Administrative adjustment request (AAR)
- Partnerships subject to the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA) generally cannot file amended returns or amended Schedule K-1s, “Partner’s Share of Income, Deductions, Credits, Etc.” Instead, they must file an AAR to make changes to an already-filed partnership return. Although the American Institute of Certified Public Accountants and other organizations have pressed the IRS to create an “EZ” process for simple adjustments or for omitted forms and elections, such relief currently is not on the horizon.
- Partnerships with fewer than 100 eligible partners that properly elect out of the BBA on a timely filed original return can file an amended partnership return for the year to which the election applies.
- Partnerships generally have three years from the date a Form 1065, “U.S. Return of Partnership Income,” is filed to file an AAR. However, once a partnership tax year has been selected for audit and the IRS mails a statutory Notice of Administrative Proceeding (NAP), an AAR no longer can be filed. Therefore, a partnership that wants to file an AAR should do so as soon as possible so it is not precluded from doing so by being selected for audit and receiving a NAP.
- An AAR is filed electronically by attaching a Form 8082, “Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR),” to a Form 1065 with box G, “Amended return,” checked or on paper using the Form 1065-X, “Amended Return or Administrative Adjustment Request (AAR).”
- The partnership representative or, in the case of a partnership representative that is an entity, the designated individual, must sign the AAR.
- If the partnership is pushing out adjustments to the partners for the year to which the AAR relates, Form 8985, “Pass-Through Statement – Transmittal/Partnership Adjustment Tracking Report,” and Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s),” must be attached to the AAR. Additionally, a copy of Form 8986 needs to be furnished to each partner.
- A pass-through partner that receives a Form 8986 must submit Form 8985 and Form 8986 to the IRS and furnish a Form 8986 to each owner or beneficiary no later than the extended due date for the tax year in which the partnership filed the AAR. For example, if a pass-through partner that is a partnership receives a Form 8986 from a calendar year partnership that filed an AAR in 2022, the pass-through partner has until Sept. 15, 2023, to submit Form 8985 and Form 8986 to the IRS and furnish the Form 8986 to each partner. In addition to partnerships, S corporations and certain trusts are treated as pass-through partners and, therefore, must follow these rules.
Crowe observation
Pass-through partnerships should furnish Form 8986 as soon as possible so its owners and beneficiaries can take timely action under the BBA regime requirements.
Superseded return
- A superseded return is an original return filed on or before the due date for the return (including extensions) and after the first original return for the tax year is filed. The last superseded return filed is treated as the original return for the tax year. A calendar year partnership can file a superseded return up until the extended deadline of Sept. 15, if a timely request for extension of the due date is filed. This is true even if the first return was filed before the original due date.
- Partnerships should consider filing an extension even if they expect to file the Form 1065 by the original due date.
Crowe observation
Requesting an extension preemptively allows a partnership to file a superseded original return rather than the more onerous AAR to make adjustments due to the discovery of an error, receipt of Schedule K-1s and other information after the original due date, or retroactive changes in law.
- Partnerships with operating agreements that specify that Schedule K-1s must be delivered to their partners on or before the original due date of the partnership return might consider amending the agreement to allow for superseding returns.
Late election and penalty relief
- If a regulatory election is not timely made, late election relief might be available. In some cases, relief is automatic and involves taking corrective action within six or 12 months of the late election. When six-month or 12-month automatic relief applies, the regulations require filing an amended return as part of taking corrective action. The regulations have not been updated to match the BBA rules, which do not allow partnerships to file amended returns. Partnerships should discuss with their tax adviser how to take corrective action in light of the BBA rules. Other opportunities for automatic late election relief might be available under certain revenue procedures. If the taxpayer is not eligible for automatic late election relief, it might be eligible for relief by filing a request for a private letter ruling with the IRS Office of Chief Counsel.
- Partnerships that discover that an intended request for extension of time to file Form 1065 was not filed on or before the original due date should file the delinquent return as soon as possible and request relief if penalties are imposed. First-time abatement or reasonable cause relief might be available depending on the particular facts and circumstances.
