How to Amend a Partnership Return (Form 1065)

To amend a partnership return, you first have to know which regime your tax year falls under. For most tax years beginning on or after January 1, 2018, a partnership cannot file a traditional amended Form 1065. It files an Administrative Adjustment Request instead, and it must decide whether to pay any resulting tax at the entity level or push the adjustments out to the partners who were there in the year being corrected.¹ For older years, and for partnerships that validly elected out of the centralized audit regime, the older amended-return process still works.

Which Process Applies to Your Year

The Bipartisan Budget Act centralized partnership audit regime applies to most partnership tax years beginning on or after January 1, 2018.¹ If the year you need to fix started before that date, you follow the pre-BBA rules.

Even for post-2017 years, a partnership may have elected out. To qualify, the partnership must have had 100 or fewer partners during the tax year, and every partner must have been an eligible type: individuals, C corporations, S corporations, estates of deceased partners, or foreign entities that would be treated as C corporations if they were domestic.² A valid opt-out made on the originally filed return means the partnership uses the pre-BBA amendment rules regardless of the tax year.

Everyone else uses the AAR process.

Amending a Pre-BBA or Opted-Out Return

This is the simpler path. For electronic filing, the partnership files a corrected Form 1065 with the “Amended Return” checkbox selected, including all corrected Schedules K-1.³ For paper filing, the partnership uses Form 1065-X, entering original amounts, the net change, and corrected amounts in three columns along with an explanation for each change.⁴

The deadline is three years from the later of the date the return was filed or the last day for filing it, without regard to extensions.⁴

Because the partnership itself does not owe income tax, the tax liability flows through. The partnership issues corrected Schedules K-1, and each affected partner files their own amended individual return, typically Form 1040-X, to account for the changes.⁵ Any underpayment accrues interest from the original due date of the partner’s return, so tell partners early.

Filing an Administrative Adjustment Request Under the BBA

Only the partnership representative can file an AAR. Under IRC 6223, the representative has “sole authority to act on behalf of the partnership” in all matters under the BBA regime, and every partner is bound by that action.⁶ If the representative is an entity, it must appoint a designated individual to sign and act on its behalf. You cannot file an AAR solely to change the representative; the AAR must contain substantive adjustments.

The forms depend on how you submit. For an e-filed AAR, the partnership files Form 8082 with a complete Form 1065 that has the “Amended return” box checked in Section G(5). The Form 1065 is required for transmission purposes even though this is not a traditional amended return.⁷ For paper filing, the partnership uses Form 1065-X.⁸

If the partnership is making a push-out election, or if any of the adjustments do not result in an imputed underpayment, the submission must also include Form 8985 and all related Forms 8986.⁷ Do not send amended Schedules K-1 with an AAR.

The filing deadline is three years from the later of the date the partnership return was originally filed or the last day for filing it, without regard to extensions.⁹ Miss it and the IRS will not accept the AAR.

Pay at the Entity Level or Push Out to Partners

When the AAR produces a net positive adjustment, the partnership must pick one of two methods. The choice is irrevocable once made, and it drives everything that follows.

Imputed Underpayment Method

Here the partnership calculates the tax and pays it when it files the AAR. The IRS applies the highest individual tax rate to the net positive adjustments. For 2026, that rate is 37% on ordinary income items.¹⁰ Capital gains and qualified dividends are taxed at their own highest applicable rates.

The drawback is obvious. The 37% rate assumes every dollar of the adjustment belongs to a partner in the top bracket. If most of your partners sit in lower brackets, the partnership overpays compared with what those partners would individually owe. The advantage is simplicity: one payment, one entity, done, with no need to chase former partners.

Interest on the imputed underpayment runs from the original due date of the reviewed-year return until the AAR is filed and paid, at the federal short-term rate plus three percentage points, compounding daily.¹¹ Failing to include full payment with the AAR can lead the IRS to treat the submission as incomplete.

Push-Out Election

The push-out shifts reporting and payment to the partners who were in the partnership during the reviewed year. Instead of paying at the entity level, the partnership furnishes Form 8986 to each reviewed-year partner detailing their share of the adjustments, and files Form 8985 as the transmittal summary.¹²

For an AAR, the Forms 8986 must be furnished to partners on the same date the AAR is filed with the IRS, and they must be included with the AAR submission itself.⁷ That is tighter than many practitioners expect. If the partnership fails to properly furnish Forms 8986 to all affected partners, the push-out election is invalidated and the partnership defaults to the imputed underpayment method. You need the reviewed-year partner list, ownership percentages, and character of each allocated adjustment ready before filing.

One real cost of the push-out: partners pay interest at a rate two percentage points above the standard underpayment rate. The standard rate is the federal short-term rate plus three points.¹¹ Push-out partners therefore effectively pay the short-term rate plus five points. That two-point premium alone can decide which method makes financial sense.

