The guide explains how Form 8985 relates to Forms 8986 and 8978, who may need to use it, and what businesses should understand before reporting partnership adjustments.

When a partnership is audited by the IRS, the resulting tax adjustments can affect not only the partnership itself but also its individual partners and other businesses that receive partnership income. These adjustments can become especially complicated when a partner is another pass-through entity, such as an S corporation, partnership, trust, or estate.

IRS Form 8985, Pass-Through Statement—Transmittal/Partnership Adjustment Tracking Report, is used to transmit certain partnership adjustment statements and track related tax calculations under federal partnership audit rules.

For business owners in Grand Rapids, Kentwood, Wyoming, Middleville, and throughout West Michigan, understanding Form 8985 can help prevent reporting errors, missed deadlines, and unexpected tax liabilities. AIM Financial helps individuals and businesses understand federal income tax reporting requirements and prepare accurate tax returns.

What Is IRS Form 8985?

IRS Form 8985 is used in connection with the centralized partnership audit rules established under the Bipartisan Budget Act of 2015.

These rules generally allow the IRS to examine partnership tax items and determine adjustments at the partnership level. Depending on the circumstances, the partnership may pay an amount called an imputed underpayment, or it may elect to push certain adjustments out to its partners.

Form 8985 helps summarize and transmit Forms 8986, which show each partner’s share of the relevant adjustments. It is also used by certain pass-through partners to report related calculations and payments.

The form is not an ordinary annual tax return attachment for every partnership. It applies to specific partnership audit and administrative adjustment procedures.

For the official form and current guidance, visit the IRS About Form 8985 webpage.

What Is the Difference Between Form 8985 and Form 8986?

Although these forms are related, they serve different purposes.

Form 8985 summarizes and transmits the adjustment information and tracks certain amounts or calculations associated with partnership adjustments.

Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), identifies the adjustments allocated to a particular partner or pass-through entity.

Think of Form 8985 as the overall transmittal and tracking document, while Form 8986 provides the adjustment information for individual recipients.

For example, suppose a partnership is audited and the IRS determines that certain expenses were deducted incorrectly. The partnership may follow the applicable procedures to communicate the resulting adjustments to its partners. Form 8986 identifies each recipient’s share of those adjustments, while Form 8985 accompanies the required package and summarizes the relevant information.

The actual filing process depends on whether the partnership is responding to an IRS examination or submitting an administrative adjustment request.

Read the IRS Instructions for Form 8985 and the Instructions for Form 8986 for details.

Who May Need to Prepare Form 8985?

The form is generally relevant to certain partnerships and pass-through entities involved in partnership audit adjustment procedures.

These may include:

• An audited partnership that elects to push adjustments out to its partners.
• A partnership that files an administrative adjustment request and follows procedures requiring Forms 8985 and 8986.
• A pass-through entity that receives Form 8986 and passes the adjustments through to its own partners or owners.
• Certain pass-through partners that calculate and pay an imputed underpayment instead of passing the adjustments further through the ownership chain.

Pass-through entities commonly include partnerships, S corporations, trusts, and estates. The specific requirements depend on the type of entity, the adjustment procedure, and the tax items involved.

An individual who receives Form 8986 generally follows a different reporting process. In many cases, an individual partner uses Form 8978 to calculate the additional reporting-year tax or overpayment resulting from the adjustments.

Therefore, receiving an ordinary Schedule K-1 does not automatically mean Form 8985 is required.

What Is an Imputed Underpayment?

An imputed underpayment is an amount calculated under the partnership audit rules when certain adjustments result in an underpayment of tax at the partnership level.

For example, an IRS examination may increase a partnership’s taxable income because the partnership claimed deductions that were not allowable. Under the applicable rules, the partnership may be required to calculate and pay an imputed underpayment.

However, the partnership may have options, including making a valid election to push certain adjustments out to its partners. If adjustments are pushed out, the partners generally take the applicable adjustments into account under the relevant reporting procedures.

When a pass-through entity receives adjustments from another partnership, it may need to determine whether to pass those adjustments through to its own owners or pay an imputed underpayment itself.

These decisions can have significant tax consequences. The appropriate treatment depends on the facts, the applicable statutory rules, and the entity’s circumstances.

How Does Form 8985 Work for Pass-Through Entities?

Pass-through entities require special attention because partnership adjustments can move through multiple levels of ownership.

Consider a simplified example.

A partnership is audited and issues Form 8986 to an S corporation that owns an interest in the partnership. The S corporation must determine how to handle the adjustments it receives.

Depending on the applicable rules and circumstances, the S corporation may pass the adjustments through to its shareholders using the required procedures or calculate and pay an imputed underpayment.

If the entity passes the adjustments through, it generally needs to prepare and furnish the required Forms 8986 and submit Form 8985 to the IRS.

The S corporation must also track the applicable deadlines. Failure to complete the required reporting or payment procedures on time may expose the entity to additional tax, penalties, and interest.

This example illustrates why partnership audit adjustments should not be treated as routine K-1 entries without reviewing the related documentation.

What Information Is Needed to Prepare Form 8985?

The information needed depends on the adjustment procedure, but relevant records may include:

• The applicable Form 8986 statements.
• Partnership identification information and employer identification numbers.
• The reviewed tax year and adjustment year.
• Details of the partnership adjustments.
• Information about any imputed underpayment and related payment calculations.
• Records identifying the affected partners or owners.
• Supporting tax returns, calculations, and correspondence.
• Tracking information required for the applicable electronic submission process.

Taxpayers should use the correct form revision. The IRS revised Forms 8985 and 8986 in December 2024, including changes to certain columns used to report adjustment amounts.

The IRS also requires electronic submission for specified Forms 8985 and 8986 packages involving audited partnerships and their pass-through partners. Procedures differ for some administrative adjustment requests, so taxpayers should consult the instructions before filing.

Common Form 8985 Mistakes to Avoid

Partnerships and pass-through entities should avoid several common errors:

Confusing Forms 8985 and 8986. Each form has a separate purpose, and the required package may include both.

Using outdated forms. Older versions may contain different column headings or reporting requirements.

Missing deadlines. The deadline depends on the applicable audit or adjustment procedure. Some partnerships must furnish and submit forms within specific periods.

Ignoring the ownership structure. A pass-through entity may need to determine whether adjustments should be passed through to its own partners or handled at the entity level.

Overlooking electronic submission requirements. Certain partnership audit packages must be submitted electronically using the IRS’s designated procedures.

Assuming the forms are required for every partnership return. Form 8985 is associated with specific adjustment procedures, not routine annual filing for all partnerships.

How AIM Financial Can Help With Partnership Tax Reporting

Partnership audit adjustments can be challenging, especially when they involve several entities, multiple tax years, or decisions about whether to pass adjustments through to owners.

AIM Financial helps individuals and businesses with federal income tax preparation and related tax reporting questions. If your business has received Form 8986, needs to understand partnership audit paperwork, or is determining how adjustments affect its tax responsibilities, professional assistance can help you identify the appropriate next steps.

For business owners in Grand Rapids, Kentwood, Wyoming, Middleville, and throughout West Michigan, AIM Financial can help you approach your tax reporting responsibilities with greater confidence.

Do not ignore partnership adjustment statements or assume they can be handled like ordinary tax documents. Contact AIM Financial to discuss your business tax preparation needs and understand which reporting requirements apply to your situation.

Disclaimer: This article provides general educational information, not individualized tax or legal advice. Form 8985 requirements depend on the partnership adjustment procedure, entity structure, and applicable IRS rules. Consult the current IRS forms and instructions or a qualified tax professional for guidance.