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Department of the Treasury
Internal Revenue Service
Instructions for Form 8978

(Including Schedule A)

(Rev. January 2023)
Partner’s Additional Reporting Year Tax

Contents Page items that are taxable to the entity partner, the entity partner
What’s New . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 should use Form 8978; for adjustments to items that pass
Purpose of This Form . . . . . . . . . . . . . . . . . . . . . . . . 1 through to the partner's owners or beneficiaries, the partner
should follow the Instructions for Forms 8985 and 8986.
Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
General Instructions . . . . . . . . . . . . . . . . . . . . . . . . . 2 The Schedule A (Form 8978) lists all the adjustments a
partner receives on Form 8986. Schedule A is also used to
Who Must File . . . . . . . . . . . . . . . . . . . . . . . . . . 2 report any related amounts and adjustments not reported on
Where and When To File . . . . . . . . . . . . . . . . . . . 2 Form 8986 which may result from changes to partner-level tax
Completing Form 8978 and Schedule A . . . . . . . . 2 attributes as a result of adjustments from Form 8986.
Specific Instructions for Form 8978 . . . . . . . . . . . . . . 4
Definitions
Specific Instructions for Schedule A (Form 8978) . . . . 5 AAR partnership is a BBA partnership (see below) which has
Inconsistent Positions . . . . . . . . . . . . . . . . . . . . . . . . 5 filed an administrative adjustment request (AAR) under section
Section references are to the Internal Revenue Code unless 6227.
otherwise noted. Additional reporting year tax is the partner’s change in
chapter 1 tax for the reporting year after taking into account the
Future Developments adjustments.
For the latest information about developments related to Form Affected partner is a partner that held an interest in a
8978 and its instructions, such as legislation enacted after they pass-through partner at any time during the tax year of the
were published, go to IRS.gov/Form8978. pass-through partner to which the adjustments in the statement
relate.
What’s New Applicable tax year is any tax year that is impacted by the audit
In general, adjustments from multiple Forms 8986 received from adjustments shown on Form 8986. For example, if the
partnerships can be reported by a partner on one Schedule A adjustments are from tax year 2020 (first affected year), that
(Form 8978) as long as the adjustments are from the same year would be impacted as well as any year between the first
source type. Totals from the Schedule A are carried by the affected year and the reporting year that had related changes to
partner to Form 8978. However, adjustments from Forms 8986 partner-level tax attributes.
related to administrative adjustment requests (AARs) must be Audited partnership, for purposes of Form 8978, is a BBA
separated from adjustments from audits under the centralized partnership that made the election under section 6226 to have
partnership audit regime of the Bipartisan Budget Act of 2015 its partners take into account their share of adjustments for
(BBA). For this reason, check boxes have been added to Form partnership-related items.
8978 and its Schedule A to indicate the source of the BBA AAR is an administrative adjustment request filed by a
adjustment(s) being reported: AAR filing or BBA audit. BBA partnership.
BBA partnership is a partnership that is subject to the
If a partner has adjustments from more than one source (AAR centralized partnership audit regime that was enacted into law
filing or BBA audit), each source type must be reported on a by section 1101 of the Bipartisan Budget Act of 2015 (BBA).
separate Form 8978 and Schedule A. The partner indicates the First affected year is the partner’s tax year that includes the
source of adjustment using the check boxes. Schedule A end of the audited partnership’s reviewed year(s). Each
adjustments related to an AAR filing are carried to a Form 8978 reviewed year of an audited partnership should have a
with “AAR Filing” box checked. Schedule A adjustments related corresponding first affected year for each partner.
to a BBA audit are carried to a Form 8978 with “BBA Audit” box Intervening years include the partner’s tax years that end after
checked. the first affected year and before the reporting year.
Because each Form 8978 and its Schedule A only provide for Non-pass-through partner is a partner that is other than a
4 years of reporting, if there are more than 4 years of pass-through partner.
adjustments for either source, the partner must file multiple Pass-through partner is a pass-through entity that holds an
Forms 8978 and Schedules A relating to that source. interest in a partnership. Pass-through entities include
Schedule A adjustments related to a BBA audit are carried to a partnerships required to file a return under section 6031(a), S
Form 8978 with “BBA Audit” box checked. See Reporting corporations, trusts (other than wholly owned trusts disregarded
adjustments from both an audit and from an AAR. as separate from their owners for federal tax purposes), and
decedents’ estates. For this purpose, a pass-through entity is not
Purpose of This Form a wholly owned entity disregarded as separate from its owner for
Partners (other than pass-through partners such as partnerships federal tax purposes.
or S corporations) use Form 8978 and Schedule A (Form 8978)
to report adjustments shown on Forms 8986 received from Note: Certain entity partners can be both non-pass-through
partnerships that have elected to push out adjustments to partners and pass-through partners. To the extent the
partnership-related items to their partners. adjustments an entity partner receives on a Form 8986 relate to
items that are taxable at the entity level, the partner is
Note: Certain entities (such as trusts or estates) can be both considered a non-pass-through partner. With respect to
taxable partners and pass-through partners. For adjustments to adjustments received by an entity partner that pass through to

