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Page 3 of 6 Fileid: … ns/i8978/202301/a/xml/cycle08/source 9:20 - 15-Dec-2022
The type and rule above prints on all proofs including departmental reproduction proofs. MUST be removed before printing.
in Part V of Form 8986, and a $6,000 decrease to capital gains, complete column (c) for 2022 on Schedule A (Form 8978) and
shown as a negative amount in Part V of Form 8986. column (c) for 2022 on Form 8978, showing the positive
Bill determines that the adjustments shown on Form 8986 are partner-level adjustments.
from a partnership that he treats as a section 469 passive activity Bill must report the additional reporting year tax from line 14
for tax purposes. of Form 8978 on the appropriate line on his 2022 Form 1040,
Bill previously reported no capital gains or losses on his following the Instructions for Form 1040.
Forms 1040 in 2020 and 2021, and now has a $6,000 decrease Bill’s payment accompanying his 2022 Form 1040 should
to capital gains (increased capital loss). Due to the $3,000 include the tax and interest. If a penalty had been applicable, he
annual capital loss limitation, the $6,000 capital loss adjustment would include that in his payment as well.
is taken in $3,000 annual increments. So, Bill claims a $3,000 Bill must attach Form 8978, Schedule A (Form 8978), and the
capital loss in 2020 and the remaining $3,000 capital loss in calculation statements to the Form 1040 he files for 2022. In this
2021. example, Bill should include statements for tax and penalty
Bill enters the ordinary income, the capital gain/loss calculations related to Form 8978. He should also attach his
adjustments, and the appropriate tracking numbers on section 469 suspended loss and section 199A schedules; these
Schedule A (Form 8978), lines 1a and 1b, respectively. After should include the adjustments shown on his Schedule A (Form
taking into account the BBA income adjustment for 2020, 2021, 8978).
and 2022, Bill determines that there are $5,000 in previously If a corporation received a Form 8986 identical to the one that
suspended passive activity losses that can be used. He enters Bill received, the corporation would follow the same procedures
the $5,000 that he has determined is available for offset as a for completing Form 8978 and Schedule A, and include those
negative amount on line 1c. with its tax year 2022 income tax return. The additional tax,
The Form 8986 that Bill received indicated that it was penalties, and interest would be reported and paid following the
determined in the BBA exam that the adjustments also impact instructions for the corporation’s income tax return.
QBI for the purposes of IRC 199A. This results in a section 199A
Reporting adjustments from both an audit and from an
deduction of $2,800 which he reports on line 3b of the
AAR. If a partner receives one or more audit-related Forms
Schedule A (entered as a positive amount because it increases
8986 and also one or more AAR-related Forms 8986, the
deductions).
partner’s Form 8978 related to the AAR adjustments should be
Bill carries the totals from lines 2 and 4 of Schedule A to Form completed first. The numbers shown on this first Form 8978
8978, lines 1b and 3b, respectively. Bill also completes lines 1a, should be included in the “as previously reported” numbers on
2, 3a, and 4 on the Form 8978, according to the instructions. the Form 8978 related to the audit adjustments. Each Form 8978
Bill attaches to Form 8978 a statement that shows how his should have applicable lines completed, and the partner should
tax year 2020 corrected taxable income, income tax, and AMT, if add all the amounts on line 14 (total increase/decrease to tax)
applicable, were figured. He includes the income adjustment as from all the Forms 8978 and report the sum on the appropriate
an increase to income and the deduction adjustment as a line of the tax return.
decrease to deductions. Example 3. Completing Forms 8978 and Schedules A for
Bill carries the amounts figured in the statement to lines 5, 6, an audit-related Form 8986 and an AAR-related Form 8986.
and 8 of Form 8978. He enters his corrected tax liability for tax Frank Smith files as a single individual. On May 15, 2020, Frank
year 2020 on line 11 of Form 8978. He enters his income tax as received a Form 8986 related to an AAR that was filed by a
previously reported for tax year 2020 on line 12 of Form 8978 partnership in which he is a partner. This Form 8986 reflects an
and subtracts this amount from the amount on line 11 to obtain increase of $5,000 to Frank’s share of other deductions. On
the increase or decrease to tax, which he enters on line 13. June 12, 2020, he received a Form 8986 related to an audit,
If any applicable penalties are shown on Form 8986, Part V, showing an additional $10,000 in income. No penalties were
Bill must attach a statement to his Form 8978 that shows how noted on either Form 8986. According to the date shown on
the additional penalties that result from the additional tax were Parts II, item D of the Forms 8986, both relate to adjustments
figured. If penalties are applicable, Bill needs to include this made to the 2019 tax year.
amount on line 15 of Form 8978. Because Part V of the Form Frank’s first step is to complete a Form 8978 and Schedule A
8986 Bill received indicates that the section 6662 substantial (Form 8978) for the AAR-related adjustments. He calculates a
understatement penalty applies, Bill prepares a separate decrease in tax of $1,200 from the AAR- related adjustments
calculation which shows that the additional $3,408 in tax and reports that amount on line 14 of the AAR-related 8978.
reported on line 13, column (a), of the Form 8978 does not Frank’s second step is to complete another Form 8978 and
exceed the $5,000 threshold required for the penalty to apply. Schedule A (Form 8978) for the audit-related adjustments. On
He attaches this separate penalty calculation statement to his this second Form 8978 (the audit-related Form 8978), he
return and enters zero on line 15 of his Form 8978. includes the amounts from the AAR-related Form 8978 in the
Bill figures his additional interest on the increase in tax shown “previously reported” amounts on lines 1a, 3a, 9a, and 12. He
on line 14 of his Form 8978 from April 15, 2021 (the due date of figures a total increase to tax of $2,400 from the audit-related
his 2020 return), up to the date the additional reporting year tax adjustments and reports this on line 14 of the audit-related Form
is paid. If penalties had been shown on his Form 8978, Bill would 8978. He reports the total net amount of $1,200 on the
have figured interest on penalties from the due date of his 2020 appropriate line of his Form 1040, referring to the Instructions for
return, or the extended due date of his 2020 return, if a valid Form 1040.
extension request had been filed. Frank attaches the forms to his 2020 Form 1040 and includes
payment of the additional $1,200 in tax, following the Instructions
Note. The reduction in tax for 2021 reflected in column (b) of the for Form 1040 with regard to amounts from Form 8978. The
Form 8978 is included in the total increase to tax reported on amount of interest is figured on the audit-related increase to tax
line 14, but is not included in the interest calculation. on line 13 of the audit-related Form 8978 using the short-term
If there were any positive intervening year partner-level quarterly rate plus 5%; interest runs from the due date of Frank’s
adjustments, Bill would have done similar calculations for those 2019 Form 1040 to the date of payment. This amount is reported
years. For example, if any of the adjustments made for 2020 or on lines 17 and 18 of the audit-related Form 8978.
2021 would also apply to Bill’s 2022 tax year, Bill would
Instructions for Form 8978 (Jan. 2023) -3-
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