IRS Form 8978 Instructions

If you’re a partner in a non-pass-through entity that has elected to push out certain tax adjustments, you may be required to file IRS Form 8978. In this article, we’ll walk through this tax form. Specifically, we’ll discuss:

  • How to complete IRS Form 8978
  • Who must file IRS Form 8978?
  • When is IRS Form 8978 due?
  • Frequently asked questions

Let’s begin by discussing exactly what IRS Form 8978 is. But beforehand, please note that this article is for educational purposes only. This should not be construed as tax advice or legal advice.

If you need tax advice, you should consult with a qualified tax professional.

How do I complete IRS Form 8978?

Although this form is only one page, it can be complicated. We’ll go through this, step by step, so you can better understand how this form works.

Part I: Computation of Additional Reporting Year Tax

In Part I, there are 4 columns. If your affected year is the only year requiring an adjustment, use only column (a). If there are more than one intervening years (years after the adjustment), then use the number of columns you need.

Line 1a: Total income per original return or as previously adjusted

Enter the total income amount as shown on your original or amended return, or as adjusted by the IRS. Enter negative amounts in parentheses.

Line 1b: Adjustments to income From Schedule A, Line 2, columns (a) through (d)

Enter the total amount of all lines from Schedule A, Line 2, Adjustments to Income.

Line 2

Combine Lines 1a and 1b. This represents your corrected income.

Line 3a: Total deductions per original return or as previously adjusted

Enter the total amount of deductions as shown on your original or amended tax return, or as adjusted by the IRS. Enter negative amounts in parentheses.

Line 3b: Adjustments to deductions From Schedule A, Line 4, columns (a) through (d)

Enter the total amount from Schedule A, Line 4, Adjustments to Deductions.

Line 4

Combine Lines 3a and 3b. This represents your corrected deductions.

irs form 8978, part I: computation of additional reporting year tax

Line 5: Corrected taxable income

Subtract Line 4 from Line 2, then enter the result. This is your corrected taxable income.

If, because of changes in tax attributes, the corrected taxable income is different from the difference between Line 4 and Line 2, you must include a separate statement. This statement should show how you calculated the corrected taxable income.

Line 6: Income tax on Line 5

Include a separate statement that explains how you calculated your new income tax liability. Enter the new income tax on Line 6.

Line 7: Alternative minimum tax on Line 5

If AMT applies to your tax situation, enter your new AMT amount here. Also include a statement that outlines your AMT calculation based upon the audit adjustments.

Line 8: Total corrected income tax

Add Lines 6 and 7. This represents your total corrected income tax.

Line 9a: Total credits per original return or as previously adjusted

Enter the total amount of tax credits reflected on your original tax return. This should reflect both refundable and nonrefundable credits.

Line 9b: Adjustments to credits From Schedule A, Line 6, columns (a) through (d)

Enter the amount from Schedule A, Line 6, Total adjustments to credits.

Line 10

Combine all credits from Line 9a and Line 9b. This represents your total corrected credits.

irs form 8978, part i, continued

Line 11: Total corrected income tax liability

Subtract Line 10 from Line 8. This should reflect your total corrected income tax liability.

If the actual total corrected tax liability is different from the calculation, you must attach a statement addressing the difference.

Line 12: Total income tax shown on original return, or as previously adjusted

Enter the original income tax shown on your original or amended tax return.

Line 13: Increase/Decrease to tax

Subtract Line 12 from Line 11. A positive amount indicates a tax increase, while a negative amount shows a decrease in your tax bill.

Line 14: Total increase/decrease to reporting year tax

Add the total of columns 13(a) through 13(d). If only reporting for one tax year, this sum should be the same as Line 13.

Part II: Penalties

Line 15: Penalties

IRS Form 8986, Part V lists applicable penalties, if there are any, and which line items are affected.

If penalties apply, include a statement showing how the penalties were figured. Enter this amount in the applicable column(s) of Form 8978.

