Not all partners included in 1065 since inception

[carolf]

New client. Former tax preparer did not include the member/manager of the LLC in the partnership. They are going on their fifth year of business.

How to fix this mess? If we go back three years, we'll have to amend three partnership returns and 4 individual returns. Since all the pass through income was accounted for, can we report this correctly going forward?

Suggestions?

Thanks!

[Roland Slugg]

Are you sure? That's pretty bizarre if it's true. I assume you mean that the managing member/partner was not issued a K-1 for any of the 5 years.

Was there net income, or a loss, that would have been allocated to that member? If so, that's a lot of incorrect returns for the past five years.

It is not widely known that taxpayers have no mandated requirement to file a corrected tax return if an error is discovered. This might be one of those situations where the most reasonable thing to do would be to simply report everything correctly going forward. Having said that, if this was MY new client, and I learned that the facts were as you said they are, I would advise the managing member, and perhaps all the members, via a letter, about the mistakes and suggest they consider filing amended returns for the open years.

If the mis-allocated income was a large amount, the changes between all the partners will be corresponding large, but if the prior years' income or losses were small, it probably won't make much difference. The allocation of a p'ship's income among its partners is a zero sum game, so the net size of the errors could be very small.

Although unlikely, it's also possible, I suppose, that the managing member had no share of the income or losses in those 5 years. Check that out by reading the p'ship agreement.

[carolf]

Thanks for your response.

Yes, three of four members received K-1's. So far there have only been losses on the K-1's, but this year there will probably be income.

I'll check out the partnership agreement.

Thanks again.