1065-X Instructions for Form 1065-X

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Instructions for Form 1065-X

Department of the Treasury
Internal Revenue Service

(Rev. December 2021)

Amended Return or Administrative Adjustment Request (AAR)
Contents
Reminders . . . . . . . . . . . . . . . .
Purpose of Form . . . . . . . . . . . .
Who Must File . . . . . . . . . . . . .
What To Attach . . . . . . . . . . . . .
Definitions . . . . . . . . . . . . . . . .
Specific Instructions . . . . . . . . . .
Part I. Classification of Filer . . . . .
Part II—Amended or
Administrative Adjustment
Request (AAR) Items for
Partnerships Filing Form 1065
Only (ELPs and REMICs Use
Part III) . . . . . . . . . . . . . . .
Forms 8985 and 8986 . . . . .
Amended Schedules K-1 . . .
Amended Sch. K-2, K-3, on/
after 1-1-2021 . . . . . . . .
Part III—Amended or
Administrative Adjustment
Request (AAR) Items for
ELPs and REMICs Only . . . .
Amended Schedules K-1 or
Schedules Q . . . . . . . . .
Part IV—Imputed Underpayment
(IU) Under the Centralized
Partnership Audit Regime . . .
Figuring the IU . . . . . . . . . .
Partnership-Partner
Amended Return Filed as
Part of Modification . . . . .
Partnership-Partners Who
Are Allocated
Adjustments That Do Not
Result in an IU. . . . . . . . .
Part V—Explanation of Changes to
Items in Part II and Part III . . .

Page
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partnership tax years beginning after
2017.

The following representations must be
made with regard to the statement attached to the election.
• The partnership is not insolvent and
does not reasonably anticipate becoming
insolvent before resolution of any
adjustment with respect to the partnership
tax year for which the election is being
made.
• The partnership has not voluntarily filed,
and does not reasonably anticipate filing,
a petition for relief under title 11 of the
United States Code.
• The partnership is not subject to, and
does not reasonably anticipate becoming
subject to, an involuntary petition for relief
under title 11 of the United States Code.
• The partnership has sufficient assets,
and reasonably anticipates having
sufficient assets, to pay a potential
imputed underpayment (IU) with respect
to the partnership tax year that may be
determined under subchapter C of
chapter 63 of the Internal Revenue Code,
as amended by BBA.
• A representation, signed under
penalties of perjury, that the individual
signing the statement is duly authorized to
make the election described in
Regulations section 301.9100-22 and that,
to the best of the individual's knowledge
and belief, all of the information contained
in the statement is true, correct, and
complete.
The statement must be signed and
dated by the tax matters partner, as
defined under section 6231(a)(7) (prior to
the amendment by BBA), and the
applicable regulations, or an individual
who has the authority to sign the
partnership return for the tax year. The
fact that an individual dates and signs the
statement making the election shall be
prima facie evidence that the individual is
authorized to make the election on behalf
of the partnership.

DRAFT AS OF
November 18, 2021
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. . 11
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Section references are to the Internal Revenue
Code unless otherwise noted.

What’s New

For tax years beginning on or after
January 1, 2021, filers of Form 1065-X
may need to include amended Schedules
K-2 and K-3 (Form 1065). See Amended
Schedules K-2 and K-3 for Tax Years
Beginning on or After January 1, 2021,
later.

Future Developments

For the latest information about
developments related to Form 1065-X and
its instructions, such as legislation
enacted after they were published, go to
IRS.gov/Form1065-X.

Reminders

The Bipartisan Budget Act of 2015 (BBA)
created a new centralized partnership
audit regime generally effective for

Nov 18, 2021

The Tax Equity and Fiscal
Responsibility Act of 1982 (TEFRA)
generally applied to tax years beginning
before 2018. BBA repealed TEFRA and
the electing large partnership (ELP) rules.
Consequently, former ELPs are now
treated as other partnerships under the
BBA regime.

Election into BBA for tax years beginning before 2018. A partnership may
make an election into the centralized
partnership audit regime for tax years that
begin after November 2, 2015, and before
January 1, 2018, by filing an AAR. Refer to
Regulations section 301.9100-22 for
detailed information. If the AAR is filed on
paper, the partnership uses Form 1065-X,
Amended Return or Administrative
Adjustment Request (AAR), and must
make the election in accordance with
section 1101(g)(4) of BBA.
Note. An AAR filed with respect to a
2018 short tax period return by a
partnership that is subject to the
centralized partnership audit regime must
meet the requirements under section
6227.
Making the election for eligible tax
years on an AAR filed on paper. To
make the election, the partnership must
write across the top of Form 1065-X used
to file the AAR, “Election under Section
1101(g)(4)” and attach a statement to the
AAR. For the statement requirement, the
partnership can use Form 7036, Election
Under Section 1101(g)(4) of the Bipartisan
Budget Act of 2015. If Form 7036 is not
used, the partnership may prepare its own
statement with the following information.
• The partnership's name, taxpayer
identification number, and the partnership
tax year for which the election is being
made.
• The name, taxpayer identification
number, address, and daytime telephone
number of the individual who signs the
statement.
• Language indicating that the
partnership is electing application of
section 1101(c) of BBA for the partnership
return for the eligible tax year.
• The information required to properly
designate the partnership representative,
as defined by section 6223, which must
include the name, taxpayer identification
number, address, and daytime telephone
number of the partnership representative.

Cat. No. 57876S

Note. Unless otherwise noted, references
to sections 6221 through 6241 are to
Internal Revenue Code sections, as
amended by BBA.

Purpose of Form

Use Form 1065-X, if you are not filing
electronically, to:
• Correct items on a previously filed Form
1065, Form 1065-B, or Form 1066;
• Make an AAR for a previously filed
Form 1065, Form 1065-B, or Form 1066;
or

• File an amended return by a
partnership-partner of a BBA partnership
as part of the modification process of a
BBA proceeding with respect to that BBA
partnership.
Form 1065-X cannot be used to file a
notice of inconsistent treatment under
section 6222 (TEFRA or BBA) or a
partner-level AAR under section 6227(d)
(under TEFRA proceedings). For a
definition of TEFRA proceedings, see
Definitions, later. Continue to use Form
8082, Notice of Inconsistent Treatment or
Administrative Adjustment Request
(AAR), to make those changes.

AAR-Partnerships (except ELPs).
Partnerships that are subject to either BBA
or TEFRA proceedings use Form 1065-X
to file for an AAR. See Specific
Instructions, later, for information on
completing Form 1065-X as an AAR.
Protective TEFRA AARs. Generally, a
protective AAR is a request for credit or
refund based on current litigation or
expected changes in tax law or other
legislation. The tax matters partner (TMP)
or partner with authority (PWA) files a
protective AAR when the right to a refund
is contingent on future events and may not
be determinable until after the period for
filing an AAR has expired. Protective
AARs are subject to AAR statutes set forth
in sections 6227, 6228, and 6229 (prior to
amendment by BBA). If you are a TMP
filing on behalf of the partnership, the
petition period described in section 6228
(prior to amendment by BBA) can be
extended by using Form 9248, Agreement
to Extend the Time to File a Petition for
Adjustment by the Tax Matters Partner
With Respect to Partnership Items. A
protective AAR must clearly state that it is
a protective AAR, alert the IRS to the
essential nature of the adjustment, and
specify the line item to be protected.

• Within 3 years after the later of the date
on which the partnership return for that
year is filed, or the last day for filing the
partnership return for that year (excluding
extensions); and
• In the case of a TEFRA partnership or
REMIC, before a notice of final partnership
administrative adjustment for that year is
mailed to the TMP or Tax Matters Person,
or, in the case of an ELP, before the
mailing to the partnership of a notice of
partnership administrative adjustment with
respect to that year.
• In the case of a BBA partnership,
before a notice of an administrative
proceeding with respect to the tax year is
mailed under section 6231.
• In the case of a partnership that is a
partner in a BBA partnership which is filing
an amended return for purposes of BBA
partnership modification under section
6225(c)(2), in the time period specified
under section 6225(c).

