Partnerships that have already filed the 2018 return, may need to correct errors in the filing. Changes to new partnership procedural rules prohibit the partnership from filing an amended return. To alleviate the harsh effect of not being able to file an amended return, the IRS will allow partnerships to file superseding returns to correct any errors. The administrative relief announced in Revenue Procedure 2019-32 applies generally to partnerships filing their 2018 tax returns.
The Bipartisan Budget Act of 2015 (BBA) substantially overhauled the Internal Revenue Code’s provisions on partnership administration. The BBA created a centralized audit regime that, as a default rule, assesses and collects tax at the partnership level. The centralized partnership audit procedures apply to all partnerships unless a partnership makes a valid election to have the BBA procedures apply. Only certain partnerships that issues fewer than 100 Schedule K-1, and have simple ownership structures, are eligible to elect out of the BBA procedures for a given taxable year.
The provisions of the BBA require that partners in a BBA partnership treat partnership-related items consistently on the partner’s return with how the BBA partnership treated such items on its return. This consistency requirement applies to partners that are pass-through entities, such as partnerships and S corporations, as well as non-pass-through persons, such as individuals and C corporations. An exception applies when the partner explicitly discloses their inconsistent treatment of an item.
For calendar year partnerships, the partnership return (Form 1065) is due by the 15th day of the third month after the end of partnership’s taxable year, or March 15. The partnership return includes both Form 1065 with supporting schedules, and Schedule K-1 that are required to be furnished to each partner by the same deadline. A six month extension of time to file is available, however, the BBA rules prohibit a partnership from amending Schedule K-1 after the due date of the return. Instead, partnerships must file administrative adjustment requests, the effects of which are handled similarly to adjustments discovered under examination—that is, with a potential partnership-level payment.
Tax year 2018 was the first taxable year for which the centralized partnership audit regime was mandatory, and the first taxable year for which restrictions on amending Schedule K-1 were effective. The IRS is aware that some partnerships have already filed their partnership return (and distributed Schedule K-1 to their partners), but have determined that errors were made on the return, including not reporting all required information on Schedule K-1. Revenue Procedure 2019-32 provides relief in such circumstances.
Revenue Procedure 2019-32
Partnerships that filed their return by the due date, without extension, are ordinarily prohibited under section 6031(b) from amending their Schedule K-1. Under Revenue Procedure 2019-32, the IRS will treat the original return filed by the statutory due date as a timely filed request for a six month extension of the deadline to file Form 1065. The extension allows a partnership to file a superseding return before the extended due to correct any errors on the previously filed return. The superseding return will replace any prior return and will be treated as the original return of the partnership, avoiding this prohibition.
Relief to file a superseding returns is only available for BBA partnerships with tax years that ended prior to the issuance of the revenue procedure and for which the extended due date for such partnership taxable year is after July 25, 2019 (generally, this includes all 2018 calendar year partnerships). When filing the superseding return, partnerships should write on the top of Form 1065 “SUPERSEDING FORM 1065 PURSUANT TO REVENUE PROCEDURE 2019-32.”
Revenue Procedure 2019-32 allows partnerships to file superseding returns to correct errors that could not be corrected by filing an amended return. For partnerships that filed by March 15, but now need to file a more accurate return, the revenue procedure sets out the steps for filing a superseding return.
Given that this relief is limited, partnerships may want to consider filing extensions, even for returns intended to be filed by the original deadline, as a best practice. This maximizes the opportunity to later supersede that filed return, in the event of a discovered error, and avoid having to use the BBA administrative adjustment request procedures.