Partnerships Given Penalty Relief for Some Incorrect Reporting

Partnerships Given Penalty Relief for Some Incorrect Reporting

Internal Revenue Service

The IRS has issued guidance (Notice 2021-13) that provides partnerships with relief from some penalties due to the inclusion of incorrect information in reporting their partners' beginning capital account balances and relief from accuracy-related penalties for any tax year for the portion of an imputed underpayment attributable to the inclusion of incorrect information reported for the 2020 tax year. Before the 2020 tax year, partnerships could report their partners’ capital accounts using one of a variety of methods that are based on different principles. Starting in the 2018 tax year, partnerships that did not report tax basis capital accounts to their partners were required to report separately the beginning and ending tax basis capital account balance of any partner that would have a negative beginning or ending tax basis capital account balance. Beginning in the 2020 tax year, partnerships were required to calculate and report their partners’ capital accounts using the transactional approach for the tax basis method, regardless of whether the beginning or ending balance is negative for a partner. The 2020 Form 1065 instructions explain that if a partnership did not report its partners’ capital accounts using the tax basis method in the 2019 tax year and did not maintain its partners’ capital accounts under the tax basis method in its books and records, the partnership may determine its partners’ beginning capital accounts for the 2020 tax year using the tax basis method, the modified outside basis method, the modified previously taxed capital method, or the <a href="/research/federal/usc26/704#cpfs-0000003" resolve="/lr/resolve//cpfs#cpfs-0000003">section 704(b)</a> method. Notice 2021-13 provides that a partnership will not be subject to a penalty under <a href="/research/federal/usc26/6698" resolve="/lr/resolve//cqpl">sections 6698</a>, <a href="/research/federal/usc26/6721" resolve="/lr/resolve//cqlm">6721</a>, or <a href="/research/federal/usc26/6722" resolve="/lr/resolve//cpmf">6722</a> due to the inclusion of incorrect information in reporting its partners’ beginning capital account balances on the 2020 Schedules K-1 if some conditions are met. The partnership must show that it took ordinary and prudent business care, as defined in the guidance, in following the 2020 Form 1065 instructions to report its partners’ beginning capital account balances using any one of the methods outlined in the instructions. A partnership also will not be subject to a penalty under <a href="/research/federal/usc26/6698" resolve="/lr/resolve//cqpl">sections 6698</a>, <a href="/research/federal/usc26/6721" resolve="/lr/resolve//cqlm">6721</a>, or <a href="/research/federal/usc26/6722" resolve="/lr/resolve//cpmf">6722</a> due to the inclusion of incorrect information in reporting its partners’ ending capital account balances on Schedules K-1 in tax year 2020 or its partners’ beginning or ending capital account balances on Schedules K-1 in tax years after 2020 to the extent the incorrect information is attributable solely to the incorrect information reported as the beginning capital account balance on the 2020 Schedule K-1 for which relief under the guidance is available. The penalty relief provided in the guidance is in addition to the reasonable cause exception to penalties for failing to properly report the partners’ beginning capital account balances. A partnership is not eligible for relief if it fails to include a partner’s beginning capital account balance on the Schedule K-1 or fails to timely file a 2020 Form 1065, Form 8865, and Schedule s K-1. The guidance also does not relieve a partner of its obligation to determine the adjusted basis of its interest in the partnership for purposes of determining its tax liability or that of any other person. The IRS will waive any accuracy-related penalty under <a href="/research/federal/usc26/6662" resolve="/lr/resolve//cp79">section 6662</a> for any tax year for any portion of an imputed underpayment that is attributable to an adjustment to a partner’s beginning capital account balance reported by the partnership for the 2020 tax year to the extent the adjustment arises from the inclusion of incorrect information for which the partnership qualifies for relief under the guidance. Notice 2021-13 does not prevent the IRS from imposing an accuracy-related penalty under <a href="/research/federal/usc26/6662" resolve="/lr/resolve//cp79">section 6662</a> for any portion of an imputed underpayment for capital account reporting by the partnership that is not previously described.

The IRS has issued guidance (Notice 2021-13) that provides partnerships with relief from some penalties due to the inclusion of incorrect information in reporting their partners' beginning capital account balances and relief from accuracy-related penalties for any tax year for the portion of an imputed underpayment attributable to the inclusion of incorrect information reported for the 2020 tax year.

The IRS has issued guidance (Notice 2021-13) that provides partnerships with relief from some penalties due to the inclusion of incorrect information in reporting their partners' beginning capital account balances and relief from accuracy-related penalties for any tax year for the portion of an imputed underpayment attributable to the inclusion of incorrect information reported for the 2020 tax year. Before the 2020 tax year, partnerships could report their partners’ capital accounts using one of a variety of methods that are based on different principles. Starting in the 2018 tax year, partnerships that did not report tax basis capital accounts to their partners were required to report separately the beginning and ending tax basis capital account balance of any partner that would have a negative beginning or ending tax basis capital account balance. Beginning in the 2020 tax year, partnerships were required to calculate and report their partners’ capital accounts using the transactional approach for the tax basis method, regardless of whether the beginning or ending balance is negative for a partner. The 2020 Form 1065 instructions explain that if a partnership did not report its partners’ capital accounts using the tax basis method in the 2019 tax year and did not maintain its partners’ capital accounts under the tax basis method in its books and records, the partnership may determine its partners’ beginning capital accounts for the 2020 tax year using the tax basis method, the modified outside basis method, the modified previously taxed capital method, or the section 704(b) method. Notice 2021-13 provides that a partnership will not be subject to a penalty under sections 6698, 6721, or 6722 due to the inclusion of incorrect information in reporting its partners’ beginning capital account balances on the 2020 Schedules K-1 if some conditions are met. The partnership must show that it took ordinary and prudent business care, as defined in the guidance, in following the 2020 Form 1065 instructions to report its partners’ beginning capital account balances using any one of the methods outlined in the instructions. A partnership also will not be subject to a penalty under sections 6698, 6721, or 6722 due to the inclusion of incorrect information in reporting its partners’ ending capital account balances on Schedules K-1 in tax year 2020 or its partners’ beginning or ending capital account balances on Schedules K-1 in tax years after 2020 to the extent the incorrect information is attributable solely to the incorrect information reported as the beginning capital account balance on the 2020 Schedule K-1 for which relief under the guidance is available. The penalty relief provided in the guidance is in addition to the reasonable cause exception to penalties for failing to properly report the partners’ beginning capital account balances. A partnership is not eligible for relief if it fails to include a partner’s beginning capital account balance on the Schedule K-1 or fails to timely file a 2020 Form 1065, Form 8865, and Schedule s K-1. The guidance also does not relieve a partner of its obligation to determine the adjusted basis of its interest in the partnership for purposes of determining its tax liability or that of any other person. The IRS will waive any accuracy-related penalty under section 6662 for any tax year for any portion of an imputed underpayment that is attributable to an adjustment to a partner’s beginning capital account balance reported by the partnership for the 2020 tax year to the extent the adjustment arises from the inclusion of incorrect information for which the partnership qualifies for relief under the guidance. Notice 2021-13 does not prevent the IRS from imposing an accuracy-related penalty under section 6662 for any portion of an imputed underpayment for capital account reporting by the partnership that is not previously described.

Sec. 6698 Failure to file partnership return

Sec. 6721 Failure to file correct information returns

Sec. 6722 Failure to furnish correct payee statements

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Partnerships Given Penalty Relief for Some Incorrect Reporting