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 April 9, 2026
| Mistake | IRS Notice | Approx. Impact | Fix |
|---|---|---|---|
| Broker basis on sale | CP2000 | $1,000–$5,000+ per sale | Recalculate IRS basis; file 1040-X |
| Missing §751 recapture | CP2000 / audit flag | $500–$3,000+ ordinary tax | Report Sales Schedule; file 1040-X |
| Missing ET K-1 (1 of 3) | CP2000 (AUR match) | $200–$800 per missing K-1 | Enter all 3 K-1s; amend if filed |
| Skipped state returns | State tax notice | $50–$500 per state + penalties | File non-resident returns |
| Netting PTP losses | CP2000 (passive loss) | $300–$2,000 disallowed loss | Separate PTP baskets; amend |
| IRA UBTI over $1,000 | IRA custodian 990-T | Trust tax rates (37% above $15,200) | File Form 990-T; pay from IRA |
| Not tracking basis | Compounding error at sale | $2,000–$10,000+ at disposition | Reconstruct from all prior K-1s |
Your broker reports your original purchase price on Form 1099-B. It is never adjusted for K-1 activity. After 8 years of holding an MLP purchased at $26/unit, your IRS-adjusted basis might be $18/unit due to cumulative distributions exceeding allocated income (Box 19A reducing basis each year). If you sell 500 units at $30 and report the broker’s $26 basis, you report $2,000 in gain. The IRS — which receives your K-1 data — calculates $6,000 in gain. The $4,000 discrepancy generates a CP2000 notice proposing additional tax, plus interest from the filing date. See why your broker’s cost basis is wrong.
An investor sells MLP units at a $2,000 loss based on market price vs. IRS basis — and still owes $1,400 in tax. How? IRC §751 recharacterizes a portion of the proceeds as ordinary income attributable to the partnership’s “hot assets” (primarily accumulated depreciation). The §751 amount appears on the Sales Schedule included with your final-year K-1. Even when total gain is zero or negative, the §751 component can generate ordinary income taxed at up to 37%. Most investors don’t know this exists until they get the K-1. See §751 depreciation recapture explained.
Energy Transfer (ET) unitholders receive 3 separate K-1s from 3 separate partnerships with 3 different EINs: Energy Transfer LP (ET itself), USA Compression Partners (USAC), and Sunoco LP (SUN). Each K-1 has its own income, deductions, credits, and state allocations. Each has a separate §469(k) passive activity basket. The IRS receives all three K-1s through its AUR (Automated Underreporter) matching system. Entering only one triggers a CP2000 notice for the missing two. See the Energy Transfer K-1 guide for the full 3-entity breakdown.
MLPs operate across multiple states, and each K-1 includes a state income allocation supplement. EPD allocates income to approximately 20 states. ET allocates to approximately 41 states. Each state with sourced income above its filing threshold requires a non-resident state return. Thresholds vary: some states require filing with any income, others set minimums of $500–$1,000. The penalty for non-filing is typically the tax owed plus interest plus a failure-to-file penalty (often 5%/month up to 25%). Many states participate in information-sharing agreements and are increasingly matching K-1 state supplement data against filed returns. See MLP state filing requirements.
IRC §469(k) creates a silo rule: losses from a publicly traded partnership can only offset income from that same PTP. Losses from EPD cannot offset income from ET, rental income, or any other passive activity. Each PTP is its own basket. Tax software handles this correctly only if you check the “PTP” box during K-1 entry. If you manually override or miss the checkbox, the software may incorrectly net PTP losses against other passive income, reducing your current-year tax but creating an audit exposure. The losses should instead be suspended and carried forward until you have income from that same PTP or completely dispose of your interest under §469(g). See PTP passive loss rules.
Holding MLPs in an IRA generates unrelated business taxable income (UBTI) under IRC §512. When UBTI exceeds $1,000 in a tax year, the IRA must file Form 990-T and pay tax at trust rates — which reach 37% at just $15,200 of income (2025 brackets). The tax is paid from IRA assets, reducing your retirement balance. The IRA custodian is responsible for filing, but many custodians charge $200–$500 for 990-T preparation. Some custodians refuse to hold MLPs at all. The $1,000 threshold is gross UBTI before the specific deduction, meaning even modest MLP positions can trigger filing. See MLP IRA UBTI explained.
Every other mistake on this list is recoverable with a single amended return. Failing to track basis compounds over time. Each year’s K-1 adjustments — Box 1 income/loss, Box 19A distributions, liability changes, §743(b) adjustments — build on the prior year’s ending basis. Miss one year and the error propagates forward through every subsequent year. By the time you sell after 10 years, your basis could be off by thousands of dollars, affecting both the capital gain calculation and the §751 allocation. Reconstructing basis requires obtaining every prior K-1, which may require contacting the partnership’s tax package provider and paying for historical copies. Start tracking now using the K-1 Basis Tracker.