The 2018 tax compliance season brought many challenges to both taxpayers and tax practitioners due to tax reform. Yet, some new regulations, such as those related to negative tax capital accounts, didn’t get the attention they likely should have causing incorrect filings.
The Internal Revenue Service (IRS) mandated tax practitioners were required to include tax basis for each partner in a partnership if that partner had a negative tax capital account. If a partnership reports anything other than tax basis capital accounts to its partners on Schedule K-1 in Item L (i.e., GAAP, 704(b) book or other), and tax basis capital is negative, then the partnership must report on Line 20 of Schedule K-1, using code AH, such partner’s beginning and ending shares of tax basis capital. What are the consequences if the mandate was not followed? Taxpayers could be subject to an IRS penalty of $195 per partner, per month.
To circumvent this, the IRS provides penalty relief for partnerships that did not report the negative tax basis capital accounts on their 2018 tax returns. They released eight frequently asked questions (FAQ’s) addressing partnership reporting requirements for negative tax basis capital accounts which is. The IRS FAQ’s introduce a safe harbor allowing a partnership to calculate a partner’s tax basis capital account by taking the partner’s outside tax basis in the partnership and subtracting the partner’s share of liabilities.
As previously stated, the partnership may be subject to penalties under Section 6721 or Section 6722 if an entity does not submit a partner’s tax basis with the filing of the 2018 return. The tax penalty cannot be removed with the first-time penalty abatement. To avoid this, the partnership must file the tax capital account schedule with the IRS no later than 180 days after the six-month extended due date for the partnership’s Form 1065 or, for calendar-year partnerships, no later than March 15, 2020 (under Notice 2019-20). Partnerships can use the six-month extended due date even if the partnership did not file a Form 7004 extension. The penalty relief in the notice does not require partnerships to provide amended Schedules K-1 to their partners or to file an administrative adjustment request under Section 6227.
Due to the late passing of this new regulation, these reporting requirements may have been overlooked during the preparation process of 2018 returns. Acknowledging the uncertainty surrounding the reporting requirement, the IRS is allowing this rectification opportunity to be addressed before March 15, 2020. Doeren Mayhew will be reviewing our clients returns to identify any potential issues related to negative tax capital to ensure proper, timely reporting to the IRS is completed. Should you have any concerns or questions related to this, contact a Doeren Mayhew tax advisor.
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