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IRS defers some (but not all) 2019 partnership return disclosures

Dec 17, 2019

Although we previously discussed the partnership return disclosures topic in detail here, there is now more to report.

To recap, the recently issued drafts of the 2019 partnership Form 1065, Schedule K-1 and the accompanying instructions indicated that, when filing their 2019 tax returns, partnerships were required to report a significant amount of additional information about both the partnership and its partners.

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, which generally contained three key points:

  • Not all of the requested information was 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 those 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 the issuance of additional IRS guidance.

In response to this feedback, the IRS has now issued Notice 2019-66, deferring some of the disclosures and providing guidance on others. In summary:

  • The requirement to present each partner’s Schedule K-1 capital account reconciliation on a tax basis as been deferred until 2020 (partnership tax years that begin on or after January 1, 2020).
    • For 2019, partnerships can continue to use tax basis, Sec. 704(b), GAAP or other reasonable method.
    • Only if a partner has a negative tax basis capital account at the beginning or end of the tax year is that partner’s tax basis required to be disclosed on their 2019 Schedule K-1.
  • 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.

The Notice also states that partnerships that comply with this Notice will not be subject to penalties for failure to file a complete partnership return or failure to furnish a complete Schedule K-1 to their partners.

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 continue to have an increased compliance burden for 2019. 

Partnerships that are not tracking partner tax basis capital and non-PTPs not tracking Sec. 704(b) capital accounts will be under pressure to compute these items by the time they file their 2019 tax returns.

Please contact your Wipfli relationship executive to discuss how these new disclosure requirements will specifically affect your partnership and what can be done now to ensure that you have all the information necessary to file a complete and timely 2019 partnership return.

Author(s)

Christenson_Crystal
Crystal Christenson, CPA, MST
Partner
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