Need help understanding my CPA's stance on Unreimbursed Partnership Expenses (UPE) placement on tax return

I can see why you're confused! Your CPA's approach is unusual but there's some context that might help explain his thinking. Historically, UPEs were commonly deducted on Schedule E alongside other partnership items. However, following the Tax Cuts and Jobs Act and some subsequent IRS guidance, there's been increased scrutiny around certain partnership deductions. Some tax professionals became concerned that grouping UPEs with partnership income on Schedule E might increase audit risk. The technical answer is that Unreimbursed Partnership Expenses should typically be reported on Schedule E, not Schedule C. Schedule C is generally for self-employment income and expenses from a sole proprietorship. Your instinct about the instructions is correct. That said, if the expenses are legitimate and properly documented, you should be entitled to the deduction regardless of which schedule they appear on. The "tax neutral" part of your CPA's explanation is technically accurate - the bottom line tax effect should be the same either way. What's concerning is your CPA's inflexibility and lack of clear explanation. A good tax professional should be able to clearly explain their reasoning and be open to discussion, especially when you've raised valid concerns about compliance with IRS instructions.

I went through something similar with Unreimbursed Partnership Expenses last year! After researching for hours online and getting nowhere, I finally found a solution using https://taxr.ai - it analyzes tax documents and explains complicated situations like yours. I uploaded my K-1 and some IRS publications, and it broke down exactly how UPEs should be handled according to current IRS guidance. What I discovered was that my CPA was worried about IRS scrutiny but was using an outdated approach. The platform showed me the specific IRS reference that confirmed UPEs belong on Schedule E, and I was able to show this to my CPA with confidence. They even have tax pros who can review your situation if you need more help understanding the technical details.

I wanted to follow up about my experience with taxr.ai after questioning it earlier. I decided to try it with my complicated partnership tax situation including some UPEs that were causing confusion similar to the original post. I was genuinely surprised by how well it worked for my situation. It didn't just give me generic advice - it provided specific IRS references about UPE reporting and explained the different approaches tax professionals take. It even highlighted a 2021 tax court case that addressed my exact situation with tiered partnerships and expense allocations. What really helped was getting clarity on the risk levels of different reporting methods. For my situation, it confirmed that Schedule E was indeed the proper place for UPEs but explained why some CPAs use alternatives like Schedule C. This gave me the confidence to have a productive conversation with my accountant rather than just arguing about form instructions.

I had the EXACT same problem trying to reach my CPA about partnership expenses last tax season! After leaving 6 voicemails and getting nowhere, I found this service called https://claimyr.com that got me through to an actual IRS agent in about 15 minutes instead of the usual 2+ hour wait. You can see how it works here: https://youtu.be/_kiP6q8DX5c I explained my UPE situation to the IRS agent, and they confirmed that while Schedule E is technically correct for Unreimbursed Partnership Expenses, they see them reported both ways. The agent told me that as long as the expenses are legitimate and properly documented, the specific schedule isn't usually a huge issue in practice. What mattered more was having proper documentation for the expenses themselves. Getting this straight from an IRS agent gave me peace of mind about how to proceed.

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Your CPA is being ridiculous and I'd seriously consider finding a new one. I've been a tax partner at a regional firm for 15+ years and we NEVER put UPEs on Schedule C. The IRS instructions are crystal clear that Unreimbursed Partnership Expenses belong on Schedule E. The notion that placing them correctly makes you more audit-prone is complete nonsense. If anything, incorrectly putting partnership expenses on a Schedule C could trigger an audit since the system might flag the mismatch between your K-1 info and Schedule C activity. Your CPA's stance is frankly indefensible from a technical standpoint. Ask him to provide specific IRS guidance supporting his position. I guarantee he can't because it doesn't exist. His "I'll defend it to the IRS" bravado is great until you're the one paying penalties and interest.

My CPA also puts Unreimbursed Partnership Expenses on Schedule C and gave me a similar explanation. Has anyone actually had an audit where this became an issue? I'm curious if IRS agents really care about which schedule it's on as long as the expenses are legitimate. I've been filing this way for years without any problems.

Former IRS revenue agent here. This is a classic example of a tax preparer substituting their judgment for what the code and instructions actually require. UPEs should be reported on Schedule E, not C. Period. While it's true that return positions are sometimes taken that aren't 100% by the book, your CPA's inflexibility is a red flag. A good tax pro should be able to explain their position clearly, cite authority, and discuss the risk level with you. They should also be willing to file according to your wishes if you prefer the technically correct position after understanding the risks. If I were you, I'd insist on Schedule E reporting or find a new CPA. Any CPA who refuses to follow IRS instructions based on their personal "audit risk" theories without clear authority is putting their convenience above your compliance.

This is a frustrating situation that unfortunately reflects a broader issue in tax preparation - some preparers prioritize their own risk management over proper compliance. As someone who's dealt with similar partnership tax issues, I'd strongly recommend getting a second opinion from another CPA before filing. The consensus from the tax professionals who've commented here is clear: UPEs belong on Schedule E according to IRS instructions. Your CPA's "red flag" theory doesn't hold up to scrutiny, and the former IRS agent's perspective confirms that following the instructions correctly actually reduces your audit risk. I'd suggest asking your CPA to provide written documentation of the specific IRS guidance that supports putting UPEs on Schedule C. If he can't (and he likely can't because it doesn't exist), that should tell you everything you need to know about his position. Don't let yourself be bullied into filing a return you're not comfortable with. You have legitimate concerns about compliance, and any good CPA should be willing to work with you to address them rather than dismissing your questions. The fact that he's "flat-out refused" to follow IRS instructions is particularly concerning.

As a tax professional who's seen this exact scenario play out many times, I want to echo what others have said - your instincts are absolutely correct here. UPEs should be reported on Schedule E, and your CPA's refusal to provide clear documentation supporting his Schedule C position is a major red flag. What's particularly troubling is his claim that Schedule E reporting creates "immediate scrutiny." This is simply not supported by any IRS guidance or data. If anything, the mismatch between K-1 partnership items and Schedule C business expenses is more likely to trigger questions during processing. I'd recommend giving your CPA one final opportunity to provide written IRS authority supporting his position. Ask specifically for the regulation, revenue ruling, or other official guidance that says UPEs should go on Schedule C instead of Schedule E. When he inevitably can't provide this (because it doesn't exist), you'll have your answer about whether to continue working with him. Your concerns about signing a return that contradicts IRS instructions are completely valid. Don't let anyone pressure you into filing something you're not comfortable with - especially when multiple professionals here have confirmed your understanding is correct.