DRAFT AS OF
November 18, 2021
Bipartisan Budget Act (BBA). All
partnerships with tax years beginning after
2017 are subject to the centralized
partnership audit regime unless eligible
partnerships elect out by making a valid
election under section 6221(b). For
purposes of these instructions (unless
otherwise noted), the centralized
partnership audit regime proceedings
under sections 6221 through 6241 will be
referred to as “BBA proceedings.”
If you are a nonTEFRA partnership
(see Definitions and items B and C in Part
I, Section 1, later) or a nonBBA
partnership (defined under Definitions,
later) filing an amended return
electronically, use Form 1065 and see the
related instructions. If you are not filing
electronically, use Form 1065-X.
Form 1065-X should only be used to
make a paper filing. For electronic filing,
use Form 8082 in conjunction with Form
1065 or 1065-B, as applicable.
Generally, the criteria used to
determine whether the original Form 1065
or Form 1065-B is required to be filed
electronically are also used to determine if
the amended return or AAR must be filed
electronically.
For information regarding when Form
1065 is required to be filed electronically,
and how to electronically file an amended
return or AAR for a partnership, see the
Instructions for Form 1065.
For information regarding when Form
1065-B is required to be filed
electronically, and how to file an AAR for
an electing large partnership, see the
Instructions for Form 1065-B.

Who Must File
Amended return. Partnerships and real
estate mortgage investment conduits
(REMICs) that become aware of incorrect
items of income, deductions, etc., use
Form 1065-X to correct their previously
filed partnership or REMIC return. See
Specific Instructions, later, for information
on completing Form 1065-X as an
amended return.

AAR under BBA. File Form 1065-X if you
are the partnership representative or
designated individual requesting an
administrative adjustment to correct a
previously filed partnership return on
behalf of the BBA partnership.
AAR-ELPs. Electing large partnerships
(ELPs) that are not required to
electronically file Form 1065-B and need
to correct errors on a previously filed Form
1065-B use Form 1065-X to file for an
AAR. See Specific Instructions, later, for
information on completing Form 1065-X
as an AAR.
AAR-REMICs. REMICs that do not meet
the small REMIC exception under sections
860F(e) and 6231 (prior to amendment by
BBA), and related regulations, or make the
election described in section 6231(a)(1)
(B)(ii) (prior to amendment by BBA) not to
be treated as a small REMIC, use Form
1065-X to file for an AAR. See Specific
Instructions, later, for information on
completing Form 1065-X as an AAR.
When a partnership's or REMIC's

TIP federal return is changed for any

reason, it may affect its state
return. For more information, contact the
state tax agency with which the state
return is filed.

When To File

Generally, a pass-through entity may file
an amended return or AAR to change
items on its return:

-2-

What To Attach

If the corrected amount involves an item
that must be supported with a schedule,
statement, or form, attach the appropriate
schedule, statement, or form to Form
1065-X. Include the entity's name and
employer identification number (EIN) on
any attachments. See the Instructions for
Form 1065, 1065-B, or 1066 (as
applicable) for a list of forms that may be
required.
If the attachments needed to support
the corrected amount include copies of
forms or schedules from previously filed
tax returns, write at the top of each
previously filed form or schedule, “Copy
Only—Do Not Process.”
A BBA partnership must attach a
schedule to Form 1065-X that supports
the position(s) reported. If the partnership
does not make the election under section
6227(b)(2) to have the adjustments taken
into account by the reviewed year partners
and would like to modify per section
6227(b)(1), it must attach Form 8980,
Partnership Request for Modification of
Imputed Underpayments Under IRC
Section 6225(c), to support any
modifications made to the IU, as
described in sections 6225(b) and
6225(c), and as applied to a BBA AAR
under section 6227(b)(1). See
Modifications to an Imputed
Underpayment Included in an
Administrative Adjustment Request in the
Instructions for Form 8980, (Pub. 5346).
In addition, if the ELP or REMIC
requests that the IRS electronically
deposit a refund of $1 million or more,
attach Form 8302, Electronic Deposit of
Tax Refund of $1 Million or More.

Instructions for Form 1065-X (Rev. Dec. 2021)

Who Must Sign
NonTEFRA and nonBBA partnerships.
Any partner or limited liability company
(LLC) member must sign the return. Form
1065-X is not considered to be a return
unless it is signed. When a return is made
for a partnership by a receiver, trustee, or
assignee, the fiduciary must sign the
return instead of the partner or LLC
member. Returns and forms signed by a
receiver or trustee in bankruptcy on behalf
of a partnership must be accompanied by
a copy of the order or instructions of the
court authorizing the signing of the return
or form.

designate any one of those 10 days as the
startup day. The day so designated is then
the startup day, and all interests are
treated as issued on that day.

Where To File

Form 1065-X must be filed with the
service center where the original return
was filed.

exclusive authority to make the
management decisions necessary to
conduct the business for which the LLC
was formed. If there are no elected or
designated member-managers, each
owner is treated as a member-manager.
For details, see Regulations section
301.6231(a)(7)-2.

DRAFT AS OF
November 18, 2021
BBA partnerships. The partnership
representative (PR) or designated
individual, if applicable, must sign the
Form 1065-X. See Partnership
representative (PR) below for the
definition of a PR.

TEFRA partnerships. The TMP must
sign the Form 1065-X. See Tax matters
partner (TMP) below for the definition of a
TMP.
ELPs. The PWA must sign the Form
1065-X. See Partner with authority (PWA)
below for the definition of a PWA.
REMICs with a startup day after November 9, 1988. For these REMICs,
Form 1065-X may be signed by any
person who could sign the return of the
entity in the absence of the REMIC
election. Thus, the return of a REMIC that
is a corporation or trust would be signed
by a corporate officer or a trustee,
respectively. For REMICs with only
segregated pools of assets, the return
would be signed by any person who could
sign the return of the entity owning the
assets of the REMIC under applicable
state law.
REMICs with a startup day before November 10, 1988. These REMICs may
elect to apply the rules for REMICs with a
startup day after November 9, 1988 (as
described in Regulations section
1.860F-4(c)(2)(iii)). Otherwise, Form 1066
must be signed by a residual interest
holder or, as provided in section 6903, by
a fiduciary, as defined in section 7701(a)
(6), who is acting for the REMIC and who
has furnished adequate notice, as
described in Regulations section
301.6903-1(b).
In the prior paragraph, the term “startup
day” means any day selected by a REMIC
that is on or before the first day on which
interests in such REMIC are issued.
Otherwise, startup day is the day on which
the REMIC issued all of its regular and
residual interests. However, a sponsor
may contribute property to a REMIC in
exchange for regular and residual
interests over any period of 10
consecutive days and the REMIC may

Definitions

TEFRA partnership. The consolidated
audit proceedings of sections 6221
through 6234 (prior to amendment by
BBA) are “TEFRA proceedings” and
partnerships that are subject to TEFRA
proceedings are “TEFRA partnerships.”
An AAR filed by the TMP of the TEFRA
partnership is a TEFRA AAR. Any partner
in a TEFRA partnership may file an AAR
using Form 8082. TEFRA proceedings will
not apply to partnerships with tax years
beginning after 2017. A partnership with a
tax year beginning before 2018 that is not
subject to TEFRA proceedings is a
“nonTEFRA partnership.”
Pass-through entity. A partnership
(including an ELP), S corporation, estate,
trust, or REMIC.
Item. Any item of a partnership, S
corporation, estate, trust, or REMIC
required to be taken into account for the
pass-through entity's tax year by the
partners, shareholders, beneficiaries,
owners, or residual interest holders of that
pass-through entity.

