Form 8978: Schedule A, Correction Amounts, and Filing Steps

Form 8978, Partner’s Additional Reporting Year Tax, is the form you use to calculate and report the extra income tax you owe when a partnership pushes out adjustments from a Bipartisan Budget Act (BBA) audit or an administrative adjustment request (AAR). You’ll fill it out after receiving Form 8986 from the partnership, recompute what your tax would have been in the reviewed year and any intervening years, add interest at a rate higher than the standard underpayment rate, and report the total on your current-year return.

When You Receive Form 8978

You use Form 8978 in two situations: after an IRS audit of a partnership under the centralized BBA regime where the partnership elected to push the adjustments out to its reviewed-year partners under Section 6226, and when a partnership files an AAR under Section 6227 and pushes the resulting changes out the same way. In both cases, the partnership itself no longer owes the imputed underpayment; the liability shifts to the partners who actually held interests during the reviewed year.¹

If the partnership elected out of the BBA regime for the reviewed year, this form doesn’t apply to you. Only partnerships with 100 or fewer eligible partners can elect out, and if yours did, any audit follows the older partner-level examination rules instead.²

Start With Form 8986

Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s), is the source document for everything on Form 8978. The partnership furnishes it to you and files it with the IRS after making the push-out election.³ It breaks down your allocated share of each adjustment by character — ordinary business income, capital gains, Section 1231 gains, deductions, credits — the same way items are broken out on a Schedule K-1.

Character matters because it determines the rate you’ll apply. An adjustment to ordinary income is taxed at your marginal ordinary rate for the reviewed year; an adjustment to long-term capital gain uses the preferential rate that applied in that year. Form 8986 also reports your share of any penalties determined at the partnership level and any credit adjustments.

Filling Out Schedule A

Schedule A (Form 8978) is where the Form 8986 data gets structured. It has four columns labeled (a) through (d), each covering a different tax year, so you can account for the reviewed year plus up to three intervening years on one schedule.⁴

Within each column, adjustments are grouped into three categories:

Income items on lines 1a through 1g, totaled on line 2.
Deduction items on lines 3a through 3g, totaled on line 4.
Credit items on lines 5a through 5g, totaled on line 6.

Lines 2, 4, and 6 flow to lines 1b, 3b, and 9b of Form 8978. If you received several Forms 8986 from the same source type — all audit-related or all AAR-related — you can combine them on one Schedule A. If they don’t fit, attach additional copies.⁵

Calculating Correction Amounts

The heart of Form 8978 is the “correction amount” for each affected tax year. You’re asking a hypothetical: what would my Chapter 1 income tax have been if the partnership had reported correctly in the first place? The difference between that hypothetical tax and what you actually reported is the correction amount for the year.⁶

First Affected Year

Begin with your original return for the year that includes the end of the partnership’s reviewed year. Work the Schedule A adjustments into your original figures and compute a corrected tax liability. The difference between that corrected liability and the tax you originally reported (including any prior amendments) is the correction amount for the first affected year.

This isn’t a line-by-line add. Changes to income ripple through every limitation and threshold on the return. Additional ordinary income can push you into a higher bracket, reduce phased-out deductions, or trigger the 3.8% net investment income tax. Recalculate the entire return with the adjustments in place, then compare the result to what you filed.

Intervening Years

Reviewed-year adjustments can change tax attributes that carry forward, like loss carryovers or credit carryforwards. For every year between the first affected year and your current reporting year, determine whether those changed attributes would have altered your tax. The correction amount for each intervening year captures that ripple.¹

Netting the Correction Amounts

Add the correction amounts across all affected years to get the aggregate. Any single year’s correction amount can be less than zero, meaning the adjustment would have reduced your tax for that year, and a negative year can offset a positive year in the sum. The aggregate itself can end up below zero.⁶ A net negative result, though, does not generate a refund of Chapter 1 tax beyond what you’re otherwise owed. The aggregate goes on Form 8978, line 14.

Interest at the Higher Rate

Interest on push-out correction amounts uses the federal short-term rate plus five percentage points, two points above the standard underpayment rate.⁶ That premium is the price of shifting the liability from the partnership to individual partners.

Interest compounds daily and is calculated separately for each year in which the correction amount is greater than zero.⁷ For each such year, interest runs from the original due date (without extensions) of your return for that year until the date you pay. A negative correction amount in one year does not reduce the correction amount in another year for interest purposes, so netting doesn’t help on the interest bill.⁶ No interest accrues on a year where the correction amount is a decrease.

