Practical guide for CPAs

We needed to correct the partners’ percentages. Simple enough, right? Change the allocations, recalculate the return, and get everyone the right numbers.

You would think we could fix the partnership return, send corrected K-1s, and have everyone amend their old returns. That is the familiar way to clean it up. But this partnership was under BBA, so we could not just follow that route.

It was a pain turning the rules into an actual work plan. Which forms belong to the partnership? Which belong to the individual? What gets filed with the IRS, what goes to the partner, and what stays in the workpapers? Knowing the rule was not enough. We needed the order of operations.

This is multiple amendments’ worth of preparation, not just one amended form. Two corrected partnership years can mean separate allocation schedules, partner statements, old-year recalculations for multiple partners, intervening-year carryovers, reporting-year returns, and sometimes separate self-employment-tax amendments. Not all those calculation copies get filed. Scope the job by years, partners, and work packages, not by counting one AAR.

I am using amending in plain English: fixing a return already filed. For this BBA correction, the actual procedure is an administrative adjustment request (AAR), not an ordinary amended partnership return.

Download the six-page BBA correction workflow and forms reference (PDF, 63 KB). The examples use illustrative figures.

Decisions and routes at a glance

Here are the calls we had to make. The case notes below describe the prepared approach, not proof that the IRS received or accepted it.

• BBA or ordinary amendment? A valid annual election out permits the ordinary route. Our prepared route: BBA AAR, not corrected K-1s followed by ordinary income-tax amendments.
• Is an AAR still available? Check the filing deadline and whether an IRS Notice of Administrative Proceeding blocks it. Our case: a historical AAR preparation project. Confirm the original filing dates and procedural status before treating that route as available for any new filing.
• Electronic or paper package? Electronic uses 1065 plus 8082; paper uses 1065-X. Our saved 1065s are marked amended, consistent with the electronic AAR transmission requirement. That checkbox does not establish which method was actually filed.
• Partnership pays or partners take the adjustments? A positive imputed underpayment (IU) allows payment or a valid push-out election; adjustments not resulting in an IU still require partner statements. Our saved 8082s say “No IU” and the packages contain partner statements. The supporting numerical IU calculation still needs validation. Do not read that checkbox as proof that reallocations automatically net to zero.
• Individual or another type of partner? Individuals use 8978; trusts and other pass-through recipients need separate classification. Our individual walkthrough uses 8978, not a blanket instruction for every recipient.
• Which years do the work and which year reports it? Our prepared approach: recalculate 2020 and 2021, check intervening-year effects through 2022, and report through 2023 Form 8978. Verify the statement-furnishing date that controls the reporting year. Do not put the old income into 2023 K-1 income.
• Is a separate old-year amendment needed? Only if non-income taxes such as self-employment tax change. Our allocation changes raised that issue: separate any required limited 1040-X from the unfiled income-tax calculation copies.
• What else is payable? Tax, interest, and applicable penalties are separate calculations. Our work plan: calculate interest by affected year, test penalties, and check software output. Neither a penalty amount nor automatic Axcess calculation should be assumed.

The sections below explain how to make each decision and assemble the right forms.

First, BBA or non-BBA?

BBA is a set of tax rules, not a type of business. The name comes from the Bipartisan Budget Act of 2015. Under these rules, the IRS generally deals with one partnership representative and collects the tax adjustment from the partnership itself. That tax amount is called an imputed underpayment (IU). There are other routes, including pushing the adjustments out to the partners. Regular annual income still generally passes through to the owners. BBA does not turn the partnership into a corporation. IRS overview.

Non-BBA, here, means the partnership qualified and elected out for that year. The IRS then uses the ordinary procedures to assess and collect tax from the partners individually. We are talking about years beginning after 2017, not trying to cover every older partnership rule. JCT explanation.

Why Congress changed the system

The practical problem was collecting the right tax when a partnership had hundreds or thousands of partners, sometimes through several layers of other partnerships. GAO reported that identifying partners and passing audit adjustments through to their returns was labor intensive and limited how many audits the IRS could conduct. GAO recommended partnership-level collection and later recorded BBA as implementing that recommendation. GAO report and legislative follow-up.

