IRS Provides Penalty Relief Relating to New Form 1065 K-1 Reporting Requirement

(Parker Tax Publishing March 2019)

The IRS is issuing penalty relief relating to a new Schedule K-1 reporting requirement under which a partnership that does not report tax basis capital accounts to its partners must report, on line 20 of Schedule K-1, the amount of such partner's tax basis capital both at the beginning of the year and at the end of the year if either amount is negative. The IRS noted that some partnerships may be unable to comply with this new requirement on a timely basis and the penalty relief will allow additional time for partnerships to provide the negative tax basis capital account information with respect to the partnerships' tax years beginning after December 31, 2017, but before January 1, 2019. Notice 2019-20.

Background

Item L of Schedule K-1 to Form 1065 requires reporting of a partner's capital account. Generally, a partnership may report partner capital to a partner using tax basis, Generally Accepted Accounting Principles (GAAP), Code Sec. 704(b) book, or some other method.

Pursuant to updates, the 2018 Instructions for Form 1065 and Partner's Instructions for Schedule K-1 (Form 1065) to Item L now require a partnership that does not report tax basis capital accounts to its partners to report, on line 20 of Schedule K-1 using code AH, the amount of such partner's tax basis capital both at the beginning of the year and at the end of the year if either amount is negative (negative tax basis capital account information). According to the IRS, certain partnerships may be unable to timely comply with this new requirement. As a result, the IRS issued Notice 2019-20, which grants penalty relief to such partnerships.

Notice 2019-20 Penalty Relief

In Notice 2019-20, the IRS said that it will waive penalties under Code Sec. 6722 for furnishing a partner a Schedule K-1 and under Code Sec. 6698 for filing a Schedule K-1 with a partnership return that fails to report negative tax basis capital account information if both of the following conditions are met:

(1) The partner Schedules K-1 are timely filed, including extensions, with the IRS and furnished to the partners and contain all other required information.

(2) The partnership files with the IRS no later than 180 days after the six-month extended due date for the partnership's Form 1065 or, for a calendar year partnership, no later than March 15, 2020, a schedule setting forth, for each partner for whom the partnership is required to furnish negative tax basis capital account information, the partner's name, address, taxpayer identification number, and the amount of the partner's tax basis capital account at the beginning and end of the tax year at issue in accordance with instructions and additional guidance posted by the IRS on IRS.gov. Whether or not a partnership files a Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, it can use the six-month extended due date in calculating the due date for filing the required schedule. The schedule should be sent to the following address: 1973 North Rulon White Blvd., Ogden, UT 84404-7843, MS 4700, Attn: Ogden PTE.

This penalty relief applies only for a partnership's tax year beginning after December 31, 2017, but before January 1, 2019. To receive a waiver of the penalty, a partnership is not required to furnish amended Schedules K-1 to its partners or to file an administrative adjustment request under Code Sec. 6227, and partnerships should not delay issuing partner Schedules K-1 on account of Notice 2019-20. The timely furnishing, including extensions, of Schedules K-1 to partners is a requirement to be eligible for relief under Notice 2019-20. The IRS will post instructions and additional information about the relief provided by Notice 2019-20 in the coming weeks on IRS.gov, where forms, instructions, and other tax assistance are available.

According to the IRS, this penalty relief will allow additional time for partnerships to provide the negative tax basis capital account information with respect to the partnerships' tax years beginning after December 31, 2017, but before January 1, 2019.

For a discussion of penalties relating to the untimely filing of a Form 1065, Schedule K-1, see Parker Tax ¶28,550.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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