Our CPA Didn’t File a Partnership Return — Now What?

When a husband and wife own a Limited Partnership together, it is surprisingly common for the tax reporting to drift off course. The LP is properly formed, both spouses are listed as owners, and the business operates normally. Yet the CPA reports the income directly on the couple’s joint tax return and never files a partnership return. At some point, usually when a new advisor gets involved, the question arises: Was this supposed to be a partnership all along?

In most cases, the answer is yes—and fortunately, the fix is usually straightforward.

This situation typically arises because spousal entities sit at the intersection of several overlapping tax concepts. Some CPAs assume that because a business is owned entirely by a married couple, it can be treated as a “disregarded entity.” Others apply LLC rules to Limited Partnerships, or rely on community-property concepts that don’t actually apply to LPs. The result is not that income goes unreported, but that it is reported in the wrong format.

What matters most is that the income was reported and tax was paid. If the LP agreement always listed both spouses as partners, the business functioned as a partnership, and the income appeared on the joint return, then the entity was legally a partnership the entire time. The issue is not that the structure was invalid; it is that the reporting didn’t match the legal reality.

For most clients, the best solution is simply to begin filing a Form 1065 partnership return going forward. This does not require creating a new entity or filing a special election. A two-member Limited Partnership is treated as a partnership by default under federal tax law. By starting to file a partnership return now and issuing K-1s to each spouse, the reporting is brought back into alignment with how the entity has always existed.

Clients often ask whether they need to go back and fix prior years. In the majority of cases, the answer is no. If income was properly reported on the joint return, reopening old tax years typically adds complexity without meaningful benefit. Amending prior filings may make sense in narrow situations—such as where ownership percentages were incorrect, depreciation or losses were misapplied, or the business is about to be sold—but those are the exception, not the rule. For most families, the cleanest approach is to correct course prospectively.

Another common question is whether it would be better to start a brand-new Limited Partnership. In most situations, that actually creates more problems than it solves. Forming a new entity can trigger property transfers, disrupt loans, reset depreciation schedules, and introduce unnecessary tax and legal friction. Unless there is a specific reason to abandon the existing entity—such as defective documents, planned ownership changes, or asset-protection concerns—it is usually far better to keep the current LP and simply correct the tax reporting.

Clients are also understandably concerned about whether this kind of issue raises red flags with the IRS. Generally, it does not. The IRS’s primary concern is whether income was disclosed and tax was paid. Correcting the form of reporting going forward, especially in the context of a husband-and-wife business, is both common and defensible. This type of cleanup happens regularly and is not viewed as abusive when handled properly.

The practical recommendation in most cases is simple: keep the existing Limited Partnership, begin filing partnership returns going forward, and make sure capital accounts, distributions, and basis are tracked correctly from this point on. There is no need for panic, and rarely a need to “start over.”

Tax law is technical, and even good professionals sometimes apply the wrong rule to the wrong type of entity. What matters is recognizing the issue early and fixing it in a calm, thoughtful way that preserves both tax efficiency and asset-protection goals.

If you are a client of Lodmell & Lodmell and have any questions about your Asset Management Limited Partnership, please contact our office directly at [e-mail].