Dec 15, 2022 Cat. No. 69657Z

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the partner's owners or beneficiaries, the entity partner is amounts reported on lines 6 and 7 of the Form 8978. The
considered a pass-through partner. additional reporting year tax from line 14 is then reported on the
partner’s reporting year income tax return.
Reporting year is the partner’s tax year(s) that includes the
date the audited partnership furnished the Forms 8986 to its Columns (a) through (d). Columns (a) through (d) on Form
partners. The date the audited partnership furnished Forms 8978 and Schedule A can be used for adjustments for the first
8986 to its partners is found on Form 8986, Part II, item G. For affected year or intervening years. See Receipt of multiple
example, if the Form 8986, Part II, item G, date is 06/15/2022 Forms 8986, later.
and the partner receiving the Form 8986 is a calendar-year-end Years to include and exclude on Form 8978 and Sched-
partner, that partner’s reporting year is tax year ending ule A. Only applicable tax years (see Definitions, earlier) need
12/31/2022. to be shown on Form 8978 and Schedule A. A year that is not
Reviewed year is the audited partnership’s tax year to which impacted does not have to be shown on the form or schedule.
the partnership adjustment(s) relates. For example, if the first affected year is 2020 and the reporting
Reviewed year partner is any person that held an interest in year is 2025, years 2021–2024 are considered intervening
the audited partnership at any time during the partnership’s years. If the only intervening year impacted is 2022 (that is, 2022
reviewed year. is the only intervening year that had related changes to
partner-level tax attributes as a result of the 2020 adjustments),
General Instructions the form and schedule only need to show 2020 and 2022.
Who Must File Receipt of multiple Forms 8986. If a partner receives multiple
Every partner (except pass-through partners) that receives a Forms 8986 for different years, a column on the form and
Form 8986 from a pass-through entity must file Form 8978 to schedule could be both an affected year and an intervening
report any additional reporting year tax as a result of taking into year.
account the partner’s share of the reviewed year(s) adjustments. Note. If all of the adjustments from Forms 8986 cannot fit on
one Schedule A (Form 8986), multiple Schedules A can be
Where and When To File attached. If more than one Schedule A is needed, enter the
A reviewed year partner or affected partner must file Form 8978 totals from all Schedule A lines 2, 4, and 6 on the corresponding
with a federal income tax return for the partner’s reporting year. Form 8978 lines 1b, 3b, and 9b, respectively.
Example 1. Where and when to file. On March 1, 2022, an Reporting adjustments related to an AAR. Adjustments from
audited partnership furnishes Forms 8986 to its two partners. an AAR are reported separately from adjustments from a BBA
One of these reviewed year partners is a calendar year audit on Forms 8978 and Schedules A. A checkmark in box 1 or
individual and the other is a pass-through partner. On January 2 of Part I, item A of Form 8986 indicates the adjustments are
15, 2023, the pass-through partner, in turn, furnishes Forms related to an audit of a BBA partnership. A checkmark in box 3 or
8986 to its two partners who are calendar year individuals. The 4 of Part I, item A of Form 8986 indicates the adjustments are
reporting year for all three individuals is the tax year that includes related to an AAR. If a partner has no adjustments from a Form
March 1, 2022. Because the partners all have a calendar year 8986 that are related to an audit, but only adjustments related to
end, the reporting year is the 2022 tax year. The partners must an AAR, only the AAR-related Form 8978 and Schedule A need
each attach a completed Form 8978 to their individual income to be included.
tax returns which are due April 15, 2023 (without regard to
extensions). If one or more adjustments are from a Form 8986 that is
related to an AAR, a separate Form 8978 and Schedule A (Form
Completing Form 8978 and Schedule A 8978) must be completed to report the tax impact of these
adjustments and calculate the correct interest. The Form 8978
What to report on Form 8978 and Schedule A (Form 8978). and its Schedule A should be filled out in the same way as for an
The specific adjustments listed on Form 8986 received by a audit-related Form 8978 and its Schedule A. Select the “AAR
reviewed year or affected partner, and other adjustments from Filing” checkbox at the top of the Form 8978 and the Schedule A
partner-level tax attributes that have changed as a result of and enter the employer identification number of the entity that
taking into account the adjustments, should be listed on the issued the Form 8986.
partner’s Schedule A under lines 1, 3, and 5 for income,
deductions, and credits, respectively, for the applicable tax year. Note. If all adjustments are AAR-related, only one Form 8978
The totals on lines 2, 4, and 6 of Schedule A are reported on and one Schedule A need to be completed.
lines 1b, 3b, and 9b, respectively, of Form 8978. Reporting adjustments related to a BBA audit. The
Note. Tax attribute schedules should be adjusted to the extent following example shows how adjustments reported on Form
adjustments to non-income items were received. For example, if 8986 related to a BBA audit are reported on Form 8978 and its
the partner’s Form 8986 reflected a decrease to the partner’s Schedule A.
share of recourse liabilities, this could change the partner’s Example 2. Completing Form 8978 and Schedule A for
amount at risk, which in turn could result in an adjustment on an audit-related Form 8986. On June 10, 2022, Bill Jones,
Schedule A to reduce the allowable loss from the partnership. In who files as a single individual, calendar-year taxpayer, receives
this example the partner's at risk schedule should be adjusted a Form 8986 from an audited partnership of which Bill is a
and an increase to income should be reported on Schedule A to partner. The Form 8986 is for reviewed year 2020. Part II, box G,
reflect the decrease to the previously reported loss from the of the Form 8986 indicates that the audited partnership issued
partnership. Forms 8986 to its partners on June 8, 2022. Because June 8,
2022, is within Bill’s tax year ending December 31, 2022, Bill
Tax calculations. Taxes should be figured and shown on a must report these adjustments on his 2022 Form 1040 income
separate statement. In general, non-pass-through partners that tax return and attach Form 8978.
receive adjustments from a Form 8986 should figure the
additional reporting year tax as if all the adjustments on Form The Form 8986 indicates that Bill's share of the adjustments
8986 had been included on the partner’s first affected year includes a $15,000 increase to ordinary income and a $10,000
return using a statement attached to Form 8978 to support the decrease in other deductions, both shown as positive amounts

-2- Instructions for Form 8978 (Jan. 2023)