Congress changed the system so the IRS could handle the adjustment and generally collect at the partnership level. JCT describes that centralized process; Treasury and the IRS explain that it reduces the IRS’s workload and makes large partnerships easier to audit. It was meant to make tax administration and collection easier. That is not the same as making our correction work easier. JCT explanation; Treasury and IRS explanation.

That is the background. Now back to the job: which way do we fix the return?

Pick the right correction route

BBA is the default for partnership tax years beginning after 2017. Being small does not automatically put a partnership outside it. An eligible partnership must make the election out annually on a timely filed return, including extensions, with the required partner information.

To elect out, the partnership generally needs 100 or fewer partners under the required counting rules and only eligible types of owners. S corporation shareholders count too. A trust or another partnership as an owner prevents the election; certain other owners do too. So we check the owner list and the actual election, not just the size of the business. IRS election-out rules; Form 1065 instructions.

For an ordinary prior-year correction after the filing deadline, the basic comparison is:

• Validly elected out: amend the partnership return and furnish amended K-1s; partners generally amend the affected prior-year returns as needed. Electronic corrections use amended Form 1065; the paper route uses Form 1065-X. The old-year tax changes on the old-year returns.
• BBA: generally use an administrative adjustment request (AAR), not ordinary amended K-1s. Calculate the imputed underpayment (IU). The partnership generally pays a positive IU or elects to push the adjustments out; adjustments that do not result in an IU must still be pushed out. Under push-out, an individual partner calculates the affected old years and reports the income-tax difference through Form 8978 in the reporting year, with the separate self-employment (SE) tax and net investment income tax (NIIT) treatment discussed below.

Form 1065 correction instructions; IRS AAR procedure.

An AAR is a voluntary correction, not an IRS audit. The audit regime also sets the correction procedure. That is why these rules matter even when the IRS has not examined the return. The form map and example below follow the BBA push-out route.

Applying that distinction to our correction

We were correcting allocation percentages, not responding to an IRS audit. The BBA push-out path meant the partnership supplied each partner’s changes and we calculated the partner-level consequences. Here is how that worked.

Choose the route before doing the work

1. Was there a valid election out of BBA for this year? Yes: use the ordinary amended-partnership/partner-amendment route. No: use the BBA rules. You cannot elect out now just because the correction would be easier.
2. Is the AAR route still open? The original return must already be filed. Generally, the deadline is three years after the later of its filing date or its unextended due date. A Notice of Administrative Proceeding generally closes this route, subject to limited exceptions. If a gate fails, stop and evaluate the applicable procedure; an ordinary amendment is not a workaround.
3. Does the IU calculation produce a positive amount? Choose partnership payment or a valid push-out election for the associated adjustments. Payment does not eliminate the separate duty to push out adjustments that do not result in an IU.
4. Zero or negative IU? Those adjustments still require partner statements. “No partnership tax” does not mean “no more forms.” IRS AAR procedures and deadlines.
5. Who receives the 8986? An individual follows the 8978 route below. A trust or another pass-through needs classification first; further 8985/8986 reporting may be required. Do not automatically use the individual route. Form 8986 instructions.
6. Does the correction also change self-employment tax or net investment income tax? Add the separate, limited old-year amendment described below. Otherwise, do not create one just because you prepared calculation copies. Form 1040-X instructions.

Forms index and who does what

Partnership work

• Original 1065 and K-1s: starting records. Preserve them so the allocation comparison has a reliable baseline.
• Allocation and IU workpapers: show original/corrected figures and the grouping/rate calculation. Retain the detailed workpapers and include the required IU computation and support with the AAR.
• 1065 plus 8082: electronic AAR package filed with the IRS for the corrected partnership year. The 1065 is marked amended for transmission; 8082 identifies the BBA AAR and applicable election. Not an ordinary corrected-K-1 filing route.
• 1065-X: alternative paper AAR route, not an extra form automatically filed in addition to the electronic package.
• 8985: partnership transmittal/summary filed with the IRS when partner statements are required.
• 8986: each partner’s adjustment statement. File with the AAR and furnish to that partner on the AAR filing date. This is the handoff, not a replacement current-year K-1.
• 8979 or 8980: conditional forms, not standard extras. 8979 addresses partnership-representative designation/change; 8980 supports permitted IU modifications where applicable. IRS package and conditional-form rules.