Penalties for each applicable tax year should be reported on line 15, columns (a) through (d).

irs form 8978, Part II, helps the taxpayer calculate penalties passed onto individual partners

Line 16: Total penalties

Add the total of all penalties in Line 15. This represents your total penalties for all applicable tax years.

Part III: Interest

Line 17: Interest

Interest on any increase in income tax is figured from the original due date of your income tax return for each tax year to which an increase in tax is attributable. Section 6226(b)(3) applies.

Calculate interest at the underpayment rate under Section 6621(a)(2). However, substitute “five percentage points” for “three percentage points” for purposes of section 6621(a)(2)(B).

This means the sum of the federal short-term rate plus five percentage points, instead of three percentage points.

For additional reporting year tax reported as a result of a Form 8986 from an AAR, this substitution is not made. Report interest for each applicable tax year on Line 17, columns (a) through (d).

irs form 8978, Part III, helps the taxpayer calculate applicable interest on increased taxes and applicable penalties

Interest on penalties is calculated in the same manner as the interest on income tax. However, the interest calculation on penalties starts from the due date of the partner’s tax return, or extended due date, if applicable.

Line 18: Total Interest

Add the totals of interest (Line 17) across all four columns. This should be the total interest you owe.

Form 8978 Schedule A

Use Schedule A to determine the amount of adjustments that go into Form 8978, specifically:

  • Income adjustments (Line 1b)
  • Adjustments to deductions (Line 3b)
  • Adjustments to credits (Line 9b)

Adjustments to income

Line 1

Enter all the adjustments individually from Form 8986, Part V, that affect taxable income. Generally, this includes adjustments to the following:

Also include related amounts and adjustments not on Form 8986 that result from changes to partner-level tax attributes and other items as a result of adjustments from Form 8986.

Schedule A: Adjustments to income
Line 2

Enter the total of all adjustments from Line 1. Carry the total of each column to the corresponding column on Form 8978, Line 1b.

Adjustments to deductions

Line 3

Enter all the adjustments individually from Form 8986, Part V, that affect deductions from income. Generally, this includes adjustments to separately stated items such as a Section 179 deduction.

Also include related amounts and adjustments not on Form 8986 that result from changes to partner-level tax attributes as a result of adjustments from Form 8986.

Schedule A: Adjustments to deductions
Line 4

Enter the total of all adjustments from Line 3. Carry the total of each column to the corresponding column on Form 8978, Line 3b.

Adjustments to credits

Line 5

Enter all the adjustments individually from Form 8986, Part V, that affect tax credits.

Also include related amounts and adjustments not on Form 8986 that result from changes to partner-level tax attributes as a result of adjustments from Form 8986.

Schedule A: Adjustments to credits
Line 6

Enter the total of all adjustments from Line 5. Carry the total of each column to the corresponding column on Form 8978, Line 9b.

What is IRS Form 8978?

IRS Form 8978, Partner’s Additional Reporting Year Tax, is used by non-pass-through partners to reflect partnership adjustments documented by their BBA partnership on IRS Form 8986. In turn, this depends on the elections the partnership may have made under Internal Revenue Code Sections 6226 and 6227 in an affected year.

This presents a few logical questions:

  • What is IRS Form 8986?
  • What is a BBA partnership?
  • What are IRC Sections 6226 and 6227?

What is IRS Form 8986?

IRS Form 8986, Partner’s Share of Adjustment(s) to Partnership-Related Item(s) (Required Under Sections 6226 and 6227), is the IRS form that a BBA partnership may use to transmit each partner’s share of adjustments to partnership-related items.

The following entities should file IRS Form 8986:

  • An audited partnership that has made an election under IRC Section 6226.
  • Direct or indirect pass-through partners that receive a Form 8986 related to an audited partnership if they choose to furnish statements to their partners to further push out the adjustments
  • Partnerships that file an administrative adjustment request (AAR) under Section 6227 and either elect to:
    • Push out the resulting adjustments to their partners, or
    • Have adjustments that do not result in an imputed underpayment (IU)
  • Direct or indirect pass-through partners that receive a Form 8986 related to an AAR partnership, if the direct or indirect pass-through partner chooses to furnish statements to its partners to further push out adjustments or have adjustments that do not result in an IU

And any partner that receives IRS Form 8986 should file Form 8978 to reflect those adjustments and any imputed underpayment amounts.

