Forgot to Enter Final K-1 in 2018; What Do I Do Now?

[Wallenowen1]

My father passed away in 2012. To manage my Dad's real estate assets until the assets could be sold, my older brother set up an LLC in North Carolina listing all siblings as passive partners. Working with a local CPA, my brother generated an annual schedule K-1 which family members used to prepare personal income taxes. I dutifully prepared returns from 2012 and onwards using TurboTax, answering all question prompts related to the LLC.

The real estate assets had all been sold by late 2018, and the LLC had been legally dissolved. The CPA issued a 2018 schedule K-1 with the "Final K-1" box checked. TurboTax didn't ask about the status of this checkbox nor did I understand that the designation created a "taxable event," and so I just filled out the tax forms with zeros for the K1 values and moved on.

Until 2021. In preparing taxes this year, I noted this large unallowed passive loss that had also been on my books in 2018, 2019 and 2020.  Conducting some research, I finally determined that in 2018, I should have told TurboTax that the LLC had been closed and provided some terminal values so that unallowed losses could be released. I discovered this error to late, unfortunately, to file an amended return for 2018, the year in which the error had taken place, due to the IRS 3-year rule for requesting refunds.

So my question for the 2022 tax year: do I just leave the dissolved LLC on my tax form as though it were still active, and look for a new source of passive gains to offset the unallowed losses? Or do I need to bring the IRS up to date on the LLC dissolution using some other form that allows me to start with a clean slate for 2022? It would seem  to me that if I "dispose of the LLC" in 2022 while the actual dissolution took place in 2018, then the IRS could have a problem with that.

I will eventually hire a CPA to figure this out -- who knew you couldn't rely on TurboTax to handle a LLC dissolution? -- but thought I would get a grounding on next legal steps required before moving forward. Thanks! 

[Anonymous_ · Accepted solution]

You cannot simply use the former passive loss on your 2022 federal income tax return.

Rather, you would need to go back to your 2018 return and start from that point (i.e., the year the suspended PAL was released).

[Critter-3]

Sadly the 2018 return needs to be amended to release the passive losses and if there is nothing to carry forward the loss is gone forever. If a loss of somekind is still available to be carried forward you would have to amend the 2019 then 2020 and finally 2021 return until it is used up completely.  However   you can no longer get a refund for a 2018 amendment ... a most unfortunate situation.  This is why using a DIY program when you have something unusual that you are not familiar with is not a wise choice.   

[Rick19744]

Well, this is certainly a learning moment in the tax world.

• I agree that you need to remove any unused losses from the prior LLC that issued a final K-1 in 2018.  Those cannot be used against any other passive income past the 2018 tax filing.
• As a member of an LLC you should have been maintaining a tax basis schedule of the investment in the LLC.  This should have been updated each year you received a K-1.
• Your tax basis schedule should have been utilized when preparing your 2018 tax return in determining any gain or loss on the LLC investment.
• TT has many questions related to each K-1 received and one of those questions has to do with a complete disposition of the activity (example receiving a final K-1).  If you are preparing your own tax return, then you need to take some responsibility in reading each and every question and make sure you understand the question and your response.  Had you indicated that there was a complete disposition of the LLC K-1, then TT would have generated other questions.  Whether those questions were answered correctly or not, TT would have "released" the suspended losses in 2018.  This doesn't guarantee that your overall gain or loss was correct, as that will only occur if you input the correct responses to the numerous questions; ie; knowing your tax basis.
• This was an unfortunate lesson, but a reminder, that while TT is a good tax preparation software, it does not replace sitting down with a tax professional and having a one on one when you have an unfamiliar tax situation.  TT can only prepare an accurate return if provided accurate information and the appropriate questions answered correctly.

[Wallenowen1]

Good stuff! It was a hard lesson learned indeed. Since I started using TT decades ago, I always assumed: "Intuit's got this tax-thing covered -- Why go to a CPA?"  This tax situation proves otherwise.

A saying often attributed to Ben Franklin states: "A man who is his own lawyer has a fool for a client." I can add to that: "A man who is his own accountant on arcane LLC tax matters using TT has a fool for a client."😫