Administrative adjustment requests for CPAR partnerships FAQ and toolkit | Baker Tilly

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Administrative adjustment requests for CPAR partnerships FAQ and toolkit | Baker Tilly

What form does a partnership use to file an AAR?

It depends. If the AAR will be electronically filed, you must use Form 8082. If the AAR will be paper filed, you must use Form 1065-X.

Note: If the partnership was required to file Form 1065 electronically (if the partnership had more than 100 partners for the return year) then the AAR must be electronically filed.

What if there are multiple adjustments to the Form 1065?

At this time, only one imputed underpayment can be reported on each AAR. The AAR forms are currently not designed to accommodate both net positive and net negative adjustments. Net positive adjustments and net negative adjustments are treated separately.

What is a net positive or net negative adjustment?

A net positive adjustment is a net increase in an item of income or decrease in an item of credit within an adjustment grouping or subgrouping.

A net negative adjustment is a net decrease in an item of income or increase in an item of credit within an adjustment grouping or subgrouping.

More on grouping and subgroupings can be found here.

Can the partnership have a liability to the IRS resulting from adjustments in an AAR?

Yes. If a partnership has a net positive adjustment, the partnership may owe to the IRS an imputed underpayment (plus interest and penalties, as applicable). The imputed underpayment is calculated by multiplying the sum of all net positive adjustments from the reallocation grouping and residual grouping by the highest rate of income tax in effect for the original tax year, plus any net positive adjustment of credit items.

Can the partnership “push out” net positive adjustments to the underlying partners?

Yes. The partnership must make a push-out election with the AAR and report the adjustments to the partners on Forms 8986. The election absolves the partnership from any liability with respect to those adjustments. Forms 8986 are filed with the IRS and separately issued to the partners. The partnership must also complete a Form 8985 with the Forms 8986 that are filed with the IRS.

Form 8986 is a substitute for an amended K-1, but not an equivalent. While a partner who receives an amended K-1 may have to amend her income tax return to report items on an amended K-1, a partner who receives a Form 8986 picks up those adjustments on her tax return in the year she receives the Form 8986.

For example, if a partnership files an AAR and corresponding Forms 8986 for its 2018 tax year sometime in 2021, then the partner picks up those adjustments on her 2021 income tax return. The partner must attach Form 8978 to her 2021 income tax return to pick up the adjustments.

What happens when a partnership has a net negative adjustment?

Net negative adjustments are pushed out to the partners of the original tax year on Forms 8986. They cannot be netted against net positive adjustments in an effort to reduce an imputed underpayment.

What happens if a pass-through partner receives Form 8986 from a partnership that filed an AAR?

If a partnership that files an AAR pushes out a net positive adjustment to a pass-through partner, then that pass-through partner has two options: (1) pay an imputed underpayment with respect to the adjustments; or (2) push out the adjustments to its partners no later than the due date of its income tax return for the year the pass-through partner received the push-out statement from the partnership that filed the AAR.

If the AAR has a net negative adjustment that is allocated to a pass-through partner on Form 8986, then that pass-through partner must issue Forms 8986 to its partners for their allocable shares of the adjustment no later than the due date of its income tax return for the year the pass-through partner received the push-out statement.

I understand there is a timing difference between the year of the original Form 1065 and when push-out adjustments from an AAR are reported by the partners. Any potential pitfalls to be aware of?

Yes. A partner’s net decrease in tax on Form 8978 resulting from an AAR acts as a nonrefundable credit on the partner’s income tax return in the year the AAR is filed. If a partner is in a positive income position for the original tax year but is in a loss position the year the AAR is filed, the AAR adjustments may not yield any tax benefit to the partner since there is no tax to decrease on the return. Thus, it is critical to understand the potential impact of an AAR filing to the partners before the partnership proceeds to file the AAR.