What is a BBA partnership?

A BBA partnership is one that is subject to the centralized partnership audit regime enacted into law by the Bipartisan Budget Act of 2015.

Under the BBA, the IRS generally assesses and collects any understatement of tax at the partnership level. This understatement is called an imputed underpayment, or IU, at the partnership level. As of 2018, all partnerships must file under the new centralized audit regime unless they elect out in a timely filed federal income tax return.

Partnerships may request to modify the imputed underpayment amounts and may elect to push out the adjustments underlying the IU instead of paying. They do this by filing IRS Form 8986.

What is IRC Section 6226?

IRC Section 6226, Alternative to payment of imputed underpayment by partnership, is the part of the tax code that enables a partnership to avoid penalties for tax underpayment by making a push-out election and issuing partnership adjustments to each partner.

What is IRC Section 6227?

IRC Section 6227, Administrative adjustment request by partnership, is the code section that provides guidance on how to make appropriate adjustments.

Who must file IRS Form 8978?

Any partner who receives IRS Form 8986 must file Form 8978 to reflect the proper tax liabilities from the partnership election, and to pay any additional tax due.

Generally speaking, partners use Form 8978 and Schedule A (Form 8978) to report adjustments shown on Forms 8986 received from partnerships that have elected to push out adjustments to partnership-related items to their partners.

However, this requirement does not apply to pass-through entities, such as S corporations or partnerships.

The Schedule A (Form 8978) lists all the adjustments a partner receives on Form 8986. Schedule A is also used to report any related amounts and adjustments not reported on Form 8986 which may result from changes to partner-level tax attributes because of adjustments made on Form 8986. This includes both positive and negative adjustments.

When is IRS Form 8978 due?

According to the Internal Revenue Service, a reviewed year partner or affected partner must file Form 8978 with a federal income tax return for the partner’s tax year.

What is a reviewed year partner?

A reviewed year partner is any person that held an interest in the audited partnership at any time during the partnership’s reviewed year. Reviewed year partners may have terminated their partnership before the end of the calendar year in question.

What is an affected partner?

An affected partner is a partner that held an interest in a pass-through partner at any time during the applicable tax year of the pass-through partner to which the adjustments in the statement relate.

Video walkthrough

This instructional video will walk you through this tax form, step by step.

Frequently asked questions

Do I need to complete Schedule A?

If you are required to complete Form 8978, you must also complete Schedule A. Schedule A helps calculate adjustments that go into Form 8978.

What if there are more than 4 years of adjustments?

Since Form 8978 only contains 4 columns, if there are more than 4 years of adjustments, you must use multiple forms to record them.

If there are adjustments from more than 1 source, how do I report them?

Adjustments may occur as a result of administrative adjustment requests (AARs) or as part of an audit under the centralized partnership audit regime of the Bipartisan Budget Act of 2015 (BBA). If you have adjustments from both sources, you must report them separately on separate Forms 8978. Each Form 8978 should be checked ‘AAR’ or ‘BBA’ based upon the source of the adjustment.

Where can I find a copy of IRS Form 8978?

You may download a copy of this tax form, and Schedule A, from the IRS website. For ease of use, you can select the appropriate file(s) below.

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10 Comments

  1. I have completed all these forms, but do not understand where the adjustments roll forward onto the 1040 form. My adjustments resulted due to the issuance of a K-1 for an ira investment. interest and dividends were reported on the k-1 and therefore on the 1040 for the applicable year. do i need to file an adjusted return for that year or can I file the adjustment on the current year and if so where? Nothing is indicated on this in turbo tax or in tax codes. Hope you can help. Thanks.