How the Imputed Underpayment Is Calculated

The imputed underpayment is not simply “multiply everything by 37%.” The IRS uses a three-step process of grouping, subgrouping, and netting.¹³ Every adjustment falls into one of four groupings: a reallocation grouping for items shifted between partners, a residual grouping for most income and deduction changes, a creditable expenditure grouping for items like foreign taxes paid, and a credit grouping for items reported as credits on the partnership return.

Within each grouping, the IRS further breaks adjustments into subgroups that generally follow the line items on Schedules K and K-1. Positive and negative adjustments only offset each other within the same subgroup. A decrease in ordinary income does not offset an increase in capital gain, because they sit in different subgroups. After netting within subgroups, the remaining net positive amounts in each grouping are totaled and taxed at the highest applicable rate.

Under Treasury Regulation 301.6225-1(b)(4), an AAR partnership can treat certain positive adjustments as zero if they are related to or result from another positive adjustment, which prevents double-counting when one adjustment mechanically triggers another.¹³

Modifications That Reduce the Bill

Modifications let the partnership show that the full imputed underpayment overstates what the partners actually owe.¹⁴ Common categories include:

Amended returns filed by reviewed-year partners that account for the adjustment and pay the tax, which removes that partner’s share from the imputed underpayment.
Adjustments allocable to tax-exempt partners, such as certain retirement plans or charitable organizations.
Rate modification for items that would have been taxed at a lower rate, such as capital gains.
Tax treaty relief that would have reduced or eliminated tax on the adjusted item for a particular partner.
Closing agreements with the IRS resolving specific adjustments.

In the AAR context, the partnership self-calculates these modifications and includes supporting documentation with its filing. That gives you more control than in an IRS-initiated audit, where modification requests must be submitted within 270 days of the notice of proposed partnership adjustment.

Adjustments That Don’t Produce an Underpayment

Not every AAR generates an entity-level bill. After grouping and netting, if any grouping or subgrouping produces a net negative amount, or if the total imputed underpayment comes to zero or less, those adjustments are classified as adjustments that do not result in an imputed underpayment. The partnership cannot claim a refund for them at the entity level. Those adjustments must be pushed out to the reviewed-year partners using Forms 8985 and 8986.⁷

A single AAR can therefore involve both methods at once: the partnership pays the imputed underpayment on the net positive groupings and pushes out the net negative groupings. Partners take those negative adjustments into account on their own returns for the year they receive Form 8986, potentially claiming a refund or reducing their current-year tax.

How Partners Handle a Push-Out

If the partnership pays the imputed underpayment, partners have nothing to do. Their individual returns for the reviewed year stay untouched.

Under a push-out, each reviewed-year partner receives Form 8986 detailing their share of the adjustments. The partner does not amend the reviewed-year return. Instead, the partner files Form 8978, which attaches to the income tax return for the year that includes the date the partnership furnished Form 8986.¹⁵ That is the reporting year.

Form 8978 requires the partner to compute an additional tax based on the adjustments and the tax rates that applied in the reviewed year, not the current year. The partner then reports that additional tax on the current-year return. The computation can be involved when the reviewed year is several years back and old rate schedules have to be pulled. Interest at the higher push-out rate accrues from the due date of the reviewed-year return until payment.

Individual partners and C corporations who receive Form 8986 follow this process directly. Pass-through partners such as another partnership or an S corporation face additional complexity, because they may need to further push the adjustments out to their own partners or compute and pay an imputed underpayment themselves.

Don’t Forget the States

Correcting the federal return does not end the process if the partnership or its partners file in states that impose income tax. A growing number of states require partnerships to report federal adjustments to the state within a set timeframe, often based on a model statute published by the Multistate Tax Commission. Under that model, partnerships file a state-level federal adjustments report within 90 days of the final determination date, and partners file and pay within 180 days. Actual deadlines vary by state, and some states have adopted variations or have not enacted reporting rules at all. Check the requirements in every state where the partnership or its partners have filing obligations, because state penalties and interest can attach even when the federal filing was done correctly.

1
Internal Revenue Service. BBA Centralized Partnership Audit Regime
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Internal Revenue Service. Elect Out of the Centralized Partnership Audit Regime
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Internal Revenue Service. Guidance for Amended Partnership Returns
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Internal Revenue Service. Instructions for Form 1065-X
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Internal Revenue Service. Instructions for Form 1065X – Amended Return or Administrative Adjustment Request
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Office of the Law Revision Counsel. 26 U.S. Code 6223 – Partners Bound by Actions of Partnership
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Internal Revenue Service. File an Administrative Adjustment Request for a BBA Partnership
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Internal Revenue Service. Instructions for Form 8082
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eCFR. 26 CFR 301.6227-1 – Administrative Adjustment Request by Partnership
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Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
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Internal Revenue Service. IRS Topic 653 – IRS Notices and Bills, Penalties and Interest Charges
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Internal Revenue Service. Instructions for Form 8985 and Form 8985-V
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Internal Revenue Service. How to Figure an Imputed Underpayment
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eCFR. 26 CFR 301.6225-2 – Modification of Imputed Underpayment
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Internal Revenue Service. Instructions for Form 8978