VIEWpoint Issue 1 | 2023
2023 Compliance Trends: Staying Ahead in an Evolving Regulatory E...
2023 Tax Calendar
The Bipartisan Budget Act (BBA) of 2015 replaced the auditing and tax collection procedures for partnerships under the Tax Equity and Fiscal Responsibility Act of 1982 and the electing large partnership rules and introduced a new centralized partnership audit regime (CPAR). Under the BBA procedures, partners can no longer amend their Form 1065 or Schedule K-1, and instead, must file an administrative adjustment request (AAR), unless the entity has elected out of CPAR.
Due to the complexity of AARs, Doeren Mayhew’s dedicated business tax accountants provide answers to some FAQs below.
BBA partnerships should file an AAR when they need to make changes to already-filed partnership returns. Generally, this applies to partnerships for taxable years beginning after Dec. 31, 2017.
If the original return was e-filed, the AAR must be e-filed with Form 8082, unless your tax software does not provide for e-filing these returns. All other returns should be filed with Form 1065-X.
Only the partnership representative can file and sign an AAR on behalf of the partnership. A partner can only file and sign an AAR on behalf of the partnership if they are also the partnership representative. If no partnership representative designation is in effect due to a failure to designate a partnership representative on the originally filed Form 1065, the partnership may submit Form 8979 with the AAR to designate a partnership representative. The designation is treated as occurring prior to the filing of the AAR and effective on the date the AAR is filed.
It is important to note, AARs do not amend the return in which the adjustment is requested. Instead, these adjustments are reflected in the year the adjustment is made. For example, if a partnership files an AAR for its 2019 tax return, those adjustments will be reflected on its 2022 tax return, assuming 2022 is the year they filed the AAR.
A partnership that files an AAR must calculate whether the requested adjustments result in an imputed underpayment (IU). A partnership must also report the IU on the AAR. If there is an IU, a partnership can either pay the tax resulting from the adjustment or it can push out all adjustments to the reviewed-year partners by making an AAR push out election. If there is not an IU, a partnership must push out all adjustments for the reviewed year partners to take into account for the current tax year.
If the partnership elects an AAR push out or the AAR contains adjustments that do not result in an IU, it must include Form 8985 and Forms 8986 with the AAR submission. Form 8986 must also be furnished to the partners on the date the AAR is filed with the Internal Revenue Service (IRS). Form 8986 operates similar to what used to be an amended K-1.
The year the partner receives a Form 8986 is the reporting year and the rules for taking the adjustments into account are different for non-pass-through partners and pass-through partners.
Non-pass-through partners (generally those who file Forms 1040, 1120 or 990T) who receive a Form 8986 because of an AAR will take the adjustments into account in the reviewed year. Since Form 8986 does not amend the return, the non-pass-through partner will report the total tax changes for the reviewed year.
Non-pass-through partners should use Form 8978 to calculate and report their tax impact of adjustments pushed out to them. If the calculation results in an additional credit, this can apply toward the current reporting year and the partner’s estimated tax payments can be adjusted to reflect this credit.
For example, if you are a non-pass-through partner who anticipates a credit from an AAR, you can reduce the payments on one of your quarterly estimated payments. So, if you expect a $200,000 credit, you can reduce your next quarterly estimated tax payment and keep that money instead of filing an amended return to claim your refund.
Pass-through partner entities (generally, those who file Forms 1041, 1065 or 1120S) who receive Form 8986 must determine whether taking the adjustments will result in an IU. They should use Form 8985 to help calculate the adjustments, and they can either pay the IU or the push out the adjustments to their reviewed-year partners. Whether or not an IU is paid, adjustments that do not result in an IU must be pushed out to partners.
This publication is distributed for informational purposes only, with the understanding that Doeren Mayhew is not rendering legal, accounting, or other professional opinions on specific facts for matters, and, accordingly, assumes no liability whatsoever in connection with its use. Should the reader have any questions regarding any of the news articles, it is recommended that a Doeren Mayhew representative be contacted.
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