Tax matters partner (TMP). If the
partnership is subject to the TEFRA
procedures, it can designate a partner as
the TMP for the tax year for which the
return is filed. The TMP is a general
partner (in most cases, the TMP must also
be a U.S. person) designated by the
partnership to represent the partners in
the consolidated audit and litigation
proceedings under sections 6221 through
6234 prior to amendment by BBA
(“TEFRA proceedings”). The designation
is made by completing the Designation of
Tax Matters Partner section of Form 1065
used for tax years beginning before 2018.
Additionally, a REMIC may designate a
tax matters person in the same manner in
which a partnership may designate a TMP
under Regulations section 301.6231(a)
(7)-1. When applying that section, treat all
holders of a residual interest in the REMIC
as general partners. The designation may
be made by completing the Designation of
Tax Matters Person section of Form 1066
for tax years beginning before 2018.
For an LLC, a member of the LLC is
treated as a partner and a
member-manager is treated as a general
partner. A member-manager is any owner
of an interest in the LLC who, alone or
together with others, has continuing

Instructions for Form 1065-X (Rev. Dec. 2021)

-3-

BBA partnership. A partnership that is
subject to the centralized partnership audit
regime is a “BBA partnership.” All
partnerships with tax years beginning after
2017 are BBA partnerships unless they
make a valid election out of the centralized
partnership audit regime. A partner in a
BBA partnership is a “BBA partner.” An
AAR filed by a BBA partnership is a “BBA
AAR” and must be filed by the PR.

Partnership representative (PR). If the
partnership is subject to the centralized
partnership audit regime, section 6223
provides that the partnership must
designate a partner or other person with a
substantial presence in the United States
as the PR who shall have the sole
authority to act on behalf of the
partnership. If the PR is an entity, the
partnership must also appoint a
designated individual (DI) to act on behalf
of the entity PR. The partnership and all
partners are bound by the actions of the
PR in dealings with the IRS under BBA.
Partner with authority (PWA). Each
ELP must designate a partner (or other
person) as the PWA who shall have the
sole authority to act on behalf of the
partnership. See section 6255(b)(1) (prior
to amendment by BBA). If the partnership
fails to designate a PWA, the IRS can
select any partner to serve as the partner
with such authority. The PWA has the
authority to file an AAR on behalf of the
partnership. The PWA does this by filing
Form 1065-X.
NonBBA partnership. Under the BBA,
certain partnerships with 100 or fewer
eligible partners for the tax year can elect
out of the centralized partnership audit
regime. Additional details regarding the
election out of the centralized partnership
audit regime can be found in the
Instructions for Form 1065. A partnership
that elects out of the centralized
partnership audit regime is a “nonBBA
partnership.”

Partnership-related item (PRI). For
BBA partnerships, under section 6241(2)
(B), a partnership-related item is any item
or amount with respect to the partnership
that is relevant in determining the income
tax liability of any person, without regard to
whether the item or amount appears on
the partnership's return. This includes an
IU and an item or amount relating to any
transaction with, basis in, or liability of the
partnership.

Adjustment year. For BBA partnerships,
the adjustment year is the partnership tax
year in which:
• In the case of an adjustment pursuant
to the decision of a court in a proceeding
brought under section 6234, such decision
becomes final;
• In the case of an AAR under section
6227, such AAR is filed; or
• In any other case, a notice of final
partnership adjustment is mailed under
section 6231 or, if the partnership waives
the restrictions under section 6232(b)
(regarding limitations on assessments),
the waiver is executed by the IRS.

Note. A paid preparer may sign original or
amended returns by rubber stamp,
mechanical device, or computer software
program.

under section 6226(b)(2)), until the date of
payment; and
• At the section 6621(a)(2)
underpayment rate.

Interest and Penalties

Judicial review of an AAR (for returns
subject to the TEFRA procedures or
ELPs). If the IRS fails to act on an AAR,
the TMP or PWA may file a petition for
judicial review with the U.S. Tax Court,
U.S. Court of Federal Claims, or U.S.
District Court. The TMP or PWA must file
the petition before the date that is 2 years
after the date the TMP or PWA filed the
AAR, but not until after the date that is 6
months from the date of such filing. The
2-year period may be extended if the IRS
and the TMP or PWA agree in writing. For
more details, see sections 6228 (prior to
amendment by BBA) and 6252.

Interest. Generally, interest is charged on
taxes not paid by the due date, even if an
extension of time to file is granted. Interest
is also charged on penalties imposed for
negligence, fraud, substantial valuation
misstatements, substantial
understatements of tax, and reportable
transaction understatements. The interest
is charged from the due date (including
extensions) to the date of payment. The
interest charge is figured at a rate
determined under section 6621.

DRAFT AS OF
November 18, 2021
Reviewed year. For BBA partnerships,
the reviewed year is the partnership’s tax
year to which a partnership adjustment
relates.

Reviewed year pass-through partner.
For purposes of these instructions, under
the BBA, a reviewed year pass-through
partner is a pass-through entity that held
an interest in a BBA partnership at any
time during the reviewed year, which is the
partnership tax year to which the
partnership adjustment relates. For
example, if the BBA AAR is filed to make
an adjustment to income for the 2021 tax
year, 2021 is the reviewed year.
Schedule K-1. Schedule K-1 is the
annual schedule reporting the partner's,
shareholder's, or beneficiary's share of
income, deductions, credits, etc., from a
partnership, S corporation, estate, or
domestic trust.
Schedule Q. Schedule Q is the quarterly
schedule reporting the residual interest
holder's share of taxable income or net
loss from the REMIC.

Paid Preparer's
Information

If a partner or an employee of the
partnership or REMIC completes Form
1065-X, the “Paid Preparer Use Only”
space should remain blank. In addition,
anyone who prepares Form 1065-X but
does not charge the partnership or REMIC
should not complete this section.
Generally, anyone who is paid to
prepare Form 1065-X must do the
following.
• Sign the return in the space provided
for the preparer's signature.
• Fill in the other blanks in the “Paid
Preparer Use Only” area of the return. A
paid preparer cannot use a social security
number in the “Paid Preparer Use Only”
box. The paid preparer must use a
preparer tax identification number (PTIN).
• Give the partnership or REMIC a copy
of the return in addition to the copy to be
filed with the IRS.

Late payment penalty. The penalty for
not paying the tax when due is usually 1/2
of 1% of the unpaid tax for each month or
part of a month that the tax remains
unpaid. The penalty cannot exceed 25%
of the unpaid tax.
Other penalties. Penalties can also be
imposed for negligence, substantial
understatements of tax, reportable
transaction understatements, and fraud.
See sections 6662, 6662A, and 6663.

Interest and penalties applicable to IU.
Except when the partnership elects to
have its partners take into account the
adjustments, BBA partnership interest and
penalties are the following.
• The interest figured with respect to any
IU is the interest which would be
determined under chapter 67 for the
period beginning on the day after the
return due date for the reviewed year and
ending on the return due date for the
adjustment year, as defined under section
6225(d)(2) or, if earlier, the date the IU is
paid.
• Any penalty, addition to tax, or
additional amount shall be determined at
the partnership level and is applied as if
such BBA partnership had been an
individual subject to tax under chapter 1
for the reviewed year and the IU were an
actual underpayment (or understatement)
for such year for purposes of part II of
subchapter A or chapter 68.
Election to apply the alternative to
payment of the IU. If the partners must
take into account the adjustments
because the BBA partnership filed an AAR
and there are adjustments that do not
result in an IU, or if a BBA partnership
elects the alternative to payment of the IU
under sections 6227(b)(2) and 6226(c),
interest shall be determined:
• At the partner level;
• From the due date of the return for the
tax year to which the increase is
attributable (determined by taking into
account any increases attributable to a
change in tax attributes for a tax year
-4-

Specific Instructions

If, after reading the instructions, you are
unable to complete an item in Part I or Part
II, enter “See Part V” in the entry space for
that item and provide the information
there.

Name and Identifying Number

Print or type the legal name of the entity
and identifying number on the appropriate
lines. Include the suite, room, or other unit
number after the street address. If the
Post Office does not deliver mail to the
street address and the entity has a P.O.
box, show the box number instead.
If the entity receives its mail in care of a
third party (such as an accountant or
attorney), enter on the street address line
“C/O” followed by the third party's name
and street address or P.O. box.
If the entity's address is outside the
United States, or its possessions or
territories, enter the information on the line
for “City or town, state, and ZIP code” in
the following order: city, province or state,
and foreign country. Follow the foreign
country's practice in placing the postal
code in the address. Do not abbreviate the
country name.

