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    Incorrect Partnership Return Filings

    What if partnership returns were prepared and filed and it was never a partnership? The returns were filed incorrectly as a partnership return by the accountant. The partners were operating as individual sole proprietors and not as a partnership. I know that the personal returns can be amended to reflect schedule C's, but what about the 1065's that have already been filed?

    #2
    TTB page 20-2 under "Partnerships" give a definition of when a partnership exists. You should consider this prior to filing Sch C's.
    Dave, EA

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      #3
      Assuming that it has already been determined that there shouldn't have been a partnership, how do you deal with the 1065's that have already been filed?

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        #4
        Just file a 1040X for each partner, say the partnership K-1 was in error as there was no partnership, and recalculate tax using Schedule C. That will basically tell IRS to ignore the 1065.

        I'm not sure why that needs to be a big deal. There really should be no difference in tax between filing two Schedule C's vs. one 1065. If you're talking small dollar amounts, the cost and hassle of doing amended returns could offset the extra tax in keeping it a 1065.

        If it is a big deal, and these people are really not partners, then liquidate the partnership, a tax free event, and have them continue next year filing 2 Schedule C's.

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          #5
          Thank you Bees Knees. I appreciate it. The individuals that were deemed partners didn't get to deduct any of their own expenses. Their entire net income which was paid by one general contractor was taxable.

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            #6
            Originally posted by kpangelinan View Post
            The individuals that were deemed partners didn't get to deduct any of their own expenses.
            Sure they can. You deduct it on Schedule E, page 2 on the line after the K-1 profit and call it UPE (unreimbursed partnership expenses). The partnership must have a written partnership agreement that says the partners pay for and deduct their own expenses, but even if your guys don't have a written partnership agreement, it can be written up after the fact, meaning today.

            Rather than risk drawing attention to yourself trying to kill a 1065, why not just amend each 1040 with UPE reported on Schedule E. UPE also reduces SE tax. See TTB, page 20-5.
            Last edited by Bees Knees; 09-17-2007, 12:55 PM.

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              #7
              Also late returns are a problem

              Also, if the IRS is looking for 1065's; and it really was not a partnership, there would be late payment penalties on the 1065's unless one can convince IRS that it was not a partnership.

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                #8
                Would that be on line 28B and list the expenses in the (j) column right underneath the Schedule K income?

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                  #9
                  yes, but it is...

                  Originally posted by kpangelinan View Post
                  Would that be on line 28B and list the expenses in the (j) column right underneath the Schedule K income?
                  the (h) column, since it is a negative. The (j) column is for income.

                  There is an example of this on page 20-22 of TTB.

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                    #10
                    thanks again....also...

                    I see it now, thanks. I'm new to this site, how do I get to the pages you're referring to for the example? Thanks, again.

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                      #11
                      Originally posted by kpangelinan View Post
                      I see it now, thanks. I'm new to this site, how do I get to the pages you're referring to for the example? Thanks, again.

                      You need to buy the book from the company that sponsors this website.

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                        #12
                        Ok, great. Will do, thanks.

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