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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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Because the AAR-related Form 8978 showed a decrease to                 Line 6—Income tax.        Include a separate statement showing 
tax, no interest is shown on that Form 8978. If the AAR-related        how the corrected income tax was figured and enter that 
Form 8978 had an increase to tax, the interest would be figured        corrected income tax on line 6. See the Instructions for Form 
using the same dates as for the audit-related Form 8978, but the       1040 or the instructions for your income tax return for the 
rate would be the short-term quarterly rate plus 3%, and the           appropriate year(s).
amount would have been reported on line 17 of the AAR-related          Line 7—Alternative minimum tax (AMT).           If AMT applies, 
Form 8978.                                                             include a separate statement showing how the corrected AMT, 
More than 4 applicable tax years.    If there are more than 4          including the applicable adjustment(s) shown on Schedule A, 
applicable tax years (see Definitions, earlier), additional Forms      was figured and enter the corrected AMT on line 7. See the 
8978 should be prepared for the additional years. Each Form            Instructions for Form 1040 or the instructions for your income tax 
8978 should have all lines completed and the total of all the          return for the appropriate year(s) to figure the corrected AMT.
line 14 amounts should be reported on the appropriate line of the      Line 8—Total corrected income tax.  Enter the sum of lines 
partner’s return. Include a Schedule A for each Form 8978.             6 and 7.
                                                                       Line 9a—Total credits per return or as previously 
Foreign partners that receive Forms 8986.  Foreign                     adjusted. Enter the total amount of credits shown on your 
corporate partners that receive Forms 8986 must complete               original or amended return, or as adjusted by the IRS.
separate Forms 8978 and Schedules A (Form 8978) to report              Line 9b—Adjustments to credits.  Enter the amount from 
adjustments pertaining to effectively connected income (ECI)           Schedule A, line 6, Total adjustments to credits.
under section 882, and fixed, determinable, annual, periodical 
                                                                       Line 10—Total corrected credits. Combine the amounts on 
(FDAP) income under section 881. ECI is income effectively 
connected with the conduct of a trade or business in the United        lines 9a and 9b and enter the result on line 10.
States; FDAP income is income from U.S. sources not                    Line 11—Total corrected income tax liability.    Subtract 
effectively connected with the conduct of a trade or business in       line 10 from line 8 to obtain the corrected income tax liability. 
the United States. The Forms 8978 and related Schedules A              This amount should not include any non-income taxes. If, as a 
should clearly indicate whether they reflect ECI or FDAP income.       result of changes not reflected on a line item on the form or 
Each “ECI Form 8978” and its Schedule A should only include            schedule, corrected income tax liability after credits is different 
ECI figures, and each “FDAP Form 8978” and its Schedule A              from the result obtained by subtracting line 10 from line 8, 
should only include FDAP figures.                                      include a separate statement showing how the corrected liability 
                                                                       was figured and enter that correct amount on line 11.
Note.  Attach a statement to each “ECI Form 8978” and each             Line 12—Total tax shown on return or as previously 
“FDAP Form 8978” explaining how all line 13 income tax                 adjusted.   Enter the amount shown on your original or 
numbers were calculated. Enter the total of all the line 13            amended return, or as adjusted by the IRS.
amounts on line 14. Enter the amounts from line 14 on the              Line 13—Increase/decrease to tax. Subtract the amount 
applicable lines on the partner’s reporting year income tax            shown on line 12 from the amount on line 11 and enter the result.
