This specialized form can help an eligible partnership request adjustments to the tax amount calculated after an IRS partnership audit. The available modifications depend on the partnership’s circumstances and supporting documentation.

From AIM Financial | Tax Preparation and Tax Planning

What Is IRS Form 8980?

When the Internal Revenue Service (IRS) audits a partnership, it may determine that the partnership reported too little taxable income or claimed deductions or credits that were not allowable. Under federal partnership audit rules, these adjustments can result in an amount of tax called an imputed underpayment.

IRS Form 8980, Partnership Request for Modification of Imputed Underpayments Under IRC Section 6225(c), is used by an eligible partnership to request certain modifications that may reduce the imputed underpayment calculated under the centralized partnership audit rules.

For partnerships and business owners in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan, understanding Form 8980 is important when an IRS partnership examination results in proposed adjustments.

Form 8980 is a specialized tax form. It is not a routine attachment to every partnership return and generally becomes relevant during specific IRS partnership audit procedures. The partnership must follow the applicable instructions and provide the required supporting documentation. See the IRS instructions and related guidance.

What Is an Imputed Underpayment?

An imputed underpayment is generally an amount calculated at the partnership level when certain adjustments increase the partnership’s taxable income or otherwise produce an underpayment under the centralized partnership audit rules.

For example, imagine an IRS examination determines that a partnership improperly deducted $100,000 of business expenses. The adjustment could increase the partnership’s taxable income for the reviewed year.

Rather than automatically recalculating each partner’s individual tax return, the centralized partnership audit rules generally provide a process for calculating an imputed underpayment at the partnership level. The amount can depend on the adjustments, applicable tax rates, and other factors specified by law.

The partnership may be able to request modifications when the statutory requirements are satisfied. These modifications can account for certain partner-specific circumstances or other permitted adjustments.

A modification does not automatically eliminate the tax. The partnership must establish that the requested treatment is permitted and substantiate its request.

Who May Need to File Form 8980?

Form 8980 may be relevant to a partnership undergoing an examination under the centralized partnership audit regime when it wants the IRS to consider eligible modifications to an imputed underpayment.

The partnership representative generally plays an important role in communicating with the IRS and managing the audit process. The representative should coordinate with the partnership’s tax advisers to determine whether modification requests are appropriate.

Potentially relevant situations include:

• A partnership has partners who qualify for a permitted tax-exempt partner modification.
• Certain partners file amended returns and pay the tax attributable to their shares of the adjustments, if the applicable requirements are met.
• The partnership qualifies for a modification based on applicable partner tax rates.
• Other statutory modifications may apply to the partnership’s circumstances.

Not every partnership audit requires Form 8980. Whether the form is appropriate depends on the type of audit, the adjustments proposed, and the modification being requested.

What Types of Modifications May Be Available?

Section 6225(c) provides several categories of modifications, subject to specific eligibility and documentation requirements.

1. Amended-return modification

Under certain conditions, partners may file amended returns and pay the tax attributable to their shares of partnership adjustments. The partnership may request a corresponding modification if the statutory requirements are satisfied and the required evidence is supplied.

This process is not simply a matter of asking every partner to amend a return. Specific procedures, deadlines, and documentation rules apply.

2. Tax-exempt partner modification

If a partner is a qualifying tax-exempt entity, some adjustments may not produce the same tax consequences that would apply to a taxable partner. A modification may be available when the requirements are met.

The partnership must substantiate the partner’s status and the eligibility of the relevant adjustments.

3. Modification based on applicable tax rates

The default calculation may use prescribed rates or assumptions. In certain circumstances, a partnership may request a different calculation based on the applicable tax treatment of partners or adjustments.

The IRS must be able to verify the basis for the requested modification.

4. Other permitted modifications

Additional rules can apply to particular types of adjustments, partners, or tax attributes. Eligibility depends on the Internal Revenue Code and the IRS procedures in effect for the examination.

Because the requirements are technical, partnerships should review the current Form 8980 instructions and the IRS’s related guidance before preparing a request.

How Do You Prepare Form 8980?

Preparing Form 8980 begins with understanding the IRS’s proposed partnership adjustments and identifying the specific modification being requested.

A general preparation process includes:

1. Review the audit notice. Identify the reviewed tax year, proposed adjustments, and current status of the examination.
2. Reconcile the partnership’s records. Compare the proposed changes with the original Form 1065, Schedules K-1, accounting records, and supporting documents.
3. Identify eligible modifications. Determine whether any partner-specific or other statutory modifications may apply.
4. Collect supporting documentation. Obtain the partner statements, tax records, certifications, or other evidence required for the requested modification.
5. Complete the appropriate sections. Follow the current Form 8980 instructions and ensure that the amounts reconcile with the partnership’s audit calculations.
6. Submit the request using the required procedure. Confirm the applicable submission deadline and delivery method with the IRS instructions and audit contact.

A modification request should be supported by clear documentation. Unsupported amounts or incomplete partner information can delay the review or result in the IRS denying some or all of the requested modification.

When Must Form 8980 Be Submitted?

Timing is critical. Under the centralized partnership audit rules, a partnership generally has a limited period to request modifications after receiving the relevant notice of proposed partnership adjustments.

The applicable period and any available extension depend on the procedural stage of the examination and the governing rules. Form 8980 and its supporting documents must be submitted according to the IRS instructions for the specific proceeding.

Partnerships should not assume that the deadline is the same as the due date for their annual Form 1065. A partnership audit modification request follows a separate process.

Because missing the applicable deadline may limit the partnership’s ability to obtain a modification, the partnership representative should promptly review any IRS notice and coordinate with a qualified tax professional.

Common Mistakes to Avoid

Partnerships should take care to avoid these problems:

• Assuming every audit adjustment qualifies for a modification.
• Missing the modification submission deadline.
• Failing to obtain sufficient documentation from partners.
• Calculating a modification using unsupported tax rates or assumptions.
• Confusing Form 8980 with Form 8978, which partners use for certain additional reporting-year tax calculations.
• Assuming an accepted modification automatically resolves every partner’s separate tax reporting responsibility.

Good recordkeeping and careful review of the IRS procedures can help a partnership respond more effectively to an examination.

How AIM Financial Can Help With Partnership Tax Questions

Partnership audits can involve complicated calculations, partner-specific tax issues, and strict procedural deadlines. Understanding the available modification options can help a business make informed decisions about its response to the IRS.

AIM Financial assists individuals and businesses with tax preparation and tax reporting questions. If your partnership operates in Grand Rapids, Kentwood, Wyoming, or elsewhere in West Michigan, contact AIM Financial to discuss your tax preparation needs and determine what type of assistance may be appropriate.

If you receive an IRS partnership audit notice, organize the notice, the affected tax returns, partner Schedules K-1, accounting records, and any correspondence with the IRS. These documents can help a tax professional understand the situation and identify the questions that need attention.

Contact AIM Financial to discuss your business tax reporting needs and take the next step toward accurate, well-documented tax compliance.

Disclaimer: This article provides general educational information and is not individualized tax or legal advice. Form 8980 eligibility, modification calculations, and deadlines depend on the facts and the applicable partnership audit procedures. Review the current IRS instructions and consult an appropriately qualified tax professional regarding your circumstances.