The IRS has significantly increased the disclosure requirements for partnerships based on recently issued drafts of the 2019 partnership Form 1065, Schedule K-1, and the accompanying instructions.
Compared to 2018, partnerships will be required to report a significant amount of additional information about both the partnership and its partners when filing their 2019 tax returns.artn
These additional disclosure requirements had one purpose: to improve the IRS’s ability to select taxpayers for audit.
The IRS quickly received an abundance of negative feedback regarding the new requirements. Feedback to the IRS generally contained three key points:
- Not all of the requested information is readily available. The short notice given by the draft instructions was insufficient for partnerships to calculate the information by the due dates of their returns, especially for partnerships that had been in existence for years.
- In the case of publicly traded partnerships (PTPs), the partnership would never be able to calculate the required information, regardless of how much time they were given.
- The draft instructions did not provide sufficient detail on all of the new disclosure requirements, resulting in requests for additional guidance.
In response to this feedback, the IRS issued Notice 2019-66, deferring some of the disclosures and providing guidance on others. Here are the highlights:
- The requirement to present each partner’s Schedule K-1 capital account reconciliation on a tax basis has been deferred until 2020 (for partnership tax years that begin on or after Jan. 1, 2020).
- For 2019, partnerships can continue to use tax basis, Sec. 704(b), GAAP, or another reasonable method.
- A partner’s tax basis must be disclosed on their 2019 Schedule K-1 only if a partner has a negative tax basis capital account at the beginning or end of the tax year.
- The requirement for partnerships to report to partners information about separate Sec. 465 at-risk activities has also been deferred until 2020.
- PTPs are exempt from having to report each partner’s net unrecognized Sec. 704(c) gain or loss until further notice.
- The IRS clarified that the required disclosure of net unrecognized Sec. 704(c) gain or loss applies to both forward and reverse Sec. 704(c) amounts.
While the one-year deferral of some of the disclosure requirements and the additional guidance contained in Notice 2019-66 is welcome news, partnerships will still have an increased compliance burden for 2019.
Partnerships that are not already tracking partner tax basis capital and non-PTPs not tracking Sec. 704(b) capital accounts (and there are many such partnerships) will be under pressure to compute these items by the time they file their 2019 tax returns.
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