Individual partner work

• Old-year 1040 calculation copies: WITHOUT and WITH workpapers for affected/intervening years. Do not file them as ordinary income-tax amendments. Retain the calculations; attach the required explanations and supporting schedules to the actual reporting package.
• 8978 plus Schedule A of 8978: translate the 8986 adjustments and old-year tax calculations into the additional reporting-year tax. File with the reporting-year individual return. This Schedule A is not the 1040 itemized-deduction schedule. Form 8978 instructions.
• 1040-X with Schedule SE or 8960, if needed: separate first-affected-year filing for self-employment tax or net investment income tax. Do not charge again the income-tax change already accounted for through 8978. Form 1040-X instructions.

The sequence below explains how to fill those buckets. First identify the years; then finish the partnership calculation and handoff; then finish each partner’s calculations and reporting.

Put the years on the desk first

Starting file stack: the original partnership 1065s and K-1s; the records supporting the corrected ownership/allocation percentages; the partner’s original or previously adjusted individual returns and carryover schedules; and the completed 8986s once the partnership package is ready. Keep originals intact. Use separate correction/calculation copies and label each with its tax year.

In this case, the corrections belonged to 2020 and 2021, but the income-tax adjustment was included in the prepared 2023 return. Those are different jobs, not conflicting dates. The client draft describes that treatment; it does not prove IRS filing or acceptance.

• 2020 and 2021: the years being corrected. Use each year’s original figures, tax rules, and corrected allocations to work out the tax change.
• 2022: a year to check, not automatically another correction. A changed loss, credit, or other carryover can affect it.
• 2023: the reporting year used in this case. This is where the old-year income-tax differences come together on Form 8978. Confirm it against the source partnership’s Form 8986 furnishing date. It is not automatically the year we finish the work.

Yes, multiple old years can feed one reporting-year return. We are moving the calculated income-tax adjustment to that return, not dumping all the old income into its current-year K-1 entries. IRS Form 8978 instructions.

Job 1 Fix the partnership and prepare its package

1 Build the before and after schedule

Confirm BBA status and the correction deadline. Then preserve the original return and work in a separate correction version for each partnership year.

For every partner and every changed K-1 item, put these columns next to each other: year; partner; K-1 box/code; original amount; corrected amount; difference. Corrected minus original is the change. Reconcile the partner amounts back to the partnership totals.

Do not confuse a changed percentage with the dollars produced by that percentage. And do not mistake increased self-employment earnings for increased self-employment tax. The earnings figure is an input to the partner’s tax calculation.

2 Work out the IU before deciding who pays

IU means imputed underpayment. Plain English: the tax amount the BBA formula would generally charge the partnership for the correction. It is not a penalty, and it is not the same calculation as each partner’s actual tax change.

Why two calculations? They answer different questions. The IU asks, “What tax does the BBA formula put on the partnership?” It uses a standardized rate so collection does not depend on completing every owner’s personal return first. The partner’s WITH/WITHOUT calculation asks, “What did this correction actually do to this person’s income tax?” That depends on their own return, deductions, credits, and limits.

We calculate the IU first to establish the partnership result and the available route. If the partnership pays the positive IU, we do not also push that same income adjustment out for the owners to pay again. If it elects push-out, the partners calculate their own tax effects instead of the partnership paying that IU. Negative adjustments and other adjustments that do not result in an IU still require partner reporting. Two calculations do not mean two income-tax bills on the same adjustment. IRS AAR payment and push-out rules.

