AARs: Streamlined Corrections for BBA Partnership Returns
By Nick S. Pegelow on February 26, 2025
-
Nick S. Pegelow
View Bio
Amending tax returns is a necessary evil—sometimes. Correcting a return to add $15,000 of unreported income might not make sense to taxpayers if it costs $25,000 to amend, putting aside ethical and other considerations. But suppose it’s an issue with an improper method of accounting. Since Circular 230 does not have a materiality threshold, the tax preparer is in an ethical bind—even using the proper method in the current year—since any change absent an amendment is likely to impact your current-year return.
Partnerships have still further complication: their partners. Who wants to tell their investors that—in addition to the costs of filing an amended partnership return, which is deducted from their draws—they must decide whether to amend their individual returns, too? (They should. Probably.)
What must you do? What can you do? And what should you do?
The historical approach under TEFRA—and the preferred approach of tax practitioners—is to amend. The partnership files Form 1065-X and each partner receives an amended Schedule K-1 to use when they go to amend their individual returns. That’s the ethics of error-correction pitted squarely against the partner-relations department.
Enter the Bipartisan Budget Act of 2015 and the Administrative Adjustment Request. With limited exceptions, BBA partnerships cannot amend their returns. (The IRS provided an initial grace period for BBA partnerships, allowing amended returns to be filed under Rev. Proc. 2020-23, but that expired on September 29, 2020.) Rather than amending, BBA partnerships must generally file an AAR to account for such corrections. This forward-looking process helps to maintain the integrity of tax reporting by eliminating an administrative quagmire: partner-by-partner adjustments.
Consider the practical impact. Under the AAR process, partnerships can correct prior-year errors at the partnership level. Even if you push out the adjustments—which is often a requirement—it won't require much additional effort on behalf of the partners. (Save pass-throughs, which like the partnership have time-sensitive filing requirements to make a push-out election.) The taxable partners take the Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227), and hand it to their current-year tax preparer—just like their Schedules K-1. The partners or their tax preparers will use this information to complete Form 8978, Partner’s Additional Reporting Year Tax, which is attached to their current-year tax returns.
No separate engagement letter; no new statement of work; and no need to amend. Just routine tax compliance.
Not everyone loves these changes or understands the benefits. And, as Meadows Collier partner and Forbes contributor Matthew Roberts points out, there are trade-offs to consider before filing an AAR. But practitioners who embrace AARs as the proper vehicle for corrections can focus their attention on technical merit rather than implementation concerns.
If you have any questions regarding this or any other tax issue, please feel free to contact me at 214-749-2459 or at npegelow@meadowscollier.com.
Partnerships have still further complication: their partners. Who wants to tell their investors that—in addition to the costs of filing an amended partnership return, which is deducted from their draws—they must decide whether to amend their individual returns, too? (They should. Probably.)
What must you do? What can you do? And what should you do?
The historical approach under TEFRA—and the preferred approach of tax practitioners—is to amend. The partnership files Form 1065-X and each partner receives an amended Schedule K-1 to use when they go to amend their individual returns. That’s the ethics of error-correction pitted squarely against the partner-relations department.
Enter the Bipartisan Budget Act of 2015 and the Administrative Adjustment Request. With limited exceptions, BBA partnerships cannot amend their returns. (The IRS provided an initial grace period for BBA partnerships, allowing amended returns to be filed under Rev. Proc. 2020-23, but that expired on September 29, 2020.) Rather than amending, BBA partnerships must generally file an AAR to account for such corrections. This forward-looking process helps to maintain the integrity of tax reporting by eliminating an administrative quagmire: partner-by-partner adjustments.
Consider the practical impact. Under the AAR process, partnerships can correct prior-year errors at the partnership level. Even if you push out the adjustments—which is often a requirement—it won't require much additional effort on behalf of the partners. (Save pass-throughs, which like the partnership have time-sensitive filing requirements to make a push-out election.) The taxable partners take the Form 8986, Partner's Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227), and hand it to their current-year tax preparer—just like their Schedules K-1. The partners or their tax preparers will use this information to complete Form 8978, Partner’s Additional Reporting Year Tax, which is attached to their current-year tax returns.
No separate engagement letter; no new statement of work; and no need to amend. Just routine tax compliance.
Not everyone loves these changes or understands the benefits. And, as Meadows Collier partner and Forbes contributor Matthew Roberts points out, there are trade-offs to consider before filing an AAR. But practitioners who embrace AARs as the proper vehicle for corrections can focus their attention on technical merit rather than implementation concerns.
If you have any questions regarding this or any other tax issue, please feel free to contact me at 214-749-2459 or at npegelow@meadowscollier.com.