    1. Forrest Baumhover says:

      Unfortunately, I cannot give specific advice without knowing more about your tax return and tax situation. To answer your question, the adjustments that carry forward to your Form 1040 should come from Line 14. According to the form instructions, “the additional penalties (Line 16) and interest (Line 18) should be included in the net payment calculation for the partner’s reporting tax year but these are not reported on the partner’s reporting year return and are not included in the additional reporting year tax.”

      If this doesn’t help, it might be worth talking with a CPA or enrolled agent to help determine the correct answer.

  2. bruce fowler says:

    I have a sec 199a adjustment amount on my 8986. Do I recalculate the QBI deduction or is the amount shown on the 8986 the new QBI deduction amount?

    1. Forrest Baumhover says:

      Bruce,

      The form instructions contain an example (Example 2), of where the taxpayer’s Form 8986 (Bill), shows QBI deductions. The instructions go on to state that the QBI deduction goes into Line 3b (increases in deductions are entered as a positive number and decreases are a negative number). However, the instructions mention nothing about how this impacts QBI on your personal return (reported on Form 8995 or 8995-A). That probably depends on other circumstances unique to your tax situation.

  3. How does the taxpayer make an early payment on the 8978 in order to cut off interest and penalties. For example, the change was to tax year 2021, they receive the 8986 on 10/15/2023 so therefore, if I’m understanding it correctly, the 8986 gets reported on the 8978 on their 2023 tax return. But I would like to send in payment early so they don’t have to pay additional interest and penalties from October 15th, 2023 through April 15th 2024 when the return is due. My thought is to have them mail in a payment now in October but how does the IRS know that the payment they are making is for the 8978?

    1. Forrest Baumhover says:

      Based upon this information, it appears that the reporting year is 2023, as you indicated. If that’s the case, then it’s simply a matter of applying your estimated payment to your 2023 tax bill.

      For your 2023 tax bill, you can always submit an estimated payment for the current year tax return, by completing IRS Form 1040-ES & sending payment, or you can go to the IRS website and submit your payment for the 2023 tax year. In either case, as long as you do not have tax balances for prior years, the IRS should apply the estimated payment towards the current tax year (and reporting year).

      If the reporting year happened to be different from the current tax year (i.e. received Form 8586 in 2022, instead of 2023), then you’d probably have to coordinate with the IRS so you can understand which tax balances would get paid down first.

  4. Mario Lopez says:

    I can’t find anywhere with instruction how to deal with Self employment tax (SE). My understanding is that 8986 would not include any SE reporting and there is not a line item or place in form 8978 to report SE Tax, so what do you do?

    1. Forrest Baumhover says:

      That’s correct. IRS Form 8986 and IRS Form 8978 have to do with partnership income reporting, not self-employment tax. If you have partnership income due to self-employment earnings, that would be reported to you on Schedule K-1 (Form 1065), Box 14, Code A.

      You would report this on IRS Schedule SE, Self-Employment Tax, to calculate the SE tax liability. Here is a link to the article and YouTube video that both walk through Schedule SE:

      Article: https://www.teachmepersonalfinance.com/schedule-se-instructions/
      Video: https://youtu.be/SmRTyhd0RnI

  5. James Holden says:

    I have received a Form 8986 and have prepared the Form 8978. The adjustment decreases the 2020 business income of a partnership where I am a partner. The Form 8986 specifies that the adjustment year is 2023. I am using TurboTax to prepare my return for 2023, but I find no place in that software that permits me to include the Form 8978 showing this additional income that I have received. Can you tell me how I should report this adjustment for 2023?

    1. Forrest Baumhover says:

      I’m not sure that you can do this in TurboTax. I’ve seen numerous references that TurboTax does not support Form 8978.

      The form instructions state that you are supposed to attach a copy of Form 8978 to your tax return after you’ve completed it (you could complete and save as PDF).

      However, checking the following TurboTax question forum, TurboTax won’t allow you to attach a PDF form to an electronically filed return: https://ttlc.intuit.com/community/taxes/discussion/can-i-add-a-pdf-attachment-to-a-turbotax-electronic-return-i-need-to-add-a-300-page-conservation/00/156903