Penalty Relief for Partner’s Negative Tax Capital Account Information


In Notice 2019-20, the IRS has provided penalty relief under Internal Revenue Code (IRC) Section 6722 (failure to furnish correct payee statements), Section 6698 (failure to file partner-ship return), Section 6038(b) and Section 6038(c) (failure to furnish information with respect to certain partnerships), and any other Code section for filing or furnishing Schedules K-1 (Form 1065) or other forms or statements, where a penalty is imposed solely as a result of failing to include information about partners’ negative tax basis capital accounts for tax years that began in 2018.

Item L of Schedule K-1 to Form 1065 (Partner’s Share of Income, Deductions, Credits, etc.) and Item F of Schedule K-1 to Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) require reporting of a partner’s capital account. Generally, a partnership may report partner capital to a partner using tax basis, Generally Accepted Accounting Principles, IRC Section 704(b) book, or some other method. Pursuant to updates, the 2018 Instructions for Form 1065 and Partner’s Instructions for Schedule K-1 (Form 1065), for Item L, now require 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 such partner’s tax basis capital both at the beginning of the year and at the end of the year if either amount is negative (negative tax basis capital account information). The Instructions for Form 8865, Schedule K-1, incorporate this requirement by reference to the Instructions for Form 1065. The IRS has become aware that certain persons and partnerships may be unable to comply timely with this new requirement.

The IRS will waive penalties that arise solely as a result of failing to include negative tax basis capital account information if both of the following conditions are met:

  1. The partners’ Schedules K-1 are timely filed, including extensions, with the IRS and furnished to the partners and contain all other required information.
  2. The partnership is required to file the Schedule K-1, or other applicable forms with the IRS, no later than one year after the due date. The partnership must attach a schedule for each partner with a negative tax basis capital account containing the following information:

a) the partnership’s name and Employee Identification Number, if any, and Reference ID Number, if any;
b) the partner’s name, address, and taxpayer identification number; and
c) the amount of the partner’s tax basis capital account at the beginning and end of the tax year at issue.

The schedule should be captioned “Filed Under Notice 2019-20” and accord with instructions and additional guidance posted by the IRS on IRS.gov.

The due date for this supplemental schedule is determined without consideration of any extensions, automatic or otherwise, that may apply to the due date for the form itself. The schedule should be sent to the address specified in Notice 2019-20. This penalty relief applies only for a tax year beginning after December 31, 2017, but before January 1, 2019. To receive a penalty waiver, a person or partnership is not required to file or furnish amended Schedules K-1 or other applicable amended forms or statements to partners or the IRS, or to file an administrative adjustment request under IRC Section 6227, if applicable. Partnerships or other persons should not delay filing or furnishing Schedules K-1 or other applicable forms or statements on account of Notice 2019-20. The timely filing and furnishing, including extensions, of Schedules K-1 or other applicable forms or statements is a requirement to be eligible for relief under Notice 2019-20.

The penalty relief under Notice 2019-20 will allow additional time for persons and partnerships to provide the negative tax basis capital account information with respect to their tax years beginning in 2018.

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