Here is how to build the workpaper for a straightforward income reallocation:

• Start with the original/corrected schedule above. Keep each reviewed year separate.
• Put the income taken away from one partner and the income given to another on separate lines. For the IU calculation, those reallocation lines stay in separate subgroups; do not cancel them just because the partnership total did not change.
• Take the positive reallocation amount into the IU calculation. Add any other net positive amounts that belong in the residual group. Use the highest statutory rate for the reviewed year, generally 37% for 2020 and 2021, before permitted modifications.
• Handle credits and creditable expenditures separately. Do not multiply every changed box by 37%. Related informational adjustments also need review so the same underlying change is not counted twice.

Invented example, not our client’s numbers: Assume $100,000 of partnership ordinary income was split 50/50, but should have been split 60/40. Partner A’s ordinary income goes from $50,000 to $60,000: +$10,000. Partner B’s goes from $50,000 to $40,000: −$10,000. With no other adjustments, credits, or modifications, the basic IU is $10,000 × 37% = $3,700, not zero. The negative adjustment is handled through the required partner statements. IRS IU worksheet and worked example; Form 8082 reallocation rules.

Does that $3,700 include interest and penalties? No. The IU is the tax amount only. If the partnership pays rather than pushes out, its total is $3,700 IU + separately calculated interest + any applicable penalties. Filing an AAR does not automatically create a penalty. With a valid push-out, the partners calculate their own tax consequences and related interest instead; do not add the partnership’s $3,700 on top. Treasury regulation §301.6227-2(b)–(c).

Now choose the filing treatment. A positive IU is generally paid by the partnership with the AAR unless it makes the push-out election. With that election, the partners take the adjustments into account instead; the $3,700 is not an extra charge on top of their resulting tax. Adjustments that do not result in an IU must still be pushed out. Keep the calculation supporting the answer, not just a checked box.

3 Yes, the electronic 1065 is marked amended

This was an important missing detail: the prepared 2020 and 2021 Forms 1065 both had box G(5), “Amended return,” checked.

That is not inconsistent with using an AAR. The IRS requires that checkbox for electronic transmission. Form 8082 identifies the filing as an AAR and a BBA AAR. Its IU and election answers describe how the adjustment is being handled. Do not translate “not an ordinary amendment” into “leave the amended box unchecked.”

For an electronic AAR, the package uses 1065 + 8082, with the required supporting explanation and statements. The paper AAR route uses 1065-X instead. Seeing a 1065-X in a software print package does not establish that a paper AAR was filed. IRS electronic and paper AAR instructions.

The saved forms show how the packages were prepared. They do not, by themselves, prove that the IU calculation was correct or that the IRS accepted the filing.

4 Finish the partnership package and hand it off

8985 is the summary. 8986 is each partner’s adjustment statement. Prepare a separate reviewed-year package, reconcile the statements to the correction schedule, and obtain the required partnership-representative/designated-individual signature.

For an AAR push-out, the partnership files 8985 and the related 8986s with the AAR, in the same manner. It furnishes each partner their 8986 on the AAR filing date. Keep filing and furnishing evidence separately. 8978 does not go in the partnership’s AAR package. IRS AAR guide; 8985 instructions.

Job 2 Use the 8986 on the individual side

5 Treat 8986 as a change sheet, not another current-year K-1

It refers to K-1 boxes and codes, so it looks familiar. But it tells us what changed in an old year. It is not another ordinary K-1 to enter as 2023 income.

Match each 8986 line to the corresponding old-year K-1 input. Check the form revision’s column headings: the original amount, adjustment, and corrected amount are not interchangeable. Reconcile original plus adjustment = corrected before entering anything.

6 Recalculate copies of the old individual returns

Here is the practical workpaper method:

• WITHOUT: preserve the original or previously adjusted 1040 baseline for that year.
• WITH: in a separate copy of that year’s return, change the relevant partnership/K-1 inputs to the corrected figures. Recalculate the related limitations, qualified business income (QBI) deduction, credits, deduction for the deductible part of SE tax, and carryovers.
• Compare income tax with the correction minus income tax without it. Do not use the total balance due if it includes SE tax, payments, or interest.