return. See the instructions for the applicable income tax return.     Line 14—Total additional reporting year tax.     Enter the 
You may receive a Form 1042-S or 8805 from the partnership (or         sum of line 13, columns (a) through (d). Report this amount on 
a pass-through partner) that has withheld on your additional           the appropriate line of your income tax return for the reporting 
reporting year tax, and you may claim the withholding credit on        year.
your income tax return.                                                Line 15.    Form 8986, Part V, Applicable Penalties, lists which 
                                                                       penalties, if any, apply and which line items are affected. If 
Specific Instructions for Form 8978                                    penalties apply, include a statement showing how the penalties 
                                                                       were figured and enter the amount of penalties in the applicable 
Part I—Computation of Additional Reporting                             column(s) of Form 8978. Penalties for each applicable tax year 
Year Tax                                                               should be reported on line 15, columns (a) through (d).
Each column, (a) through (d), is figured separately for lines 1        Line 17.    Interest on any increase in income tax is figured from 
through 13.                                                            the original due date of your income tax return for each tax year 
Line 1a—Total income per original return or as                         to which an increase in tax is attributable, as determined under 
previously adjusted.    Enter the total income amount as shown         section 6226(b)(3). Interest is computed at the underpayment 
on your original or amended return, or as adjusted by the IRS.         rate under section 6621(a)(2), but substituting “five percentage 
Enter negative amounts in parentheses.                                 points” for “three percentage points” for purposes of section 
                                                                       6621(a)(2)(B) (that is, the sum of the federal short-term rate plus 
Line1b—Adjustments to income.        Enter the amount from             five percentage points instead of three percentage points). For 
Schedule A, line 2, Total adjustments to income.                       additional reporting year tax reported as a result of a Form 8986 
Line 2—Corrected income.  Enter the total of lines 1a and              from an AAR, this substitution is not made. Interest for each 
1b.                                                                    applicable tax year should be reported on line 17, columns (a) 
Line 3a—Total deductions per return or as previously                   through (d).
adjusted. Enter the total amount of deductions shown on your 
original or amended return, or as adjusted by the IRS.                 Note.  Interest should not be calculated on any decreases in tax 
Line 3b—Adjustments to deductions.         Enter the amount            on line 13 for a tax year.
from Schedule A, line 4, Total adjustments to deductions.
Line 4—Corrected deductions.   Combine the amount on                   Note. Interest on penalties is figured in the same manner as 
line 3b with the amount on line 3a and enter the result.               interest on tax, except it is figured from the due date of the 
Line 5—Corrected taxable income.  Subtract line 4 from                 partner’s return including any valid extensions that were filed by 
line 2 and enter the result. This should be the corrected taxable      the partner.
income. If, as a result of changes in tax attributes, corrected        Where to report additional reporting year tax.   The total 
taxable income is different from the result obtained by                additional reporting year tax from Form 8978, Part I, line 14, is 
subtracting line 4 from line 2, include a separate statement           reported on the appropriate lines of the partner’s reporting year 
showing how the corrected taxable income amount was figured            return (see the instructions for the applicable reporting year tax 
and enter that corrected amount on line 5.                             return). The additional penalties and interest should be included 

