What happens if I report the wrong cost basis for my MLP sale?

You'll receive a CP2000 notice from the IRS. Their automated matching systems cross-reference K-1 data against your filed return. If your reported basis is higher than the K-1-adjusted basis, the IRS will propose additional tax, plus interest and potential accuracy penalties.

Can I correct MLP tax mistakes from prior years?

Yes. File Form 1040-X (amended return) for any open tax year — generally the last 3 years. Filing voluntarily before the IRS contacts you typically avoids penalties.

Are MLP tax mistakes common?

Extremely common. The complexity of K-1 tracking, the broker basis mismatch, and multi-state filing obligations create a perfect storm for errors. Even experienced investors and some tax professionals make mistakes with partnership taxation.

Will the IRS audit me for MLP tax errors?

The IRS uses automated matching (AUR system) to compare K-1 data against filed returns. This generates CP2000 notices — not full audits. However, significant discrepancies can trigger a full examination.

How do I know if I'm making MLP tax mistakes?

If your only basis number comes from your brokerage statement, it's almost certainly wrong. Other red flags: you only entered one K-1 for Energy Transfer, you've never filed a non-resident state return, or you don't know what §751 recapture means.

Should I hire a CPA for MLP taxes?

If you have significant MLP holdings, multiple MLPs, or are planning to sell, a CPA experienced in partnership taxation is valuable. Ask if they've prepared returns with Form 8949 basis adjustments for MLP sales.

7 MLP Tax Mistakes That Trigger IRS Notices (And How to Avoid Them)

MLP taxation is complex by design — and these seven mistakes account for the vast majority of IRS notices, overpayments, and missed deductions among partnership investors.

By Lucas Andersen — Last updated March 6, 2026

Mistake #1: Using Your Broker's Cost Basis

Your broker reports original purchase price, never adjusted for K-1 activity. After 5-10 years, the gap can be thousands per unit. The IRS receives your K-1s and knows what your basis should be.

Mistake #2: Ignoring §751 Recapture

When you sell MLP units, part of your gain is reclassified as ordinary income under §751 — taxed at up to 37%, not capital gains rates. The §751 amount is on your final-year K-1 Sales Schedule.

Mistake #3: Only Entering One K-1 for Energy Transfer

ET unitholders receive 3 K-1s from 3 separate partnerships. Each has a different EIN. The IRS receives all three and flags missing ones.

Mistakes #4-7

Skipping non-resident state returns, netting PTP losses against other passive income, ignoring IRA UBTI above $1,000, and not tracking basis at all.