Part I. Check the
Appropriate Box

An AAR can be filed by a partnership
subject to TEFRA proceedings (TEFRA
AAR), a partnership subject to BBA
proceedings (BBA AAR), an ELP, and a
REMIC.
If you are a BBA partnership that has
received a notice of administrative
proceeding, you may not file an AAR.
Also, a partner may not file an AAR on
behalf of the BBA partnership in which it is
a partner unless doing so in its capacity as
the PR for that partnership.
An AAR can also be filed by the
following partners.

Instructions for Form 1065-X (Rev. Dec. 2021)

• Partners of a TEFRA partnership,
• Residual interest holders,
• Partnerships (but only for purposes of

providing notice of inconsistent treatment
with the AAR.) See Regulations section
301.6227-1(a), referring to Regulations
section 301.6222-1.
See Part II below.

Section 1—TEFRA/NonTEFRA
Determination
Item A

If the answer to item A is “Yes,” the
partnership return is not subject to the
TEFRA proceedings. You should proceed
to item E and check the “Not subject to
TEFRA” box.

• Another partnership.
• An LLC which files as a partnership or

is treated as a disregarded entity.
• Any type of trust, including a grantor
trust.
• A nominee.
• A nonresident alien.
• An S corporation.

DRAFT AS OF
November 18, 2021
For partnership tax years beginning
before January 1, 2018 (unless electing into BBA).

TEFRA AAR. The consolidated audit
proceedings of sections 6221 through
6234 (prior to amendment by BBA) are
“TEFRA proceedings” and partnerships
that are subject to TEFRA proceedings
are “TEFRA partnerships.” An AAR filed
by the TMP of the TEFRA partnership is a
TEFRA AAR. Form 8082 is also used by
any partner in a TEFRA partnership filing
an AAR. TEFRA proceedings will not
apply to partnerships with tax years
beginning after 2017. A partnership with a
tax year beginning before 2018 that is not
subject to TEFRA proceedings is a
“nonTEFRA partnership.”

ELP AAR. The ELP procedures were
repealed for tax years beginning after
2017. However, ELPs filing a non-e-filed
AAR for a tax year that began before 2018
will use Form 1065-X.
For partnership tax years beginning
after 2017 and partnerships electing
into BBA for tax years beginning after
November 2, 2015, and before January
1, 2018.
BBA AAR. All partnerships with tax
years beginning after 2017 are subject to
the centralized partnership audit regime
unless an eligible partnership makes a
valid election under section 6221(b) to
elect out of the centralized partnership
audit regime. Partnerships electing into
BBA for tax years beginning after
November 2, 2015, and before January 1,
2018, are also subject to the centralized
partnership audit regime. Partnerships
that are subject to the centralized
partnership audit procedures of sections
6221 through 6241 are “BBA
partnerships.” A partnership with a tax
year beginning after 2017 that is not
subject to BBA proceedings because it
has made a valid election under section
6221(b) is a nonBBA partnership. An AAR
filed by a BBA partnership is a BBA AAR.
Partnership-partner amended
return related to modification of
another partnership’s IU. If a partner
that is itself a partnership
(partnership-partner) is filing an amended
return as part of modification of the IU
under section 6225(c)(2), check this box.

Items B Through E

Table for Determining Which Box To Check in
Item E

These items are used to determine if the
partnership is subject to the rules for
consolidated audit procedures (TEFRA
procedures).

IF in item...

The box
checked
is...

THEN in item E,
check...

B

No

Subject to TEFRA.

Consolidated REMIC proceedings.
Generally, the tax treatment of REMIC
items is determined at the REMIC level in
a consolidated REMIC proceeding, rather
than in separate proceedings with
individual residual interest holders. A
REMIC subject to consolidated REMIC
procedures will have checked the box on
item G on page 3 of its original Form 1066.

C

No

Subject to TEFRA.

D

Yes

Subject to TEFRA.

B and C

Yes

Not subject to TEFRA.

D

No

Not subject to TEFRA.

Items B and C

All partnerships with tax years beginning
before 2018 (except ELPs) and REMICs
ARE subject to TEFRA partnership audit
procedures unless the partnership or
REMIC is subject to the small partnership
exception. See section 6231(a)(1)(B)
(prior to amendment by BBA).
A small partnership is a partnership
with 10 or fewer partners at all times
during the year. All partners must be U.S.
individuals and their estates; resident alien
individuals; or C corporations.
Note. For making the small partnership
determination, a husband and wife each
having their own partnership interest are
considered one partner. An individual who
has passed away during the year and their
estate are considered one partner.

Item D

A partnership defined as a small
partnership can elect to be treated as a
TEFRA partnership for tax years
beginning before 2018. The partnership
elects TEFRA treatment by attaching a
statement to the tax return for the first year
they wish the election to be effective. This
statement must be signed by all partners.
See Regulations section 301.6231(a)
(1)-1(b). Form 8893, Election of
Partnership Level Tax Treatment, is the
statement that can be used to make this
election. If you answer “Yes” to item D,
also enter the tax year of the filing of this
election in the space provided.

Item E

If, at any time during the tax year, there
are more than 10 partners or any of the
following are partners in the partnership,
then the partnership is not a small
partnership.

Instructions for Form 1065-X (Rev. Dec. 2021)

-5-

Item F

Check the box to indicate whether you are
filing an amended return or an AAR.

Amended Return. Check this box if you
checked the “Not subject to TEFRA” box
in item E, and you are not an ELP. This
means that you are filing a request to
correct a previously filed nonTEFRA
partnership return or REMIC return.
If your partnership or REMIC return
meets the exception under section
860F(e) or section 6231 (prior to
amendment by BBA), and does not file an
election to be treated as a TEFRA
partnership under section 6231(a)(1)(B)(ii)
(prior to amendment by BBA), and related
regulations, and you received a corrected
Form 1099 or are making changes to
income, deductions, or credits, but there
are no flow-through changes from a
TEFRA partnership, then you are filing an
amended return. Check the “Amended
Return” box.
Administrative Adjustment Request
(AAR). Check this box if you are filing a
request to correct a previously filed
partnership or REMIC return and you are
one of the following.
• The TMP of the TEFRA partnership or
REMIC. The REMIC must be subject to
consolidated REMIC proceedings. For
more information on consolidated REMIC
proceedings, see the Instructions for Form
1066.
• An ELP correcting a previously filed
return.

Item G

A substituted return requests that the
treatment of an item shown on the AAR be
substituted for the treatment of the item on
the pass-through entity's return. If the IRS
allows substituted return treatment, the
changes shown on the amended return
will be treated as corrections of

mathematical or clerical errors, and the
IRS may assess any resulting tax to the
partners or residual interest holders
without a deficiency or entity level
proceeding. In this case, partners or
residual interest holders may file amended
returns requesting refunds. See section
6227(c)(1) (prior to amendment by BBA).

the IU. See section 6226(a)(2) for details.
If this valid election is made, the
partnership is no longer liable for the IU,
and no payment from the partnership is to
be made for the IU. If the adjustments
contained in the BBA AAR do not result in
a positive IU or the BBA partnership
makes a valid election under section
6227(b)(2), the partnership must furnish to
each partner of the partnership for the
reviewed year a Form 8986, Partner’s
Share of Adjustment(s) to
Partnership-Related Item(s), reflecting the
partner’s share of the adjustments. The
partnership is also required to file with the
AAR all Forms 8986 furnished to partners
and Form 8985, Pass-Through
Statement—Transmittal/Partnership
Adjustment Tracking Report. See the
instructions for these forms for further
information.

Section 3—Partnership-Partner
Amended Return Filed as Part
of Modification of the Imputed
Underpayment (IU) During a
BBA Audit
Section 6225(c)(2) allows a BBA
partnership under examination to request
specific types of modifications of an IU
proposed by the IRS. One type of
modification applies when a partner or
indirect partner, including
partnership-partners, file an amended
return for the tax year of the partner which
includes the end of the reviewed year of
the BBA partnership under examination.
See Part I of Form 8980 and the related
instructions.

