n-21-13.pdf

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Relief for Partnerships from Certain Penalties Related to the Reporting of Partners’
Beginning Capital Account Balances

Notice 2021-13

SECTION 1. PURPOSE
The purpose of this notice is to provide partnerships with relief from certain
penalties due to the inclusion of incorrect information in reporting their partners'
beginning capital account balances on the 2020 Schedules K-1 (Form 1065) and the
2020 Schedules K-1 (Form 8865) as outlined in the 2020 Instructions for Form 1065,
U.S. Return of Partnership Income (2020 Form 1065 Instructions). This notice also
provides relief from accuracy-related penalties for any taxable year for the portion of an
imputed underpayment attributable to the inclusion of incorrect information in a partner’s
beginning capital account balance reported by a partnership for the 2020 taxable year.
SECTION 2. BACKGROUND
Section 6031 of the Internal Revenue Code (Code) and §§ 1.6031(a)-1 and
1.6031(b)-1T of the Income Tax Regulations generally require a partnership:
• to make a return for each taxable year stating the items of its gross
income and deductions allowable by subtitle A of the Code and any other
information as prescribed by forms and instructions for the purpose of
carrying out the provisions of subtitle A of the Code, and
• to furnish to its partners statements containing each partner’s distributive
share of the partnership’s items of income, gain, loss, deduction, or credit
required to be shown on the partnership return and any additional

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information required to apply particular provisions of subtitle A of the
Code to the partner with respect to items related to the partnership as
prescribed by form or accompanying instructions.
Pursuant to section 6031 and the accompanying Income Tax Regulations, the Internal
Revenue Service (IRS) has, in forms and instructions, long required the reporting of
partner capital account balances.
Prior to the 2020 taxable year, partnerships could report their partners’ capital
accounts for the taxable year on Schedules K-1, Partner’s Share of Income,
Deductions, Credits, etc., using one of a variety of methods that are based on different
principles (for example, tax basis, generally accepted accounting principles (GAAP),
section 704(b) book, or any other method). Starting in the 2018 taxable year, however,
the instructions for Form 1065 required partnerships that did not report tax basis capital
accounts to their partners to report separately the beginning and ending tax basis
capital account balance of any partner that would have a negative beginning or ending
tax basis capital account balance.
Beginning in the 2020 taxable year, the 2020 Form 1065 Instructions require
partnerships to calculate and report their partners’ capital accounts using the
transactional approach for the tax basis method, irrespective of whether the beginning
or ending balance is negative for a partner. The instructions for Form 8865, Return of
U.S. Persons with Respect to Certain Foreign Partnerships, refer to the Form 1065
Instructions for reporting partners’ capital accounts. Under the transactional approach
outlined in the 2020 Form 1065 Instructions, partnerships report partner contributions,
each partner's share of partnership net income or loss, withdrawals and distributions,

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and other increases or decreases using tax basis principles, instead of methods based
on other principles such as GAAP. The 2020 Form 1065 Instructions explain that if a
partnership did not report its partners’ capital accounts using the tax basis method in the
2019 taxable year and did not maintain its partners’ capital accounts under the tax basis
method in its books and records, the partnership may determine its partners’ beginning
capital accounts for the 2020 taxable year using any one of the following methods: the
tax basis method, modified outside basis method, modified previously taxed capital
method, or section 704(b) method (each as described in the 2020 Form 1065
Instructions).
Section 6698 imposes a penalty for failing to file a return or report at the time
prescribed therefor, or for filing a return or a report that fails to show the information
required under section 6031. A return required under section 6031 includes Form 1065
and each Schedule K-1. A failure to file a partnership return that shows information
required under section 6031 would generally subject a partnership to the section 6698
penalty. A section 6698 penalty will not be imposed if it is shown that the failure is due
to reasonable cause.
Section 6721 imposes a penalty for any failure to file an information return on or
before the required filing date, and for any failure to include all of the information
required to be shown on the return or the inclusion of incorrect information. When
regulations under section 6011 require a partnership to file a partnership return
electronically, each Schedule K-1 required to be included with the return with respect to
each partner is treated as a separate information return subject to the section 6721
penalty. See section 6724(e) of the Code. Failure to electronically file a correct

