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Penalty relief for partnerships, information reporting of partners’ beginning capital account balances for 2020

Penalty relief for partnerships

The IRS released an advance version of Notice 2021-13 that provides relief for partnerships from certain penalties due to the inclusion of incorrect information in reporting their partners' beginning capital account balances on the 2020 Schedules K-1 (Form 1065) and the 2020 Schedules K-1 (Form 8865) as outlined in the 2020 instructions for Form 1065, “U.S. Return of Partnership Income.”

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Read Notice 2021-13 [PDF 68 KB] 

Penalty relief

Notice 2021-13 provides that a partnership will not be subject to a penalty under sections 6698, 6721 or 6722 due to the inclusion of incorrect information in reporting its partners’ beginning capital account balances on the 2020 Schedules K-1—if the partnership can show that it took ordinary and prudent business care in following the 2020 Form 1065 instructions to report its partners’ beginning capital account balances using any one of the following methods:

  • The tax basis method
  • The modified outside basis method
  • The modified previously taxed capital method
  • The section 704(b) method

For these purposes, the term “ordinary and prudent business care” is defined as the standard of care that a reasonably prudent person would use under the circumstances in the course of its business in handling account information.

Notice 2021-13 further provides that in demonstrating ordinary and prudent business care, taxpayers are reminded that capital account balances are part of a partnership’s books and records and must be maintained accordingly.

Also, penalty relief is provided to a partnership due to the inclusion of incorrect information in reporting its partners’ ending capital account balances on Schedules K-1 in tax year 2020 or its partners’ beginning or ending capital account balances on Schedules K-1 in tax years after 2020 to the extent the incorrect information is attributable solely to the incorrect information reported as the beginning capital account balance on the 2020 Schedule K-1 for which relief under this notice is available.

This penalty relief is in addition to the reasonable cause exception to penalties for failing to properly report the partners’ beginning capital account balances.

Notice 2021-13 provides that a partnership is not eligible for this relief if it fails to:

  • Timely file a 2020 Form 1065, Form 8865, and Schedules K-1
  • Include a partner’s beginning capital account balance on the Schedule K-1

The IRS notice also does not relieve a partner of its obligation to determine the adjusted basis of its interest in the partnership for purposes of determining its tax liability or that of any other person pursuant to section 705 and Reg. section 1.705-1(a)(1).

Notice 2021-13 further provides that the IRS will waive any accuracy-related penalty under section 6662 for any tax year with respect to any portion of an imputed underpayment that is attributable to an adjustment to a partner’s beginning capital account balance reported by the partnership for the 2020 tax year to the extent the adjustment arises from the inclusion of incorrect information for which the partnership qualifies for relief under this notice. However, Notice 2021-13 does not prevent the IRS from imposing an accuracy-related penalty under section 6662 for any portion of an imputed underpayment related to capital account reporting by the partnership that is not described in the previous sentence.

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