For taxable years beginning on or after January 1, 2018, partnerships that did not or cannot elect out of the BBA partnership audit rules no longer have the ability to file amended returns, including amended Schedules K-1.
Under the BBA rules, partnerships must file Administrative Adjustment Requests (“AARs”) instead of amended returns to make any adjustments to previously filed partnership returns. In addition to the AAR filed at the partnership level, partnerships must then issue Forms 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), to affected partners, unless the partnership elects to pay any additional tax at the partnership level.
Upon receipt of a Form 8986, a partner does not file an amended return for the year to which the adjustment relates (the “reviewed year”), as they would have done with an amended K-1. Rather, the partner takes the adjustment into account on their return for the year in which they received the Form 8986 (the “adjustment year”).
For example, an individual partner receiving a Form 8986 in March 2021 (2021 adjustment year) for an adjustment to a 2018 partnership return (2018 reviewed year) would have to wait until their 2021 return is filed in April 2022 in order to take the adjustment into account. For taxpayer-favorable adjustments, this is clearly not the ideal path, as it delays the ability to reduce tax owed or claim a refund.
One short-term solution for partnerships with taxable years beginning on or after January 1, 2020, is to file an application for an extension of time to file the partnership return on or before March 15, 2021, or whenever the original due date of the partnership return falls. An extension allows a partnership to file a superseding return before the extended due date, which would allow the partnership to issue corrected K-1s instead of having to file an AAR and issue Forms 8986. Partners should also consider filing extensions for their returns, so as to be able to file a superseding return upon receipt of a corrected K-1.
A superseding return is a return filed subsequent to the originally filed return and filed within the filing period (including extensions). Unlike amended returns, which merely adjust certain items on an original return, superseding returns replace the originally filed return in its entirety. As a result, superseding returns can be very useful tools for fixing issues with original returns.
There is no downside to filing an application for an extension of time for a return. If the extended due date is not used, and the partnership or partner files their return on or before the original due date, the assessment statute of limitations begins to run on the original due date. Additionally, for any superseding return filed on a date between the original due date and on or before the extended due date, the assessment statute will begin on the date the return is filed, rather than automatically on the extended due date.
If you have any questions about filing an application for extension of time to file a partnership or other returns, please contact your Cherry Bekaert advisor. If you have any questions about the BBA partnership audit rules, contact your Cherry Bekaert advisor for Tax Controversy Services.