DRAFT AS OF
November 18, 2021
If the request is not treated as a
substituted return, the partners or residual
interest holders may file amended returns
requesting refunds. The IRS may conduct
an examination of the pass-through
entity's return, or take no action on the
request. When a request is not treated as
a substituted return, the IRS cannot
assess tax without a deficiency or entity
level proceeding. See section 6227(c)(2)
(prior to amendment by BBA).

ELPs. An ELP cannot request substituted
treatment. See section 6251(b) (prior to
amendment by BBA).

Section 2—BBA AAR
Item A

If the "Yes" box is checked, complete
Form 8979 and attach it to the AAR. See
the Instructions for Form 8979,
Partnership Representative Revocation,
Designation, and Resignation for more
information.
Note: If you are a BBA partnership, you
may not file an AAR solely for the purpose
of changing the PR.

Item B

BBA partnerships filing an AAR will need
to determine if the partnership
adjustments result in an IU. See Figuring
the Imputed Underpayment (IU) below, for
information as to how to figure the imputed
underpayment. The BBA partnership
should consider all available guidance
issued by the IRS in making a
determination of whether or not the AAR
results in an IU. Also, see Part IV Imputed
Underpayment Under the Centralized
Partnership Audit Regime below, for
discussion of the imputed underpayment.
Note. An IU calculation must always be
made and presented on the AAR even if
that IU results in a zero or less than zero or
the adjustments do not result in an IU. For
additional information, see Figuring the
Imputed Underpayment (IU).

Item C

If the adjustments contained in the BBA
AAR result in a positive IU, the partnership
generally takes the adjustments into
account and pays the IU at the time that
the AAR is filed. However, under section
6227(b)(2), the partnership can elect to
have its reviewed year partners take the
adjustments into account. This is an
election to push out the adjustments to the
partners as an alternative to payment of

Item D

Each reviewed year partner is required to
take into account its share of adjustments
requested in a BBA AAR if the partnership
adjustments result in an IU and the
partnership makes the alternative to
payment election discussed under Item C,
earlier. Additionally, each reviewed year
partner is required to take into account its
share of any adjustments requested in a
BBA AAR that do not result in an IU. The
determination of whether or not an
adjustment results in an IU amount is
discussed in Item B, earlier.
The partnership is required to furnish
each reviewed year partner with a Form
8986 with its share of the BBA AAR
adjustments. The partnership
representative must attest to the
partnership’s compliance with this
requirement. The PR will sign the Form
1065-X under item D to declare, under
penalties of perjury, that all statements
have been provided to the reviewed year
partners, as required by these
instructions.

Item E

Under section 6227(b)(1), the partnership
may modify the IU resulting from
adjustments reported in a BBA AAR in
accordance with the provisions under
section 6225(c), disregarding the
provisions under paragraphs (2), (7), and
(9). Any modification made to the IU under
section 6227(b)(1) must be disclosed and
fully explained on Form 8980, Partnership
Request for Modification of Imputed
Underpayments Under IRC Section
6225(c), included with the AAR.
Note. If the partnership makes an election
to push out the adjustments to the
partners as an alternative to payment of
the IU, the modifications to the IU are
disregarded and are not included on the
statements provided to the partners.
-6-

A BBA partnership under examination
will be assigned a unique audit control
number. A partnership-partner using a
Form 1065-X to file an amended return as
part of a modification under section
6225(c)(2), must include in Section 3 of
Form 1065-X, the name, EIN, reviewed
year, and audit control number of the BBA
partnership under examination to which
the amended return relates. In addition, if
the partnership-partner should not furnish
amended Schedule K-1s to its partners,
but instead must pay an amount
computed like an IU on the adjustments
allocable to it, plus any penalties and
interest, see Part IV Imputed
Underpayment Under the Centralized
Partnership Audit Regime, for payment
instructions.

Part II—Amended or
Administrative Adjustment
Request (AAR) Items for
Partnerships Filing Form
1065 Only (ELPs and
REMICs Use Part III)

For information on income, deductions,
credits, etc., see the instructions for Form
1065, Schedules K and K-1, for the tax
year being amended or otherwise
adjusted. See the Instructions for Form
1065 for a list of forms that may be
required.

TEFRA partnerships filing AARs. A
TEFRA partnership filing an AAR to
change items that were reported on its
original return must do the following.
1. Determine the required changes to
be made.
2. Complete Form 1065-X to identify
the changes being made.
a. On Form 1065-X, check the
“TEFRA AAR” box under Part I.
b. See below for how to complete
columns (a) through (c) of Part II.
3. Complete Form 1065-X.

Instructions for Form 1065-X (Rev. Dec. 2021)

a. See Who Must Sign earlier for who
must sign the Form 1065-X.
b. Attach amended Schedules K-1
showing the corrected amounts for
each partner.
4. File Form 1065-X and attach any
other supporting documents required.
5. Give a copy of the amended
Schedules K-1 to the applicable partners.

Forms 8985 and 8986 (pushout
package).
5. File Form 1065-X and attach any
other supporting documents required,
including copies of Forms 8985 and 8986
(if applicable).
6. If applicable, distribute the Forms
8986 to reviewed year partners according
to the Form 8986 instructions.

TEFRA partner filing an AAR. A partner
in a TEFRA partnership that is filing an
AAR to change items associated with its
investment in the TEFRA partnership that
were reported on its original return must
do the following.
1. Determine the required changes to
be made.
2. Complete Form 1065-X to identify
the changes being made.
a. On Form 1065-X, check the
“TEFRA AAR” box under Part I.
b. See below for how to complete
columns (a) through (c) of Part II.
3. Complete Form 1065-X.
a. See Who Must Sign earlier for who
must sign the Form 1065-X.
b. Attach amended Schedules K-1
showing the corrected amounts for
each partner.
4. File Form 1065-X and attach any
other supporting documents required.
5. Give a copy of the amended
Schedules K-1 to any applicable partners.

Column (a). Enter the amounts from
Schedule K of Form 1065 as originally
filed or as was previously adjusted. If the
return was changed or audited by the IRS,
enter the amounts as adjusted.

AAR all Forms 8986 furnished to partners
and Form 8985. See the instructions for
these forms for further information. ELPs
filing a Form 1065-X as an AAR should
see Part III below. All other partnerships
should file amended Schedules K-1 with
Form 1065-X and furnish copies of the
amended Schedules K-1 to the partners.

DRAFT AS OF
November 18, 2021

If you are a TEFRA partnership, the
IRS will process Form 1065-X following
the guidelines set forth in sections 6227(c)
(1) and 6227(c)(2) (prior to amendment by
BBA).
BBA partnerships filing AARs. A BBA
partnership filing an AAR to change items
that were reported on its original return
must do the following.
1. Determine the required changes to
be made.
2. Complete Form 1065-X to identify
the changes being made.
a. On Form 1065-X, check the “BBA
AAR” box under Part I.
b. See later for how to complete
columns (a) through (c) of Part II.
3. Figure an IU and determine if there
are any adjustments that do not result in
an IU.
4. Determine if you will pay the IU or
pushout the adjustments to the partners.
a. If paying an IU, report the IU
appropriately in Part IV. Complete
Forms 8985 and 8986 (pushout
package) pertaining to the
adjustments that do not result in an IU
(if applicable).
b. If pushing out all the adjustments to
the reviewed year partners, complete

Column (b). Enter the net increase or
decrease for each line being changed.
Enter as a positive the amount by which
column (c) exceeds column (a) or enter as
a negative the amount by which column
(a) exceeds column (c). Use parentheses
around all amounts that are negative.
Positive amounts are increases and
negative amounts are decreases. Explain
the increase or decrease in Part V.
Column (c). Enter the correct amount.
This will be the sum of column (a) and
column (b).

