Is a 1065 Partnership Return required?

I do taxes for someone who runs a store with a friend. They don't make huge money, but they split income and expenses.

To me, it looks, sounds, and smells like a partnership.

The problem is, the friend (who is not my client) handles the books with their accountant. The way they (the friend and the friend's accountant) tell my client to do it, is split the income and expenses on Schedule C.

I've been telling the friend: this is a partnership, and you guys need to prepare a 1065. You don't report this on Schedule C. You should get a K-1 that reports your share, and I use that to prepare your individual return.

I've been trying to figure out why the friend's accountant would say otherwise. I know in the 1065 instructions that a "joint undertaking" to share expenses isn't a partnership. But this is more than that -- they run a store together and share income too. They barely break even, and don't make huge income in general. Still, a partnership is a partnership.

My questions are:
1) Am I right that this is a partnership and 1065 is required?
2) What can you do if the partner who controls the books doesn't seem to care about filing a 1065?
3) Will the IRS care if the income and expenses get reported on Schedule C? It's not as if less tax is being paid.
4) Anything else I can to do cover my ***?

I do taxes for someone who runs a store with a friend. They don't make huge money, but they split income and expenses.

To me, it looks, sounds, and smells like a partnership.

I agree with you. Smells like a general partnership.

See Treas Reg §301.7701-1(a)(2) for the general rule and then Treasury Reg §1.761-2 for exceptions, which your client doesn't seem to fit.

Yeah, pretty tough to just say it's a joint venture when it's an active biz.

Can one member "bind" the business to supplier contracts?

My questions are:
1) Am I right that this is a partnership and 1065 is required? [Yes, although the accountant might be a limited partner and not have SE tax?]
2) What can you do if the partner who controls the books doesn't seem to care about filing a 1065? [Send a letter to the client explaining your position referencing ManVsTax Code Sections and the penalties for noncompliance.]
3) Will the IRS care if the income and expenses get reported on Schedule C? It's not as if less tax is being paid. [Don't place bet's on audits, your job is to be more likely than not.]
4) Anything else I can to do cover my ***? [See 2]

I'd say IRS would care when they can assess the penalty for non-compliance....

I'd say IRS would care when they can assess the penalty for non-compliance....

That would be a good reason, but I wonder if Rev Proc 84-35 might help out.

They're reporting timely (I assume), albeit incorrectly on Sch C vs Sch E.

[Yes, although the accountant might be a limited partner and not have SE tax?]

If it's a general partnership, with no partnership agreement, it would be hard to argue that right?