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Penalty relief, partnership negative tax basis capital account reporting

Notice 2019-20: Penalty relief

The IRS today released an advance version of Notice 2019-20 that provides penalty relief for partnerships that file and furnish Schedules K-1 but that fail to report information about the partners’ negative tax basis capital accounts for partnership tax years beginning after December 31, 2017, but before January 1, 2019.

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Notice 2019-20 [PDF 14 KB] provides relief from penalties imposed under section 6722 (failure to furnish correct payee statements) and section 6698 (failure to file partnership return).

Summary

Schedule K-1 (Form 1065) requires a partnership that does not report tax basis capital accounts to its partners to report on line 20 of Schedule K-1 (using code “AH”) the amount of the partner’s tax basis capital at both the beginning and the end of the year if either amount is “negative.” This is referred to as the “negative tax basis capital account information.”

Notice 2019-20 acknowledges that certain partnerships may be unable to timely comply with this new requirement and provides that the IRS will waive penalties under section 6722 for furnishing a partner a Schedule K-1 and penalties under section 6698 for filing a Schedule K-1 with a partnership return that fails to report negative tax basis capital account information, if the following conditions are met:

  • The partner Schedules K-1 are timely filed with the IRS, furnished to the partners and contain all required information.
  • The partnership files with the IRS—no later than 180 days after the six-month extended due date for the partnership’s Form 1065, or if a calendar year partnership, no later than March 15, 2020—a schedule setting forth for each partner for whom the partnership is required to furnish negative tax basis capital account information:
    • The partner’s name, address, taxpayer identification number
    • The amount of the partner’s tax basis capital account at the beginning and at the end of the tax year at issue

Notice 2019-20 provides that regardless whether a partnership files an automatic extension application on Form 7004, the partnership can use the six-month extended due date in calculating the due date for filing the required schedule of the negative tax basis capital account information.

To qualify for this penalty relief, the partnership is not required to furnish an amended Schedule K-1 to its partners or to file an administrative adjustment request under section 6227. The IRS notice states that “partnerships should not delay issuing partner Schedules K-1…” because of today’s release of Notice 2019-20.

Today’s IRS notice concludes that the penalty relief will allow additional time for partnerships to provide the negative tax basis capital account information with respect to the partnership’s tax years beginning after December 31, 2017, but before January 1, 2019.

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