Forms 8985 and 8986

If a BBA partnership files an AAR and it is
making an election under section 6227(b)
(2) to have the adjustments taken into
account by the reviewed year partners,
has adjustments that do not result in an IU,
then it will furnish to each partner of the
partnership for the reviewed year a Form
8986 reflecting the partner’s share of the
adjustments to PRI as a result of a BBA
audit or BBA AAR for situations where the
partners are taking into account the
adjustments. The partnership is also
required to file with the AAR all Forms
8986 furnished to partners and Form 8985
(Pass-Through Statement-Transmittal/
Partnership Adjustment Tracking Report).
Form 8985 is used to summarize and
transmit Forms 8986, in situations where
the partners are taking into account the
adjustments. Adjustments shown on the
Form 1065-X, Part II, column (b,) should
tie to the adjustments reported on the
Form 8985, Part IV, column (f). Form 8985
is also used to report payment made and
related calculations by a pass-through
partner, if applicable. See the instructions
for these forms for further information.

Amended Schedules K-1

If a BBA partnership files an AAR and it
needs to make its partners aware of their
allocable share of adjustments, it will
furnish to each partner of the partnership
for the reviewed year a Form 8986,
reflecting the partner’s share of the
adjustments (and should not provide
amended Schedules K-1). The
partnership is also required to file with the

Instructions for Form 1065-X (Rev. Dec. 2021)

-7-

If a TEFRA partnership is filing Form
1065-X for an AAR, it should inform the
partners receiving the amended
Schedules K-1 that the partnership is filing
the AAR. If the partnership is not subject
to either the rules for consolidated audit
proceedings (TEFRA proceedings) under
sections 6221 through 6234 (prior to
amendment by the BBA) or to the
centralized partnership audit regime under
BBA, it must furnish the amended
Schedules K-1 to its partners. The
partners must then file their own amended
returns.

Amended Schedules K-2 and
K-3 for Tax Years Beginning on
or After January 1, 2021
NonBBA partnership filing an amended return. Attach the amended K-2 and
on the header of the schedule notate “As
Amended.” Attach the amended
Schedules K-3 with the amended box
checked at the top of each. The
partnership must furnish the amended
Schedules K-3 to its partners.
BBA partnerships filing AARs. Attach
the amended K-2 and on the header of the
schedule notate “As Amended.” BBA
partnerships filing AARs will not issue
amended Schedules K-3 but rather will file
Forms 8985 and 8986 with the AAR and
furnish Forms 8986 to partners. Refer to
the Instructions for Forms 8985 and 8986.

Part III—Amended or
Administrative Adjustment
Request (AAR) Items for
ELPs and REMICs Only
ELPs only. An ELP may file an AAR to
adjust its partnership items. Generally, the
ELP has two choices for handling the
adjustment.
1. It may combine the adjustment with
the same partnership item for the year in
which the IRS allows the adjustment and
pass it through to the current partners for
that year. However, if the adjustment
involves the reduction in a credit which
exceeds the amount of that credit for the
partnership tax year in which the
adjustment is allowed, the partnership
must pay tax in an amount equal to the
excess amount.
2. It may elect to not pass the
adjustment through to current partners by
paying tax on any IU that results from the
adjustment. If the partnership elects to pay

the tax, enter it on Part III, line 16. Attach a
computation of the tax to Form 1065-X.
In either case, the partnership is liable
for any interest and penalties on IUs that
result from the adjustment. See section
6242(b) (prior to amendment by BBA) for
details. Interest is figured on the IU for the
period beginning on the day after the due
date (excluding extensions) of the
partnership return for the tax year the
adjustment takes effect, or, if earlier, the
date the partnership paid the tax due
under (2) above. The adjusted year is the
partnership tax year in which the item
being adjusted arose.

Line 16. If the ELP or REMIC does not
use electronic fund transfers, including the
Electronic Federal Tax Payment System
(EFTPS), enclose a check with this form.
Make the check payable to “United States
Treasury.”
Line 17. If the ELP or REMIC is entitled to
a refund larger than the amount claimed
on the original return, line 17 will show
only the additional amount of
overpayment. This additional amount will
be refunded separately from the amount
claimed on the original return. The IRS will
figure any interest due and include it in the
refund.

The partnership may elect under
section 6227(b)(2) to have the reviewed
year partners take into account,
adjustments resulting in an IU. If the
partnership makes the election, the
partnership is not liable for, nor required to
pay, the IU related to the adjustments.
Additionally, if the IU calculation results in
an amount that is zero or less than zero, or
the adjustments do not result in an IU,
then all adjustments are taken into
account by the reviewed year partners.
However, the partnership may have
withholding and reporting obligations
under chapter 3 or chapter 4 with respect
to the adjustments taken into account by
the reviewed year foreign partners. See
the Instructions for Form 8985 and Form
8986.

DRAFT AS OF
November 18, 2021
ELPs and REMICs. Identify in Part III of
Form 1065-X the amount and treatment of
any item the partnership or REMIC is
changing from the way it was reported on
the original return.
Column (a). Enter a description of the
item that the partnership or REMIC is
adjusting or amending.

Column (b). Enter the amounts from the
ELP's or REMIC's return as originally filed
or as it was later adjusted. If the return
was changed or audited by the IRS, enter
the amounts as adjusted.
Column (c). Enter the net increase or net
decrease for each line being changed.
Use parentheses around all amounts that
are decreases. Explain the increase or
decrease in Part V.
Column (d). Enter the correct amount.
This will be the sum of column (b) and
column (c).
Line 6. Show any increase or decrease to
the ELP's tax or other payments.
Line 10. Enter total tax as follows.
ELPs. Enter the line 6 amounts on
line 10.
REMICs. Add the amounts on lines 7
through 9 and enter the total for each
column on line 10.
Line 11. Enter the amount of tax
deposited with Form 7004, Application for
Automatic Extension of Time To File
Certain Business Income Tax, Information,
and Other Returns.
Line 14. Enter the amount from the
“Overpayment” line of the original return,
even if the ELP or REMIC chose to credit
all or part of this amount to the next year's
estimated tax. This amount must be
considered in preparing Form 1065-X
because any refund due from the original
return will be refunded separately from
any additional refund claimed on Form
1065-X. If the original return was changed
by the IRS and the result was an
additional overpayment of tax, also
include that amount on line 14.

Amended Schedules K-1 or
Schedules Q

If the ELP or REMIC is filing Form 1065-X
for an AAR, do not furnish the amended
Schedules K-1 or Schedules Q to the
partners or residual interest holders. If the
REMIC is not filing for an AAR and is not
subject to the rules for consolidated audit
proceedings under sections 6221 through
6231 (prior to amendment by BBA), the
REMIC must furnish the amended
Schedules Q to its residual interest
holders.

Part IV—Imputed
Underpayment (IU) Under
the Centralized
Partnership Audit Regime

BBA AARs must always include a
computation of the IU (even when the IU is
zero or less than zero or the adjustments
do not result in an IU) as determined
under section 6225(b). Where the
adjustments do not result in an IU, the IU
should be shown as zero. Documentation
should be included with the AAR that
supports the computation of the IU
amount. If the resulting IU amount is zero
or less than zero or the adjustments do not
result in an IU, or if the partnership is
making an election under section 6227(b)
(2) to have the adjustments taken into
account by the reviewed year partners,
line 1 of Part IV should be shown as zero.
Otherwise, the IU amount should be
reported on line 1 of Part IV.
If the adjustments requested in the
AAR result in an IU, generally the
partnership takes the adjustments into
account and must pay the IU. Adjustments
requested in the AAR that result in a zero
IU (or less than zero or the adjustments do
not result in an IU) must be taken into
account by each reviewed year partner as
if the partnership had made an election
under section 6227(b)(2), but only with
regard to those adjustments that do not
result in an IU. In this instance, see Forms
8985 and 8986 and their related
instructions for reporting amounts not
included in the IU.
-8-

If the partnership elects under section
6227(b)(2) to have its reviewed year
partners take all the adjustments into
account, all modifications by the
partnership (that would have been allowed
had the partnership paid an IU) are not
allowed and disregarded.
The partnership must always include
an IU calculation, irrespective of whether
the IU is zero (or less than zero or the
adjustments don’t result in an IU) or the
partnership elects under section 6227(b)
(2) to have its reviewed year partners take
all the adjustments into account.
Under section 6227(b)(1), the
partnership may modify the IU resulting
from adjustments reported in a BBA AAR
in accordance with the provisions under
section 6225(c), disregarding the
provisions under section 6225(c)(2), (7),
and (9). Any modification made to the IU
under section 6227(b)(1) must be
disclosed and fully explained in
documentation included with the AAR.

