A taxpayer had been accumulating passive losses over many years by virtue of being a limited partner. The partnership was issuing forms K-1 every year showing a loss. The taxpayer was not filing tax returns for all these years, as he was below filing requirements. Any ideas as to the source that the taxpayer can use the accumulated passive losses in a year of gain, and that he does not forfeit the losses by virtue of not filing of forms 8582. Thanks!
USA Prior Year Unallowed Losses - Unfiled Form 8582
- Thread starter Eli
- Start date
It seems that the purpose of form 8582 is to calculate allowable losses, rather than keep track of unallowed losses. Losses from Publicly Traded PTNs, for instance, are not reported on form 8582, these losses are tracked on worksheets. So, again, it seems that failure to file returns with 8582 should not jeopardize the taxpayer's right to deduct accumulated losses in the year of gain. Any thoughts?
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Maybe.
Problem is, if you didn't file returns, you didn't establish the loss. However, there were tax court cases that led to this ruling:
Rev. Rul. 1965-96
"For purposes of determining the portion of a net operating loss to be
carried to the second preceding taxable year, the taxable income of the
third preceding taxable year should be reduced by the amount of an
unclaimed deduction, even though such deduction is barred by the statute of
limitations."
Note this applies to NOL's and not passive losses. But there is certainly an argument that this is intended to clarify both. There is an argument that if the IRS is unable to go after income outside of the statute of limitations, they shouldn't be able to go after losses either.
What I would do is file returns for the prior three years and take a catch up on the losses as if 8582's were filed up to that point. Attach a statement showing the carryfoward from prior years. Keep copies of the K-1's on hand and document your calculation in case you receive the dreaded and likely CP notice.
Problem is, if you didn't file returns, you didn't establish the loss. However, there were tax court cases that led to this ruling:
Rev. Rul. 1965-96
"For purposes of determining the portion of a net operating loss to be
carried to the second preceding taxable year, the taxable income of the
third preceding taxable year should be reduced by the amount of an
unclaimed deduction, even though such deduction is barred by the statute of
limitations."
Note this applies to NOL's and not passive losses. But there is certainly an argument that this is intended to clarify both. There is an argument that if the IRS is unable to go after income outside of the statute of limitations, they shouldn't be able to go after losses either.
What I would do is file returns for the prior three years and take a catch up on the losses as if 8582's were filed up to that point. Attach a statement showing the carryfoward from prior years. Keep copies of the K-1's on hand and document your calculation in case you receive the dreaded and likely CP notice.
Colin, thank you for your practical suggestion.
I think (hope) there is a fundamental difference between passive losses and the NOL. The NOL does not exist without a return reporting (creating) it. In contrast, passive losses were actually reported by an entity which files K-1s. The K-1s in question were reported timely on the partnership return and could be tracked by the taxpayer, even though hid individual returns were filed.
There is most definitely no requirement to file a return just by virtue of getting a K-1 with a loss. Let’s say a taxpayer has a capital loss carryover generated in 2011. If this taxpayer has no filing requirement in 2012, and does not file a return in 2012, he still can enter an amount from his Capital Loss Carryover Worksheet on 2013 Schedule D. The filing of 2011 tax return with a loss in excess of $3,000 on schedule D should establish the carryover amount.
Similarly, the entity filed timely returns with all K-1s throughout the years, and my firm obtained a K-1 for each year.
I think (hope) there is a fundamental difference between passive losses and the NOL. The NOL does not exist without a return reporting (creating) it. In contrast, passive losses were actually reported by an entity which files K-1s. The K-1s in question were reported timely on the partnership return and could be tracked by the taxpayer, even though hid individual returns were filed.
There is most definitely no requirement to file a return just by virtue of getting a K-1 with a loss. Let’s say a taxpayer has a capital loss carryover generated in 2011. If this taxpayer has no filing requirement in 2012, and does not file a return in 2012, he still can enter an amount from his Capital Loss Carryover Worksheet on 2013 Schedule D. The filing of 2011 tax return with a loss in excess of $3,000 on schedule D should establish the carryover amount.
Similarly, the entity filed timely returns with all K-1s throughout the years, and my firm obtained a K-1 for each year.
In case of a PTP with a loss, nothing is reported to the IRS. The filing of a K-1 seems to be a sufficient establishment of loss, and the taxpayer keep the record until such time that he has income from that PTP or until the final disposition.
With the PTP loss, you would still file a Schedule E, with zero loss deducted and a worksheet attached to show the disallowed loss to be carried over.
But I agree, there is nothing to require filing to establish the carryover. The IRS will just send you a notice requiring you to submit proof (K-1's) of how you calculated the loss.
But I agree, there is nothing to require filing to establish the carryover. The IRS will just send you a notice requiring you to submit proof (K-1's) of how you calculated the loss.