Because interest runs from the original return due date (often several years back) at a rate above the standard underpayment rate, the interest component frequently rivals or exceeds the underlying tax. If you previously made a Section 6603 deposit to suspend interest, you can request that it be applied by attaching a statement with the deposit dates and amounts, the partnership’s name and taxpayer identification number, the reviewed year, and the audit control number.⁵

Penalties

Penalties tied to the partnership adjustments, such as the accuracy-related penalty under Section 6662, are determined at the partnership level during the audit. Your Form 8986 identifies which penalties apply and your allocated share.⁸ Under Section 6223, that partnership-level determination binds you, so you cannot simply argue at the Form 8978 stage that the penalty shouldn’t apply.

The dollar amount, however, is computed against your individual circumstances as a reviewed-year partner. If you have a partner-level defense such as reasonable cause, you can raise it — but only by paying the penalty first and then filing a refund claim for the reporting year. Interest on penalties runs from the extended due date of your return for the applicable year at the same elevated rate.

Reporting on Your Return

The amount from Form 8978, line 14, is reported on the appropriate line of your income tax return for the reporting year. The reporting year is the tax year that includes the date the partnership furnished the Form 8986 to you.⁵ Attach Form 8978 and every Schedule A to that return.

One detail trips people up: the interest and penalties you calculated do not go on the return. Only the line 14 tax figure does. Interest and penalties are part of your payment but are handled separately from the additional reporting year tax.⁵ The full amount — tax, interest, and penalties — is due by the due date of your reporting-year return, including extensions.

Individual partners report the line 14 amount on Form 1040. Corporate partners use Form 1120. Tax-exempt entities use Form 990-T. The instructions for each return type point to the specific line.

AAR Adjustments Go on a Separate Form 8978

If your Form 8986 came from an AAR rather than an audit, you still use Form 8978, but AAR-related adjustments must sit on a separate Form 8978 and Schedule A from any audit-related adjustments. Check the “AAR Filing” box at the top of both forms and enter the employer identification number of the partnership that issued the Form 8986.⁵

If you receive Forms 8986 from both an audit and an AAR in the same year, complete the AAR-related Form 8978 first. Then, on the audit-related Form 8978, include the AAR results in the “as previously reported” figures. Add the line 14 amounts from all Forms 8978 together and report the combined total on your return.⁵

When You Also Need a 1040-X

Form 8978 covers Chapter 1 income tax only. If the partnership adjustments also change your self-employment tax or net investment income tax, those changes cannot go on Form 8978. You must file Form 1040-X for the first affected year to report them.⁹

The mechanics here are counterintuitive. On the 1040-X, don’t change the income tax figures on lines 1 through 8; those stay as originally reported (or previously amended), because the income tax piece is already handled through Form 8978. Complete the applicable schedules (Schedule SE for self-employment tax, Form 8960 for net investment income tax) with the adjusted numbers, report the corrected non-income taxes on line 10, and explain in Part II how you calculated the change and that Form 8986 is the source.⁹ Nothing on Form 8978 flags this requirement, so it’s a common miss.

If You’re Yourself a Pass-Through Partner

If the partner receiving Form 8986 is itself a partnership, S corporation, or other pass-through, it can either calculate and pay the additional tax at its own level or push the adjustments further out to its own partners. A pass-through partner that pushes out must prepare and electronically submit its own Forms 8985 and 8986 to the IRS and to its partners.¹⁰ The chain continues through tiers until the adjustments reach partners who can’t push further. Every level adds time, so if you sit inside a tiered structure, stay in contact with the partnership representative — your Form 8986 may arrive well after the original push-out election.

State Tax Filings

Federal push-out adjustments almost always have state consequences, and state rules are fragmented. Some states have adopted the BBA framework in whole or in part; others have no specific rules and expect amended returns; only a few have dedicated forms. A partnership filing in multiple states may need separate amended, composite, or withholding returns in each one even after Form 8978 resolves the federal side. Check each state where you have filing obligations, because a missed state deadline can generate its own penalties.

1
Office of the Law Revision Counsel. 26 USC 6226 – Alternative to Payment of Imputed Underpayment by Partnership
2
Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime
3
Internal Revenue Service. Instructions for Form 8986
4
Internal Revenue Service. Schedule A (Form 8978)
5
Internal Revenue Service. Instructions for Form 8978
6
eCFR. 26 CFR 301.6226-3 – Adjustments Taken Into Account by Partners
7
Office of the Law Revision Counsel. 26 USC 6622 – Interest Compounded Daily
8
Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments
9
Internal Revenue Service. Instructions for Form 1040-X
10
Internal Revenue Service. Instructions for Form 8986