IR-2020-240, October 22, 2020 WASHINGTON — The IRS released today an early draft of the instructions to Form 1065, U.S. Return of Partnership IncomePDF, for tax year 2020 (filing season 2021) that include revised instructions for partnerships required to report capital accounts to partners on Schedule K-1 (Form 1065). The revised instructions are part of a larger effort by the agency to improve the quality of the information reported by partnerships to the IRS and furnished to partners to facilitate increased compliance. The revised instructions indicate that partnerships filing Form 1065 for tax year 2020 are to calculate partner capital accounts using the transactional approach for the tax basis method. Under the tax basis method outlined in the instructions, partnerships report partner contributions, the partner's share of partnership net income or loss, withdrawals and distributions, and other increases or decreases using tax basis principles as opposed to reporting using other methods such as GAAP. According to IRS data, most partnerships already use the tax basis method although partnerships previously could report capital accounts determined under multiple methods. Partnerships that did not prepare Schedules K-1 under the tax capital method for 2019 or otherwise maintain tax basis capital accounts in their books and records (for example, for purposes of reporting negative capital accounts) may determine each partner's beginning tax basis capital account balance for 2020 using one of the following methods: the Modified Outside Basis Method, the Modified Previously Taxed Capital Method, or the Section 704(b) Method, as described in the instructions, including special rules for publicly traded partnerships. In anticipation of requesting more consistent and useful tax information from partnerships, the Department of the Treasury and the IRS released Notice 2020-43PDF seeking public comment on other possible methods to report capital accounts to partners. The IRS and the Treasury Department received numerous comments from taxpayers requesting that the tax basis method approach be retained. At the same time, the IRS did not receive practical alternative approaches to partner capital account reporting. Reporting using only one method assists the IRS in assessing compliance risk, and identifying potential noncompliance, while ensuring that compliant taxpayers' returns are less likely to be examined. To promote compliance with using the tax basis method described in the revised instructions, the Treasury Department and the IRS intend to issue a notice providing additional penalty relief for the transition in tax year 2020. The notice will provide that solely for tax year 2020 (for partnership returns due in 2021), the IRS will not assess a partnership a penalty for any errors in reporting its partners' beginning capital account balances on Schedules K-1 if the partnership takes ordinary and prudent business care in following the form instructions to calculate and report the beginning capital account balances. This penalty relief will be in addition to the reasonable cause exception to penalties for any incorrect reporting of a beginning capital account balance. The draft instructions are intended to give tax practitioners a preview of the changes and software providers the information they need to update systems before the final version of the updated instructions is released in December. The IRS is now accepting comments for 30 days at firstname.lastname@example.org. The IRS plans similar revisions, as applicable, to Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.