If modifications are applied to the IU,
complete and attach Form 8980 and
report the modified IU amount in Part IV,
line 1. See Part I, Section 2, Item E,
earlier, for more information on
modification.
The applicability of interest and
penalties is discussed under Interest and
penalties applicable to IU. The BBA AAR
may include a prepayment for interest and
penalties. If making such prepayments,
the AAR should include documentation
that supports the calculations. A payment
made with Form 1065-X should detail the
portion of the payment that is for the IU,
the portion that is for prepaid estimated
interest, and the portion that is for prepaid
estimated penalties. The total of all three
should be reflected on line 2 of Part IV.
Under section 6232(a)(2), partnerships
filing a BBA AAR that have adjustments
that result in an IU, and do not elect the
alternative to payment of the IU (by not
electing to push out the adjustments to the

Instructions for Form 1065-X (Rev. Dec. 2021)

reviewed year partners), must pay the IU,
which should be shown on line 2 in Part IV
of Form 1065-X at the time of filing the
AAR. Information to include on the
payment made by check is the name of
the partnership, “Form 1065,” the taxpayer
identification number of the partnership,
the tax year, and “BBA AAR Imputed
Underpayment.” Checks must be payable
to “United States Treasury” and included
with the BBA AAR. If making an electronic
payment, choose the payment description
“BBA AAR Imputed Underpayment” from
the list of payment types. The payment
amount, including any prepaid estimated
interest and penalties, should be reported
in Part IV, line 3.

Negative adjustment. A negative
adjustment is any adjustment that is a
decrease in an item of gain or income, an
increase in item of loss or deduction, or an
increase in an item of credit or creditable
expenditure.
Positive adjustment. A positive
adjustment is any adjustment that is not a
negative adjustment.

Steps in Figuring the IU
Step 1—Grouping
Place each adjustment into one of four
groupings: reallocation, credit, creditable
expenditure, and residual groupings.
Reallocation grouping. A
reallocation adjustment generally consists
of at least two adjustments, one positive
and one negative, with each in a separate
subgrouping.
• One part of the reallocation adjustment
reverses the effect of the improper
allocation of a PRI.
• The other part of the adjustment makes
the proper allocation of the PRI.
• Under the AAR rules, if one of the
reallocation adjustments is negative, such
negative adjustment must be pushed out
to the proper partner(s).

DRAFT AS OF
November 18, 2021
Figuring the Imputed
Underpayment (IU)
Definitions

Reallocation grouping. In general,
any adjustment that allocates or
reallocates a partnership-related item
(PRI) to and from a partner or partners is a
reallocation adjustment, except for an
adjustment to a credit or to a creditable
expenditure. Each reallocation adjustment
generally results in at least two separate
adjustments, each of which becomes a
separate subgrouping.
Credit grouping. Any adjustment to a
PRI that is reported or could be reported
by a partnership as a credit on the
partnership’s return, including a
reallocation adjustment to such PRI, is
placed in the credit grouping.
Creditable expenditure grouping.
Any adjustment to a PRI where any
person could take the item that is adjusted
(or item as adjusted if the item was not
originally reported by the partnership) as a
credit, including a reallocation adjustment
to a creditable expenditure, is placed in
the creditable expenditure grouping.
Residual grouping. Any adjustment
to a PRI that doesn’t belong in the
reallocation, credit, or creditable
expenditure grouping is placed in the
residual grouping. This grouping also
includes any adjustment to a PRI that
derives from an item that would not have
been required to be allocated by the
partnership to a partner under section
704(b), such as an adjustment to a liability
amount on the balance sheet.
Subgrouping. Each adjustment is
subgrouped according to how the
adjustment would be required to be taken
into account separately under section
702(a). In general, a subgrouping follows
the Schedule K/K-1 line items, including
any alpha codes related to a Schedule K-1
line item.

Net positive adjustment. An amount
that is greater than zero which results from
netting adjustments within a grouping or
subgrouping. A net positive adjustment
includes a positive adjustment that was
not netted with any other adjustment. A
net positive adjustment includes a net
decrease in an item of credit (or creditable
expenditure).
Net negative adjustment. Any
amount which results from netting
adjustments within a grouping or
subgrouping that is not a net positive
adjustment. A net negative adjustment
includes a negative adjustment that was
not netted with any other adjustment.

Total netted partnership
adjustments (TNPA). The sum of all net
positive adjustments in the reallocation
grouping and the residual grouping.
Adjustments not resulting in an IU.
If, after grouping, subgrouping, and
netting, the amount in any grouping or
subgrouping is a net negative or the
calculation of the IU is zero or less than
zero, then the adjustments in those net
negative groups or in the calculation of the
IU are adjustments that do not result in an
IU. Any adjustments that do not result in
an IU are taken into account by the
reviewed year partners in accordance with
Regulations section 301.6227-3.

Formula for Figuring the IU
Figuring the IU
TNPA x rate* =
+ Sum of net positive
adjustments to
creditable expenditure
and credit groupings:
= Total Imputed
Underpayment (IU)
* Highest rate in effect for the reviewed year
under section 1 or 11.

The process of taking the adjustments
shown on the AAR and inputting them into
the formula above requires an
understanding of the concepts of
grouping, subgrouping, and netting. There
are seven steps necessary in figuring an
IU. The first three steps focus on grouping,
subgrouping, and netting.

Instructions for Form 1065-X (Rev. Dec. 2021)

-9-

Do not net reallocation
adjustments. As each part of a
CAUTION reallocation adjustment is placed
in a separate subgrouping within the
reallocation grouping, those adjustments
cannot be netted in accordance with the
netting rules.

!

Example. $100 of ordinary income is
being reallocated from Partner A to
Partner B. For purposes of figuring the IU,
there will be two adjustments, each in a
separate subgrouping: a negative
adjustment of $100 (reversing improper
allocation to Partner A) and a positive
adjustment of $100 (making proper
allocation to Partner B). These two
adjustments cannot be netted. As a result,
the total net positive adjustment in the
reallocation grouping is $100 and will be
included in the TNPA.
Credit grouping.

• Generally, a decrease in credits is

treated as a positive adjustment, and an
increase in credits is treated as a negative
adjustment.
• A reallocation adjustment relating to the
credit grouping is placed into two separate
subgroupings and will not be netted
together nor will they be netted with other
credit adjustments.
Creditable expenditure grouping.

• Generally, a decrease in creditable

expenditures is treated as a positive
adjustment to credits, and an increase in
creditable expenditures is treated as a
negative adjustment.
• A reallocation adjustment relating to a
creditable expenditure grouping is placed
into two separate subgroupings and will
not be netted together.
• A creditable expenditure is treated in
this manner even if the partners claimed a
deduction in lieu of a credit.
• Each adjustment to a creditable
expenditure is subgrouped based upon

the separate category of income to which
the creditable expenditure relates and to
account for any different allocation of the
creditable expenditure between partners.
Two or more adjustments to creditable
expenditures are included within the same
subgrouping only if each adjustment
relates to creditable expenditures in the
same separate category, and each
adjusted PRI would be allocated to the
partners in the same ratio had those items
been properly reflected on the originally
filed partnership return.

such line item must be further
subgrouped.

net positive adjustment or net negative
adjustment for that subgrouping.

