The IRS created several new forms to implement the centralized partnership audit regime enacted by the Bipartisan Budget Act of 2015 (BBA), including Form 8986, “Partner’s Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227).” Form 8986 is a BBA form used by a partnership to report each partner’s allocable share of partnership adjustments. Under IRC Section 6241(2), a partnership adjustment is any adjustment to a partnership-related item (PRI), and a PRI generally is defined as any item or amount with respect to a partnership that is relevant in determining the income tax liability of any person. The BBA rules are very complex, and the rules for recipients of Form 8986 are no exception. Here is a high-level overview of when a Form 8986 is used and what actions are required when the form is received.
How are partnership adjustments made?
As a general matter, BBA partnerships cannot file amended returns or amended Schedule K-1s. Instead, they must file an administrative adjustment request (AAR) to make changes to an already-filed partnership return. Additionally, partnership adjustments are made by the IRS as part of a partnership examination. Part I.A of Form 8986 is used to identify if the Form 8986 received is issued as part of a partnership examination or if the partnership is voluntarily making adjustments. If box 1 or box 2 in Part I.A of the Form 8986 is checked, the partnership adjustments were made during an audit of a BBA partnership. If box 3 or box 4 in Part I.A of the Form 8986 is checked, the partnership adjustments were made by a partnership filing an AAR.
When does a partnership send Form 8986 to its partners?
Generally, a partnership can either pay the tax resulting from taking the partnership adjustments into account (referred to as the imputed underpayment), or it can push those adjustments out to the partners for the year to which the adjustments relate, referred to as a pushout. However, in the case of an AAR, a partnership is required to push out adjustments that do not result in an imputed underpayment. Form 8986 is one of the forms that is filed as part of a pushout. The partnership also must furnish a copy of the Form 8986 to the partner.