In the same invented reallocation example: the old individual-return copy has $50,000 in the partnership’s ordinary-income input. Change that input to $60,000, not $110,000. Recalculate the whole return so deductions, limits, and credits respond to the correction. If the completed WITHOUT calculation shows $22,000 of income tax and WITH shows $24,000, the difference is $24,000 − $22,000 = $2,000. Those tax amounts are assumed outputs for illustration, not a promised tax result from adding $10,000 of income. The actual return calculation supplies them.

For 2021, include both its direct 2021 adjustment and any effect carried from 2020. It can be an affected year for one 8986 and an intervening year for another. Calculate the combined year’s income-tax difference once; do not add the same carryover effect twice. Then check 2022 and update any remaining 2023 carryovers.

These full old-year recomputations are calculation copies. They are not ordinary old-year income-tax amendments to submit. IRS multiple-8986 and affected-year instructions.

7 Enter the results in the reporting-year 8978 inputs

In the reporting-year individual return, use Form 8978 and its Schedule A inputs, not the ordinary current-year K-1 income input.

Schedule A here means Schedule A to Form 8978, not the 1040 itemized-deduction schedule. Organize the changes by affected year, with the source/tracking information. Use the preserved baselines and corrected income-tax, alternative minimum tax (AMT), and credit results to complete and check Form 8978.

Axcess supports 8978/Schedule A, including corrected-income-tax-liability and tracking-number entries. The exact screens depend on the tax-year version. This guide does not assume that copying old returns or entering 8986 automatically fills 8978. Check the generated form against the workpapers. CCH Axcess 2022-5.0 notes; CCH Axcess 2023-2.6 notes.

Separate invented illustration: assume the full calculations produce a $2,000 income-tax increase for 2020, a $600 increase for 2021 after all direct and carryover effects, and no change for 2022. The total reported through 8978 on the 2023 return is $2,600. Those amounts are tax differences, not extra 2023 income.

8 Separate any SE or NIIT amendment

Form 8978 handles income tax. Related SE-tax or NIIT changes use a separate, limited Form 1040-X for the applicable first affected year. Do not put the income-tax difference on that amendment again. The example below shows why the full calculation copy and the limited filing copy are different. IRS Form 1040-X BBA instructions.

This is the individual route. A trust or another pass-through partner needs separate classification and may need a further 8985/8986 handoff. Do not force it into the individual workflow. Form 8986 instructions.

Why the old-year returns caused confusion

In this case, changing the partners’ prior-year allocations also raised a self-employment-tax question. We had to recalculate the old returns to measure the effects. A full recalculation can show both the income-tax change and the SE-tax change together.

The practical conflict was this: an ordinary amended return would appear to report both changes in the old year, but the BBA push-out reports the income-tax change in the reporting year. We needed to report any SE-tax change without putting the same income-tax change on both filings.

The client explanation described the income-tax change as already included in the prepared reporting-year return. That did not mean the SE-tax change belonged there too, and it did not establish that either return had been filed or accepted by the IRS.

That means keeping three outputs separate:

1. Recalculate the old year in a working copy. Enter the correction and recompute the affected taxes, deductions, and credits. Use the income-tax difference, plus any intervening-year effects, to prepare Form 8978. This fully recomputed old-year return is a calculation workpaper, not an old-year income-tax amendment to file.
2. Put the income-tax difference on Form 8978 with the reporting-year return. This is the actual filing that reports the push-out income-tax change. The reporting year comes from when the source partnership furnished Form 8986, not when we happened to do the work.
3. If SE tax also changes, prepare a separate Form 1040-X for the first affected year. For this push-out correction, that amendment reports the related non-income-tax change, not the income-tax difference already going through Form 8978. Related NIIT changes use this separate amendment route too. If no related non-income tax changes, this step is not needed.

Separate invented example, not client figures: A calendar-year partner receives a source partnership’s Form 8986 in 2023 correcting 2020. Assume the completed calculations show $2,000 more income tax and $500 more SE tax, with no intervening-year effects.

• 2020 working copy: establishes both differences; do not submit it as an ordinary amended return.
• 2023 return with Form 8978: reports the $2,000 income-tax increase.
• 2020 Form 1040-X with Schedule SE: reports the $500 SE-tax increase.

