistance.   

[abhishtu2]

Thank you all.

I have located the mistake(yes, it was a mistake). While preparing my 2017 Return, I had ticked the question on all my investment is at risk. I realize, now, that since I was a passive investor, I should not have ticked that box. When I unchecked it, the year's loss is zero.

I went through the subsequent returns (2018 to 2022) and thankfully had NOT ticked the box.

Hence, my passive loss carried forward remained overstated by 130K. As the aggregate losses carried forward prior to 2017 was in excess of 150K, the mistake in 2017 has not affected my taxes.

MY ISSUE NOW IS

1. When preparing my Return for 2023, can I merely reduce the passive losses brought forward by 130K.

2. Since the Form 8582 in the previous years is technically wrong, do I have to file amended returns for the past years, even if there is no tax impact.

Thanks in advance.

[AmeliesUncle · Accepted solution]

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@abhishtu2 wrote:

I had ticked the question on all my investment is at risk. I realize, now, that since I was a passive investor, I should not have ticked that box. When I unchecked it, the year's loss is zero.

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Just because you are a passive investor doesn't necessarily mean you are entirely not At-Risk.  It depends on the loans (if any) and your other Basis in the activity.  

If you are not sure, I highly recommend going to a good tax professional.

If you are somehow absolutely positive that you know the correct amounts for everything, personally, I would amend the incorrect year (2017), correct the current year carryforward and not amend the in-between years.

[abhishtu2]

Thanks for the advice: appreciate it.

Not sure, if I can amend 2017 Return. It might be time barred.

In any case, thank you, once again.

[tagteam]

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@abhishtu2 wrote:

Not sure, if I can amend 2017 Return. It might be time barred.

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A refund would be time-barred, but you could amend at any time.

[abhishtu2]

Thank you. Will do as advised by both of you.