Uncooperative Partners

I'm amazed that the law-abiding partner has been unable to persuade the two would-be tax cheats. Do they really want to risk paying penalties and interest for underreporting their taxable income, not to mention the hassles of dealing with the IRS as adversary? Is the "extra" tax large enough that they can live with that possibility?

If they amend the return and make a plausible case for it being an honest error, they'll probably escape the penalty and the hassles.

If they won't let the partnership correct its filing, I would think that the honest partner, for his own protection, would have to amend his 1040 and include partnership income based on his share of the income that should have been reported.

Just an opinion, and from a layman, not a tax professional.

Take a look at Form 8082, Notice of Inconsistent Treatment. I've used it once. In theory, it protects your client from penalties (assuming reasonable position and still wrong) should the Service audit the partnership and make a change. Would also allow your client the peace of mind to sleep.

Thanks Bruce.

Now the question is whether you wish to advise the partners that you will be filing Form 8082, since it is highly likely the IRS will raise the issue with the partnership return. Give the partners a chance to avoid a bigger problem of their own making.