This guide explains how the form works, what to do when you receive it, and how the adjustments may affect your federal income tax reporting.

Receiving an IRS Form 8986 can be confusing, especially when the partnership adjustment relates to a tax year that has already been filed. For business owners and investors, understanding this form is important because changes to partnership income, deductions, credits, and other tax items may affect future tax reporting.

IRS Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), is used to communicate a partner’s share of certain adjustments resulting from a partnership audit or an administrative adjustment request.

For taxpayers and business owners in Grand Rapids, Kentwood, Wyoming, Middleville, and throughout West Michigan, AIM Financial provides tax preparation guidance to help individuals and businesses understand complex federal reporting requirements.

What Is IRS Form 8986?

Form 8986 is used by partnerships subject to the centralized partnership audit rules to report each partner’s share of adjustments to partnership-related tax items.

These rules generally apply to partnership tax years beginning on or after January 1, 2018, subject to applicable exceptions.

An IRS examination may determine that a partnership incorrectly reported income, deductions, credits, or other items on a prior-year return. Alternatively, a partnership may discover an error and submit an administrative adjustment request, commonly called an AAR.

Depending on the circumstances, the partnership may elect to push the adjustments out to its partners rather than pay an imputed underpayment at the partnership level.

Form 8986 communicates the affected partner’s share of those adjustments. It may also be used when a pass-through entity receives adjustments and passes them through to its own owners or beneficiaries.

Form 8986 is not an ordinary annual tax form that every partnership files. It is associated with specific partnership audit and adjustment procedures.

For official details, visit the IRS About Form 8986 webpage.

Who May Receive Form 8986?

Form 8986 may be provided to individuals, corporations, partnerships, trusts, estates, and other entities that held an interest in an affected partnership.

For example, imagine that a West Michigan business operates as a partnership and is later audited by the IRS. The examination determines that certain business expenses were deducted incorrectly. The partnership elects to push the adjustments out to its partners.

Each affected partner may receive a Form 8986 showing that partner’s share of the adjustments.

The partner must then determine how to handle the information under the applicable federal tax rules.

If the recipient is an individual or another partner that is not itself a pass-through entity for the relevant adjustment, Form 8978 is generally used to calculate the additional reporting-year tax or overpayment.

If the recipient is a pass-through entity, such as an S corporation or another partnership, additional steps may be required. The entity may need to pass the adjustments to its own owners or beneficiaries or calculate and pay an imputed underpayment under the applicable rules.

The correct procedure depends on the recipient’s entity type and the nature of the adjustment.

What Information Does Form 8986 Contain?

Form 8986 provides identifying information about the partnership and the recipient, along with details about the adjustments.

Important information may include:

• The name and taxpayer identification number of the audited partnership.
• The reviewed year to which the adjustments relate.
• The partnership’s adjustment year.
• The partner’s identifying information.
• The partner’s original and corrected share of certain partnership items.
• Adjustments to income, gains, losses, deductions, credits, and other tax-related information.
• Additional statements explaining particular adjustments when required.

The form helps the recipient understand what changed and provides information needed for the next reporting step.

Do not assume that every adjustment represents additional taxable income. Depending on the circumstances, an adjustment may increase or decrease income, change a deduction or credit, or affect another tax item. The final tax result depends on the adjustment and the applicable tax rules.

What Should You Do If You Receive Form 8986?

If you receive Form 8986, do not simply file it away with your other tax documents. Review it promptly and determine what action is required.

Step 1: Verify the Information

Check the partnership name, tax identification information, reviewed year, and your identifying details. Compare the adjustment statement with your available Schedule K-1 records and any related partnership correspondence.

If information appears incorrect, contact the partnership or the person responsible for issuing the form to clarify the issue.

Step 2: Determine Your Reporting Requirements

The required next step depends on whether you received the form as an individual partner or as a pass-through entity.

An individual partner generally uses Form 8978 and its Schedule A to calculate the effect of the adjustments on the reporting-year tax return.

A pass-through entity may need to issue Forms 8986 to its own partners or calculate and pay an imputed underpayment. The entity must follow the applicable submission procedures and deadlines.

Step 3: Review the Applicable Tax Years

The year being adjusted, known as the reviewed year, may differ from the reporting year.

For that reason, you should not automatically amend the old return or simply enter the adjustment as current-year income. Follow the instructions applicable to the form and partnership procedure involved.

Step 4: Keep Supporting Records

Retain Form 8986, related Forms 8985 or 8978, original tax returns, Schedule K-1 statements, and supporting calculations.

These records can help explain how the adjustment was handled and support future tax reporting if questions arise.

What Is the Difference Between Forms 8985, 8986, and 8978?

These forms work together but have different purposes.

Form 8985 is a transmittal and tracking form used in specified partnership adjustment procedures.

Form 8986 communicates the partner’s share of adjustments to partnership-related items.

Form 8978 is generally used by partners other than pass-through entity partners to calculate additional reporting-year tax or an overpayment arising from the adjustments.

For example, an audited partnership may prepare Forms 8985 and 8986 when pushing adjustments out to its partners. An individual partner receiving Form 8986 generally uses Form 8978 to determine the effect on the individual’s tax liability.

Understanding these distinctions is important because filing the wrong form or overlooking a required calculation can result in an incorrect tax return.

Deadlines and Common Form 8986 Mistakes

Partnership adjustment deadlines depend on the procedure involved. Under the IRS instructions, an audited partnership that elects to push out adjustments generally must furnish Forms 8986 to its partners and submit the forms with Form 8985 within 60 days after the partnership adjustments are finally determined.

Pass-through partners may have separate deadlines tied to the extended due date of the partnership’s adjustment-year return.

Common mistakes include:

• Ignoring Form 8986 because it relates to an earlier tax year.
• Assuming the form automatically requires an amended return.
• Failing to determine whether Form 8978 is required.
• Overlooking adjustments that affect deductions, credits, or other tax attributes.
• Missing deadlines for passing adjustments through to owners.
• Using an outdated form or instructions.

Always consult the current IRS instructions for the particular procedure and tax year.

How AIM Financial Can Help With Partnership Tax Adjustments

Partnership audit adjustments can be difficult to navigate, especially when several tax years, business entities, or individual owners are involved.

AIM Financial helps individuals and businesses with federal income tax preparation and related tax reporting questions. If you receive Form 8986, need assistance understanding a partnership adjustment, or want to determine how the changes affect your tax return, professional guidance can help you identify the correct next steps.

For individuals and business owners in Grand Rapids, Kentwood, Wyoming, Middleville, and throughout West Michigan, contact AIM Financial to discuss your tax preparation needs.

Do not let a complicated partnership adjustment lead to an avoidable filing mistake. Contact AIM Financial for help understanding your federal tax reporting responsibilities and preparing an accurate return.

Disclaimer: This article is for general educational purposes and is not individualized tax or legal advice. Form 8986 reporting 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.