                                                                   -4-                     Instructions for Form 8978 (Jan. 2023)

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in the net payment calculation for the partner’s reporting tax year Line 5—Credits. Enter all the adjustments individually from
but these are not reported on the partner’s reporting year return Form 8986, Part V, that affect tax credits. Also include related
and are not included in the additional reporting year tax. amounts and adjustments not on Form 8986 that result from
changes to partner-level tax attributes as a result of adjustments
Specific Instructions for Schedule A from Form 8986.
Line 6—Total adjustments to credits. Enter the total of all
(Form 8978) adjustments from line 5. Carry the total of each column to the
Adjustments. Enter the description of the item that corresponding column on Form 8978, line 9b.
corresponds to the Schedule K-1 or Schedule K-3 line number
and title as reflected in columns (a) and (b) of Form 8986, Part V. Inconsistent Positions
For example, if Form 8986, Part V, column (a), shows “1” and If you originally reported an amount for an item inconsistent with
column (b) shows “Ordinary business income,” enter on the amount reported to you by the partnership on Schedule K-1
Schedule A, Adjustments column, “Schedule K-1, line 1, or Schedule K-3, and this same item is included as an
Ordinary business income.” For adjustments due to changes in adjustment on the Form 8986 received, you should also include
partner tax attributes, use the description used on the partner’s the amount of inconsistency for that item on Schedule A (Form
return. 8978).
Note. Schedule K-3 (Form 1065) adjustments that do not Example 4. Inconsistent position and BBA audit
directly increase or decrease a partner's taxable income should adjustment. Mary Johnson, a partner and calendar year
be reported with a zero amount on Schedule A (Form 8978), with taxpayer, received a tax year 2021 Schedule K-1 with $100 of
any corresponding change to the partner's tax attributes such as ordinary business income. If she only reported $70 on her Form
the foreign tax credit shown as a positive (increase) or negative 1040 or 1040-SR, she would have taken a $30 inconsistent
(decrease) amount. position on her Form 1040 or 1040-SR. If she subsequently
receives a Form 8986 for affected tax year 2021, with an audit
Tracking number. If an adjustment is from a Form 8986 that is adjustment reflecting a $50 increase to the Schedule K-1, line 1,
related to an audited partnership, the tracking number column Ordinary business income amount, she would have two amounts
should be completed for that adjustment line. If applicable, the to enter on Schedule A (Form 8978). First, Mary would enter on
tracking number can be found at the top of the Form 8986. If the line 1a “Schedule K-1, line 1, Ordinary business income” in the
tracking number is not on the Form 8986, use the audit control adjustments column and $50 in column (a), which would be
number at the top of the Form 8986. If an adjustment is from a labelled “12/31/2021.” Second, Mary would enter on line 1b
Form 8986 that is related to an AAR partnership, indicate “AAR” “Inconsistent position previously taken on line 1a item” in the
and enter the tax identification number of the entity that issued adjustments column and $30 in column (a). Because she
the Form 8986. Leave the tracking number field blank for all received an 8986 from an audit, Mary must now resolve the
adjustments to partner-level tax attributes. inconsistency with the original K-1. If she had no other
Reporting amounts from Form 8986. All adjustments adjustments, the amount of her total adjustments to income on
(positive and negative) from a Form 8986 should be shown as line 2 of Schedule A, column (a), would be $80. She would carry