Example. 2019 Schedule K-1, box 13,
code A (cash contributions 60%), and
box 13, code B (cash contributions 30%),
are two separate subgroupings.
• The ordinary income/(loss) amount
reflected on line 1 of Schedule K and
box 1 of Schedule K-1 is sourced from
Form 1065, page 1, and is a net amount
consisting of various page 1 line items of
income and expenses. Although those
separate page 1 line items are distinct
items of income and expense, if they are
appropriately netted and included on line 1
of Schedule K and box 1 of Schedule K-1,
the net amount will be considered a single
subgrouping, unless such amount is
required to be separately allocated, such
as when the partnership has more than
one trade or business. If the partnership
has more than one trade or business
activity, the net income/loss from each
separate activity must be reported on
Schedule K-1. Each separate activity will
constitute a separate subgrouping and it
must be determined which activity an
adjustment to the page 1 item of income
and expense relates to for subgrouping
purposes.
• If you have a negative adjustment along
with a positive adjustment in the same line
item of Schedule K/K-1, you must
consider whether they may be properly
netted at the partnership level and
whether they are required to be taken into
account separately by any partner
because it may be subject to a limitation or
preference under the Internal Revenue
Code before you can place them in the
same subgrouping (for example, passive/
active for separate activities).
• A negative adjustment that is not
otherwise required to be placed in its own
subgrouping must be placed in the same
subgrouping as another adjustment if the
negative adjustment and the other
adjustment would have been properly
netted at the partnership level and such
netted amount would have been required
to be allocated to the partners of the
partnership as a single item for purposes
of section 702(a) or other provision of the
Internal Revenue Code and regulations.

Step 4—Figure the Total Netted
Partnership Adjustments (TNPA)

• Each net positive adjustment in a
grouping or subgrouping in the residual or
reallocation grouping that results after
netting the adjustments is included in the
calculation of the TNPA.
• Each net negative adjustment in a
grouping or subgrouping that results after
netting the adjustments is excluded from
the calculation of the TNPA because those
adjustments do not result in an IU.

DRAFT AS OF
November 18, 2021
Residual grouping. The residual
grouping contains all adjustments that do
not fit into one of the other groups.

Recharacterization adjustments. A
recharacterization adjustment will
generally result in at least two separate
adjustments within the residual grouping.
• One adjustment reverses the improper
characterization of the PRI.
• The other adjustment makes the proper
characterization of the PRI.
• The adjustments that result from a
recharacterization are placed into
separate subgroupings.

Step 2—Subgrouping
Determine if any adjustment, within one of
the four groupings, needs to be
subgrouped. Each adjustment is
subgrouped according to how the
adjustment would be required to be taken
into account separately under section
702(a). If any adjustment could be subject
to any preference, limitation, or restriction
under the Internal Revenue Code (or not
allowed, in whole or in part, against
ordinary income) if taken into account by
any person, the adjustment is placed in a
separate subgrouping from all other
adjustments within the grouping.
Generally, each separate line item of
Schedule K/K-1 or return schedule (that is,
Schedule L, etc.) represents a separate
and distinct subgrouping.
Example. Adjustments to ordinary
income must be placed in a different
subgrouping than capital gain income or
interest income since each of those items
is required to be separately stated under
section 702(a).
• Subgroupings generally reflect a line
item from Schedule K/K-1, including any
subcategories of those lines (for example,
alpha codes per the Schedule K-1
instructions or activities broken out via
attached statements). If any line item on
Schedule K/K-1 or other schedules
consists of multiple items and the
components are required to be taken into
account separately under the Internal
Revenue Code, regulations, forms,
instructions, or other IRS guidance, then

Step 5—Determine the Highest Tax
Rate in Effect Under Section 1 or
11 in the Reviewed Year

Step 6—Determine the Sum of Net
Positive Adjustments to Creditable
Expenditure and Credit Groupings
That Will Increase the Product of
the TNPA Multiplied by the Highest
Rate in Effect

• A net decrease to creditable
expenditures is treated as a net positive
adjustment to credits and increases the
product of the TNPA multiplied by the
highest tax rate in effect. A net increase to
creditable expenditures is treated as a net
negative adjustment that is excluded from
the calculation of the TNPA and is an
adjustment that does not result in an IU.
• For the credit grouping, a net positive
adjustment will increase the product of the
TNPA multiplied by the highest tax rate in
effect. A net negative adjustment,
including net negative adjustments
resulting from a credit reallocation
adjustment, will be treated as an
adjustment that does not result in an IU.

Step 7—Figure the IU Based on the
Results of Steps 4 Through 6 and
Insert Those Results Into the IU
Formula
Figuring the IU

Step 3—Netting
Net all adjustments within each of the
groupings and subgroupings.
• Positive and negative adjustments may
only be netted against each other if they
are in the same subgrouping.
• An adjustment in one grouping or
subgrouping may not be netted against an
adjustment in any other grouping or
subgrouping.
• All adjustments within a subgrouping
are netted to determine whether there is a

-10-

TNPA x rate* =
+ Sum of net positive
adjustments to
creditable expenditure
and credit groupings:
= Total Imputed
Underpayment (IU)
* Highest rate in effect for the reviewed year
under section 1 or 11.

Instructions for Form 1065-X (Rev. Dec. 2021)

Partnership-Partner Amended
Return Filed as Part of
Modification

Partnership-partners who are filing
amended returns as part of the
modification of the IU during examination
under section 6225(c)(2) will report the
applicable payment of tax in Part IV, line 1.
The pass-through partner will compute the
amount like an IU on the adjustments
allocated to it and make the payment with
the filing of the Form 1065-X. A payment
made with Form 1065-X should detail the
portion of the payment that is for the
payment of the IU and the portion that is
for interest and penalties. The partnership
should consider all available guidance
issued by the IRS when figuring the
amount due. In general, the partnership
should compute its amount due in
accordance with the IU computation in
these instructions. See Steps in Figuring
the IU. The total of all three should be
reflected in Part IV, line 2. If the payment is
made by check, information to include on
the payment is the name of the
partnership-partner, “Form 1065,” the
taxpayer identification number of the
partnership-partner, tax year, and “Partner
Payment for BBA Modification.” Checks
must be payable to the “United States
Treasury” and included with the amended
return. If making an electronic payment,
choose the payment description “Partner
Pymnt for BBA Modification” from the list
of payment types. The payment amount,
including interest and penalties, should be
reported in Part IV, line 3.

Partnership-Partners Who Are
Allocated Adjustments That Do
Not Result in an Imputed
Underpayment

If a partnership-partner is paying an
amount due as part of an amended return
submitted for purposes of modification,
any adjustments that do not result in an IU
must be taken into account in the tax year
that the amount is paid by the
partnership-partner. However, if there are
only adjustments that do not result in an
IU, those adjustments are subject to
modification by the ultimate taxpayers who
reported the original amounts and not by
the partnership-partner itself. Refer to
Regulations section 301.6225-3 for further
guidance.

the information. We need it to ensure that
you are complying with these laws and to
allow us to figure and collect the right
amount of tax.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records relating
to a form or its instructions must be
retained as long as their contents may
become material in the administration of
any Internal Revenue law. Generally, tax
returns and return information are
confidential, as required by section 6103.
The time needed to complete and file
this form will vary depending on individual
circumstances. The estimated burden for
business taxpayers filing this form is
approved under OMB control number
1545-0123 and is included in the
estimates shown in the instructions for
their business income tax return.
If you have suggestions for making this
form simpler, we would be happy to hear
from you. You can send us comments
from IRS.gov/FormComments. Or you can
write to: Internal Revenue Service, Tax
Forms and Publications Division, 1111
Constitution Ave. NW, IR-6526,
Washington, DC 20224. Do not send
Form 1065-X to this address. Instead, see
Where To File, earlier, near the beginning
of the instructions.

DRAFT AS OF
November 18, 2021
Part V—Explanation of
Changes to Items in Part II
and Part III
For each amended item, explain in detail
the reasons for the change. Include any
computations necessary to support the
amended item.
Changes in allocations. If there is a
change in the allocation of income, gain,
loss, deduction, or credit to a partner,
check the box in Part V and specify the
nature and reasons for the changes.
Paperwork Reduction Act Notice. We
ask for the information on this form to carry
out the Internal Revenue laws of the
United States. You are required to give us

Instructions for Form 1065-X (Rev. Dec. 2021)

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