CPA, Partner, Practice Leader, Federal Tax Services
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Penalty Relief for Missing Negative Tax Basis Capital Account Information
The Treasury Department and Internal Revenue Service (IRS) issued Notice 2019-20, which provides penalty relief for partnerships unable to timely report negative tax basis capital account information, so long as certain conditions are met. Partner capital on Schedule K-1 is reported in Item L and may be reported using tax basis, Generally Accepted Accounting Principles, Section 704(b) book or some other method. The 2018 Instructions for Form 1065 (pg. 30) require partnerships that have partners with negative tax basis capital accounts to report those amounts on line 20 of Schedule K-1 using code AH.
Penalty Relief under Notice 2019-20
Partnerships that do not report negative tax basis capital accounts on their Schedule K-1’s will generally be subject to a penalty. However, the penalty may be waived for partnerships with taxable years beginning after Dec. 31, 2017, but before Jan. 1, 2019, if the following two conditions are met:
1) Schedule K-1’s with all other required information are timely filed, including by extension, with the IRS and timely furnished to the partners
2) The partnership files a schedule with the IRS within 180 days after the six-month extended due date (even if the partnership does not file an extension), but not later than March 15, 2020. A schedule must be filed for each partner with a negative tax basis capital account and include the partner’s name, address, taxpayer identification number, and the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue.
The partnership is not required to furnish amended Schedule K-1’s to its partners or file an administrative adjustment request under Section 6227. Additional information concerning this penalty relief will be posted on the IRS website in the coming weeks.
To allow taxpayers more time to provide negative tax basis capital account information, the IRS will waive the penalty for those partnerships unable to timely disclose this information if certain conditions are met. Partnerships with taxable years beginning after Dec. 31, 2017, but before Jan. 1, 2019, may take advantage of this waiver if Schedule K-1’s are timely filed and if a schedule is provided to the IRS within a certain timeframe after the partnership return due date. Taxpayers should consult their tax advisors about their eligibility for this penalty waiver as well as to ensure proper compliance.
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