I just received a letter from WPZ saying that it had entered into a closing agreement with the IRS regarding its 2011 tax return. I assume others on this board that owned WPZ have received or will receive on Monday the same letter. Apparently WPZ understated its Line 1 loss on the 2011 K-1s - for me, the corrected loss for 2011 was about $ 1,200 higher than the K-1 showed. The agreement WPZ entered into with the IRS allowed WPZ to add the extra loss to the 2012 K-1s. Confusing, but if you didn't sell any WPZ units in 2011, you don't have to do anything. If you did sell units in 2011, you are allowed, but not required, to amend your returns. The extra loss would reduce your tax basis when you sold, so I would think there's not likely to be any real impact in that case, either.
Anyway, this is the first time I have ever heard of an MLP having this problem. This doesn't seem to be the result of an IRS exam - it's too quick for the exam process to have been completed on a 2011 tax return. So I guess WPZ found the problem and contacted the IRS.
Interesting, but for almost everyone, meaningless.
A few posts on the IV MLP board about this and they all seem to be missing the point. People there are talking about this proving the wisdom of filing an extension - they appear to be thinking this is a revision of the 2012 K-1, whereas it is for 2011. You don't usually get an extension for 18 months!. And someone said he would revise as it would pay for a nice dinner - but unless you sold, you would not get any refund due to passive loss carryforward.
And I thought the letter was pretty clear than if you did not sell your units, there is no need to revise anything as they have adjusted the 2012 K-1 to compensate for the error in the 2011 one. So unless you sold your units, it is already fixed. There would be no point in revising the 2011 return if you didn't sell because the passive loss rules would mean you do not get a refund anyway. If you revise your 2011 return, you also need to revise your 2012 return as the 2012 K-1 was adjusted for the 2011 error. Anyone who requests an adjusted K-1 for 2011 also gets an adjusted K-1 for 2012 and the two cancel each other out - unless you sold your units in 2011.
Unfortunately, I sold 1/3 of my position in 2011 because I was getting overweighted due to the rapid price appreciation (which is why I posted it on the IV board to begin with, although I did not describe it as elegantly as you!).
I doubt I will file an amended 2011 and 2012 return, since I also got a revised 1099 and in my head I roughly figure the two adjustments will balance out anyway. I have a perverse desire to have the IRS audit me anyway so I could see if I've been calculating everything the past two years is correct.
jrad - I did not own WPZ in 2011 and thus was not effected with the problem. If you owned in 2012 and had a larger loss you would generally simply need to change the passive loss carryforward on your return. The effect of not doing this via an amendment on sale would be to increase the tax due from recapture by the amount of the change. As you said in your case it would reduce your tax basis by $1200 - thus taxes due on $1200 more on sale unless you adjust your 2012 return. Certainly not meaningless today.
I don't think I understand you. In my case (I owned WPZ in 2011 and had no sales of units in 2011), the effect of amending returns would be to increase my 2011 passive loss carryover by $ 1,200, and reduce my 2012 passive loss carryover by the same amount. I have to assume that when I eventually sell, WPZ will be able to figure out the correct amount of ordinary income on sale.
If you did not own WPZ in 2011, then I think your 2012 K-1 does not reflect any correction from 2011. So this whole thing would not affect you.