IRS Gives Partnerships Until September 16, 2019 to Correct 2018 Tax Return Errors

(Revenue Procedure 2019-32)

John Hadwen, Tax Senior Manager
August 19, 2019

Through Rev. Proc. 2019-32, the IRS recently offered certain partnerships a one-time (and rapidly expiring) ability to make corrections to partnership tax returns (Forms 1065) and related Schedules K-1. This concession lets them make such adjustments in the classic, familiar fashion, rather than following the newly-applicable partnership audit rules. In turn, this allows the adjustments to potentially be taxed at lower rates and impact partners in a manner consistent with the unadjusted results. For 2018 calendar-year filers, action will be needed by September 16, 2019.

Background

The benefits of this Rev. Proc. will be understood only by readers who are somewhat familiar with, or at least aware of, the new partnership audit rules known as The Bipartisan Budget Act of 2015 (“BBA”). Those partnership audit rules are explained in more detail in a previous BNN article, but a short overview is as follows:

The BBA created new rules related to partnership audits that generally are effective for partnership tax returns for years beginning on or after January 1, 2018. The most significant impact of the new rules is that they allow the IRS to make tax assessments and collections at the partnership level, rather than partner level. Furthermore, the tax will be assessed and collected against the partnership in the year the audit concludes, rather than the earlier year that is actually under examination. This will shift the burden of payment onto current partners, rather than those who were partners during the year under audit. The tax will be assessed at the highest federal income tax rate, regardless of the potentially lower rates that may otherwise apply. Limited elections are available that may allow some partnerships to alter this treatment.

The issue – and the fix

While the new rules were designed primarily to address changes resulting from IRS audits, they also apply to changes discovered by the taxpayer. In particular, the changes generally prevent many partnerships from filing amended returns that are accompanied by amended partner Schedules K-1. Instead, changes to income and expenses will be subject to the regime described above, which shifts the adjustments to a different year and potentially to a different ownership mix of partners. (Mechanically, amended Forms 1065 will still be used, but the changes will result in tax adjustments at the entity level, rather than the individual level. Therefore, amended Schedules K-1 will not be needed by partnerships operating under the new BBA rules.)

Note that there is an important distinction between an “amended” return and a “superseded” return. Amended returns are used to make corrections to a return that not only has been filed, but for which the corrections are made after the filing deadline for that return has expired. By contrast, if the original return can be adjusted with a corrected filing before the filing deadline has expired, a superseded return (and superseded K-1 schedules) may be used.

Under the new rules, partnerships (other than eligible entities that elected out of the new BBA treatment) no longer may utilize amended Schedules K-1. However, they still may utilize superseded returns and superseded K-1s – but only if filed before the filing deadline expires. In other words, calendar year partnerships who file a valid extension request may file a superseded return anytime through the extended deadline (generally September 15), while those who file without an extension must do so by the original filing deadline (generally March 15). When beyond whichever of those deadlines is applicable, superseded returns are not allowed.

We now get to the thrust of the issue. It is not uncommon for entities to realize the need to file corrected returns. 2018 holds increased likelihood of this need, due to numerous and complex tax law changes. Calendar year 2018 partnerships who obtained an extension have until September 16, 2019 to file a corrected (in this case “superseded”) return, simply adjusting that year’s return and its related K-1s. However, those who filed before March 15 and did not request and extension may file an amended Form 1065, but are barred by the BBA rules from filing amended K-1s, and also could not (until Rev. Proc. 2019-32) file a superseded return and superseded K-1s. They would be stuck instead following the new regime that assesses tax at the entity level at the highest rate and forces the adjustments into 2019, rather than 2018, potentially affecting “the wrong” partners. Rev. Proc. 2019-32 allows a one-time concession (this year only) by allowing partnerships that timely filed returns without using an extension to now file a superseded return on or before September 16, 2019. They can do so simply by filing the adjusted 2018 return and stamping at the top “SUPERSEDED FORM 1065 PURSUANT TO REVENUE PROCEDURE 2019-32.” This basically allows early filers to pretend, this one time only, that they filed an extension request. It preserves the ability to account for the related tax changes at the individual, rather than entity level, and allocate corrections to partners in the same manner that the pre-correction income and expenses were allocated.

Planning tool

Rev. Proc. 2019-32 may be limited in scope, but it brings to mind some opportunities.

First, partnerships that need to correct 2018 filings can use this procedure to accelerate an adjustment into 2018, rather than 2019. This is especially useful if the adjustment is favorable, producing a refund.

Second, recall this is a one-time concession, wherein the IRS tossed taxpayers a bone due to the newness and complexities of the recent tax law changes and revised partnership audit rules. This benefit will not exist next year. Taxpayers who would like to have this additional wiggle room to make adjustments between March 15 and September 15 in subsequent years should consider filing a federal extension form, even if they fully anticipate filing a finalized return before the March 15 deadline. Why? Simply to preserve this ability to file a superseded return.

Conclusion

Partnership filers who did not request extensions, but have noticed the need for changes to their 2018 returns, should look into whether their situation would be improved by filing a superseded return. If so, be sure to do so before September 16, 2019, and follow the protocol described in Rev. Proc. 2019-32.

For more information or a discussion on how this may impact you, please contact John Hadwen or your BNN tax advisor at 800.244.7444.

Disclaimer of Liability: This publication is intended to provide general information to our clients and friends. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.