reported on that form. When entering adjustments from a Form this amount to Form 8978, line 1b, column (a).
8986, enter amounts from Form 8986, Part V, column (h), which
reflect the adjustments net of any approved modifications Note. A partner’s requirement to treat partnership-related items
(column (g) of Form 8986). These amounts should be entered in consistently applies to adjustments that result from an audited
the applicable columns (a) through (d) that correspond to the partnership or an AAR partnership regardless of whether the
partner’s affected year. However, if Form 8986 is a result of an partner previously treated the item inconsistently. However,
AAR partnership (and not an audited partnership), no partners that properly and timely file a subsequent Form 8082,
modifications should be shown on Part V, column (g), of that Notice of Inconsistent Treatment or Administrative Adjustment
Form 8986 and no modifications should be reported on Request (AAR), for items that are adjusted as part of an AAR
Schedule A. filing are not required to treat the items on Schedule A (Form
8978) consistent with the partnership’s treatment.
Schedule A line instructions.
Line 1—Income. Enter all the adjustments individually from Paperwork Reduction Act Notice. We ask for the information
Form 8986, Part V, that affect taxable income. Generally, this on this form to carry out the Internal Revenue laws of the United
includes adjustments to ordinary income, rental income, interest States. You are required to give us the information. We need it to
income, dividends, royalties, gains and losses, and other ensure that you are complying with these laws and to allow us to
income. Also include related amounts and adjustments not on figure and collect the right amount of tax.
Form 8986 that result from changes to partner-level tax
attributes and other items as a result of adjustments from Form You are not required to provide the information requested on
8986. a form that is subject to the Paperwork Reduction Act unless the
Line 2—Total adjustments to income. Enter the total of all form displays a valid OMB control number. Books or records
adjustments from line 1. Carry the total of each column to the relating to a form or its instructions must be retained as long as
corresponding column on Form 8978, line 1b. their contents may become material in the administration of any
Line 3—Deductions. Enter all the adjustments individually Internal Revenue law. Generally, tax returns and return
from Form 8986, Part V, that affect deductions from income. information are confidential, as required by section 6103.
Generally, this includes adjustments to separately stated items The time needed to complete and file this form will vary
such as a section 179 deduction. Also include related amounts depending on individual circumstances. The estimated burden
and adjustments not on Form 8986 that result from changes to for business taxpayers filing this form is approved under OMB
partner-level tax attributes as a result of adjustments from Form control number 1545-0123 and is included in the estimates
8986. shown in the instructions for their business income tax return.
Line 4—Total adjustments to deductions. Enter the total
of all adjustments from line 3. Carry the total of each column to If you have comments concerning the accuracy of these time
the corresponding column on Form 8978, line 3b. estimates or suggestions for making this form simpler, we would

Instructions for Form 8978 (Jan. 2023) -5-

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be happy to hear from you. See the instructions for the tax return 
with which this form is filed.

                                                                   -6- Instructions for Form 8978 (Jan. 2023)

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