That is $2,500 of additional tax in total, before interest or penalties. Not $2,500 on each return.

The $2,000 is an assumed result after all related income-tax effects, including any change to the deduction for the deductible part of SE tax. It is not a flat-rate calculation that ignores that deduction.

Why the software can confuse this: changing the old-year inputs can recalculate both taxes together. That helps us measure the correction, but it does not tell us which amounts belong in each filing. We need three clearly labeled outputs: calculation copy; reporting-year filing; limited old-year amendment if required.

IRS Form 8978 instructions; IRS Form 1040-X instructions, BBA partner non-income-tax changes; IRS Schedule SE instructions.

Trusts also need their own review: amounts taxable to the trust and amounts passing to beneficiaries can follow different paths, and wholly owned grantor trusts have owner-treatment rules. Do not hand every partner the same filing instructions. Form 8985 instructions.

Why this became more work than changing percentages

We had to preserve the original figures before changing the software inputs so the before-and-after comparison actually meant something. Then we had to distinguish calculation copies from filing copies and explain the result clearly enough that the client would not file the wrong set.

Calculate interest and check penalties separately

The IU may feel like a penalty because the formula uses a high rate. It is still the partnership’s calculated tax, not a punishment. Keep three buckets: tax, interest, and any applicable penalty.

If the partnership pays the IU: calculate interest from the day after the reviewed-year partnership return’s due date, without extensions, through the AAR filing date. The IU is due when the AAR is filed; later payment can create further interest and penalties. Check the applicable penalty rules rather than automatically adding 20%. Treasury regulation §301.6227-2(b).

If the individual partner takes the push-out:

1. Take each positive yearly income-tax increase from Form 8978, line 13. Calculate interest from that year’s original return due date through payment. A negative year produces no interest credit.
2. Use the AAR underpayment rate: federal short-term rate plus three percentage points, not the audit push-out’s plus five.
3. Check Form 8986, Part V, for applicable penalties. Calculate the identified penalty under its own rules and thresholds; do not assume a percentage. Report it on Form 8978, line 15, with supporting calculations. Is it automatic in Axcess? Do not assume so. Confirm what your version computes, check the result against the penalty rules, and inspect the supporting statement. Form availability does not prove automatic calculation; the same check applies to interest.
4. Report interest by year on line 17 and attach the computation. Interest on penalties uses the return due date including valid extensions, unlike interest on the tax.
5. Line 14 tax goes to the reporting-year return. Penalties and interest enter the net payment calculation, not that return’s income-tax adjustment. Form 8978 instructions.

Build the interest workpaper: year | tax or penalty principal | start date | end date | quarter | annual rate | days | interest accrued | running balance. Split the time at quarterly rate changes and actual payments. Use the historical rate for each period, not today’s rate for the whole job. Interest compounds daily, so a flat “tax × rate × years” shortcut is not the finished calculation. IRS historical quarterly rates; daily compounding rule.

For our invented $2,000 tax increase, $2,000 is the starting tax principal. The interest amount stays blank until we have the correct due date, payment date, and historical rates. Keep any penalty on its own line.

Finish the job, not just the calculations

Before anything goes out, tie the partner statements back to the partnership correction and tie each individual calculation back to their 8986. Check the years, required signatures and authorizations, and exactly which package is being filed. Label the calculation copies DO NOT FILE.

Then keep separate proof of the partnership filing, delivery of partner statements, and individual filings. A prepared return is not proof that it was filed. A credit shown on a return is not proof that it paid another balance.

That is the practical plan: fix the partnership numbers, file the partnership package, hand off the 8986s, calculate each individual’s tax effect, and file the right amounts in the right years.

Changing the percentages may be quick. Getting the correction all the way through without confusing the client or duplicating the tax is the work.

For help scoping business and individual filing work, see our tax preparation services.

Federal educational example using guidance reviewed in October 2026. Actual treatment depends on the years, partner types, and facts; state requirements need separate review.

Joe Gallegos, CPA/CVA

Partner-in-Charge · JAG CPA & Co.

Author of The Ultimate Guide to Choosing a CPA

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