This form is especially important when partnership adjustments are passed through to partners instead of being handled solely at the partnership level.

AIM Financial | Business Tax Preparation and Tax Reporting

When the IRS audits a partnership, the results can affect more than the partnership itself. Adjustments to income, deductions, credits, and other tax items may need to be reported by individual partners or passed through additional business entities before reaching the taxpayers ultimately responsible for reporting them.

IRS Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), is used to communicate each partner’s share of certain adjustments resulting from a partnership audit or an administrative adjustment request (AAR). Understanding this form can help partnerships, business owners, and tax professionals manage complicated reporting requirements.

For businesses in Grand Rapids, Kentwood, Wyoming, and throughout West Michigan, AIM Financial provides tax preparation guidance to help taxpayers understand their reporting responsibilities. This guide explains Form 8986 in plain English.

What Is IRS Form 8986?

Form 8986 is part of the federal centralized partnership audit regime established by the Bipartisan Budget Act of 2015.

Under these rules, the IRS generally reviews partnership returns and determines adjustments at the partnership level. When the partnership makes an eligible election to pass adjustments to its partners, Form 8986 identifies the adjustments allocated to each partner.

The form may also be used to track adjustments resulting from a partnership’s administrative adjustment request, which is a formal request to correct certain items reported on a previously filed partnership return.

Form 8986 is not a routine attachment to every partnership tax return. It is used in specific partnership audit and adjustment situations under Sections 6226 and 6227 of the Internal Revenue Code. The current IRS form revision is December 2024. <Cite refs={[“turn813872search1″,”turn813872search0”]}/>

Who Receives Form 8986?

Form 8986 may be issued to several types of partners and entities, depending on the structure of the business.

Potential recipients include:

• Individual partners who own an interest in an audited partnership.
• Partnerships that receive adjustments through another partnership in which they invest.
• S corporations that receive partnership adjustment information and may need to pass it on to shareholders.
• Trusts and estates that receive adjustments affecting the entity or its beneficiaries.

When an entity receives Form 8986, it must determine which adjustments apply at the entity level and which must be passed through to its owners or beneficiaries. The appropriate reporting method depends on the entity’s circumstances and the applicable IRS rules. <Cite refs={[“turn813872search0″,”turn813872search1”]}/>

What Information Appears on Form 8986?

Form 8986 contains several sections designed to connect the adjustment information with the correct partnership, tax year, and partner.

1. Information about the entity submitting the form

The form identifies the entity submitting the statement and the type of tax return it files. The filer may be an audited partnership, a pass-through partner, or an entity involved in an administrative adjustment request.

2. Information about the audited partnership

This section identifies the partnership whose audit or adjustment request resulted in the changes. It includes information needed to track the reviewed tax year and related adjustment year.

3. Information about the partner receiving the form

The statement identifies the partner receiving the adjustments. Correct taxpayer identification information is important because the recipient may need to use the information when preparing a later tax return.

4. Adjustments to income, gains, losses, deductions, and credits

This is one of the most important sections. Form 8986 lists the partner’s share of affected partnership items, including amounts originally reported, adjustments, approved modifications where applicable, and corrected totals.

These figures help the recipient understand how the partnership audit changes the amounts associated with the partner’s share of partnership activity.

5. Additional statements

Some adjustments require further explanation or supporting statements. For example, certain qualified business income information under Section 199A may require additional detail to determine how the changes affect the recipient’s tax calculations.

The IRS instructions explain how these sections should be completed and how adjustments should be presented. <Cite refs={[“turn813872search0″,”turn813872search27”]}/>

What Should You Do If You Receive Form 8986?

Receiving Form 8986 does not necessarily mean you must pay a specific amount immediately. It means you should review the information carefully and determine how the adjustments affect your reporting obligations.

Step 1: Verify the information

Check the partnership name, tax year, partner information, and adjustment details. Compare the statement with relevant partnership records and prior tax documents.

Step 2: Determine whether you are a direct or pass-through partner

An individual who receives Form 8986 directly generally follows the instructions for Form 8978, Partner’s Additional Reporting Year Tax, and attaches Form 8978 to the appropriate reporting-year return.

A pass-through entity may have additional responsibilities, including preparing its own Forms 8985 and 8986 to transmit adjustments to its owners or beneficiaries when required. Special rules apply to certain entities and partners. <Cite refs={[“turn813872search0″,”turn813872search1”]}/>

Step 3: Review tax, payment, and deadline requirements

The reporting-year tax calculation may differ from simply amending the original return. The correct treatment depends on the partnership audit procedure and the partner’s circumstances.

Some partners may be able to make an advance payment to stop additional interest from accruing, subject to IRS rules. Review the current Form 8978 and Form 8986 instructions before making a payment or filing a return.

Step 4: Keep the documentation

Retain Form 8986, related Forms 8985 and 8978 when applicable, partnership correspondence, and supporting calculations. These records can help explain how the adjustment was reported.

Common Form 8986 Mistakes to Avoid

Partnership audit reporting can be complicated. Common mistakes include:

• Ignoring a Form 8986 because it does not look like a traditional tax bill.
• Reporting the adjustment on the wrong tax year or return.
• Failing to distinguish between a direct partner and a pass-through entity.
• Overlooking adjustments to deductions, credits, or qualified business income.
• Missing deadlines or failing to review applicable interest and payment rules.
• Assuming the original partnership return must always be amended.

Because the rules are technical, taxpayers should carefully review the IRS instructions rather than applying ordinary partnership tax reporting practices automatically.

How AIM Financial Can Help With Partnership Tax Reporting

Partnership audits can create reporting obligations for several entities and taxpayers. Understanding Form 8986, Form 8985, and Form 8978 can help clarify how partnership adjustments move through a business structure and how those adjustments may affect tax returns.

AIM Financial helps individuals and businesses understand tax preparation requirements and organize their tax reporting needs. If you have received a partnership adjustment statement, have questions about reporting prior-year partnership items, or need help understanding a complex IRS notice, professional guidance can help you identify the appropriate next steps.

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

AIM Financial — helping West Michigan taxpayers navigate complex tax reporting with greater clarity and confidence.

This article is for educational purposes only and is not legal or tax advice. Form 8986 applies to specialized partnership audit and adjustment procedures. Reporting obligations and deadlines depend on the facts of the case. Consult the current IRS form instructions and a qualified tax professional before filing.