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Schedule K-1 when required would generally subject a partnership to a section 6721
penalty.
Section 6722 imposes a penalty for any failure to furnish a payee statement on or
before the date prescribed therefor to the person to whom such statement is required to
be furnished, and for any failure to include all of the information required to be shown on
a payee statement or the inclusion of incorrect information. Section 6724(d)(2) provides
a definition for "payee statement" that applies to section 6722. Under section
6724(d)(2)(A), a Schedule K-1 furnished to each partner is considered a payee
statement. A failure to furnish a correct Schedule K-1 as required under section 6031
would generally subject a partnership to the section 6722 penalty.
Section 6724 provides an exception to a penalty for any failure under sections
6721 and 6722 if it is shown that the failure is due to reasonable cause and not to willful
neglect. Under § 301.6724-1 of the Procedure and Administration Regulations, a
penalty is waived for reasonable cause only if the filer establishes that either there are
significant mitigating factors with respect to the failure or the failure arose from events
beyond the filer’s control. In addition, the filer must establish that the filer acted in a
responsible manner both before and after the failure occurred.
Section 6662 imposes an accuracy-related penalty on portions of an
underpayment attributable to one or more types of misconduct, such as negligence or
substantial understatement of income tax. Under section 6221, the applicability of any
penalties, additions to tax, or additional amounts that relate to an adjustment to a
partnership-related item must be determined at the partnership level for partnerships
subject to the centralized partnership audit regime enacted by the Bipartisan Budget Act

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of 2015, Pub. L. 114-74, 129 Stat. 584. Section 6233 makes partnerships subject to the
centralized audit regime liable for the section 6662 penalties calculated on the imputed
underpayment.
SECTION 3. RELIEF FROM PENALTIES UNDER SECTIONS 6698, 6721, AND 6722
A partnership will not be subject to a penalty under sections 6698, 6721, or 6722
due to the inclusion of incorrect information in reporting its partners’ beginning capital
account balances on the 2020 Schedules K-1 if the partnership can show that it took
ordinary and prudent business care in following the 2020 Form 1065 Instructions to
report its partners’ beginning capital account balances using any one of the following
methods, as outlined in the instructions: the tax basis method, modified outside basis
method, modified previously taxed capital method, or section 704(b) method. For
purposes of this notice, “ordinary and prudent business care” means the standard of
care that a reasonably prudent person would use under the circumstances in the course
of its business in handling account information. In demonstrating ordinary and prudent
business care, taxpayers are reminded that capital account balances are part of a
partnership’s books and records and must be maintained accordingly.
In addition, a partnership will not be subject to a penalty under sections 6698,
6721, or 6722 due to the inclusion of incorrect information in reporting its partners’
ending capital account balances on Schedules K-1 in taxable year 2020 or its partners’
beginning or ending capital account balances on Schedules K-1 in taxable years after
2020 to the extent the incorrect information is attributable solely to the incorrect
information reported as the beginning capital account balance on the 2020 Schedule K-
1 for which relief under this notice is available. The penalty relief provided in this notice

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is in addition to the reasonable cause exception to penalties for failing to properly report
the partners’ beginning capital account balances, as described in section 2 of this
notice.
A partnership that fails to timely file a 2020 Form 1065, Form 8865, and
Schedules K-1 is not eligible for the relief provided by this notice. A partnership that
fails to include a partner’s beginning capital account balance on the Schedule K-1 is
also not eligible for relief. This notice does not relieve a partner of its obligation to
determine the adjusted basis of its interest in the partnership for purposes of
determining its tax liability or that of any other person as prescribed in section 705 of the
Code and § 1.705-1(a)(1) of the Income Tax Regulations.
SECTION 4. RELIEF FROM PENALTIES UNDER SECTION 6662
The IRS will waive any accuracy-related penalty under section 6662 for any
taxable year with respect to any portion of an imputed underpayment that is attributable
to an adjustment to a partner’s beginning capital account balance reported by the
partnership for the 2020 taxable year to the extent the adjustment arises from the
inclusion of incorrect information for which the partnership qualifies for relief under
section 3 of this notice. This notice does not prevent the IRS from imposing an
accuracy-related penalty under section 6662 for any portion of an imputed
underpayment related to capital account reporting by the partnership that is not
described in the previous sentence.
SECTION 5. CONTACT INFORMATION

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The principal author of this notice is Margaret Burow of the Office of the
Associate Chief Counsel (Passthroughs and Special Industries). For further
information, please contact Ms. Burow at (202) 317-5279 (not a toll-free number).