Form 8594 Part III is the supplemental statement that amends the original allocation, triggered by any event that changes total consideration after the original filing. Because agency deals so often carry earnouts, holdbacks, and working-capital true-ups, the original allocation is rarely the final one — and a buyer who treats the closing-day filing as the end of the story will miss the amendments the IRS expects. Knowing which events trigger Part III, which don't, and how to coordinate the amendment with the seller is what keeps the cumulative allocation clean and audit-defensible.
§ 01 · What triggers Part IIIFive events, plus three re-characterizations.
| Trigger type | Examples |
|---|---|
| Consideration change (five) | Working-capital / locked-box reconciliation; earnout payments; indemnification offsets; escrow releases; contingent payments |
| Re-characterization (three) | IRS examination adjustments; post-closing disputes; discovered errors |
The five consideration-change triggers are the common ones in agency deals: working-capital adjustments and purchase-price true-ups, earnout payments that vary from the expected value originally booked, indemnification offsets against seller notes, escrow releases (conditional escrows are excluded from the original consideration and added when released), and additional contingent payments like rollover-equity adjustments or put/call exercises. The three re-characterization triggers are different in kind — an IRS examination adjustment, a post-closing dispute resolved by arbitration or court order, or a discovered error requiring correction.
§ 02 · What doesn't trigger itThree non-events.
Three events that feel like they should trigger Part III don't. Depreciation and amortization in the normal course recover basis but don't change the allocation. Subsequent dispositions are a new tax event, not an amendment to the original deal. And book-accounting impairment affects financial statements but not tax basis, so it has no bearing on the 8594. Knowing the non-events matters as much as knowing the triggers, because over-filing Part III for routine amortization or an impairment charge creates noise in the record and invites questions that the actual triggers don't.
§ 03 · Timing and methodologyThe year-of-event rule.
Part III is filed with the return for the tax year the adjustment event occurred — not the original deal year. An original 2025 deal with a working-capital true-up in January 2026 puts the Part III on the 2026 returns filed in 2027. Multiple adjustments in one year can be consolidated into a single Part III filing for that year — but file each year separately; aggregating multiple years into one late filing is a common mistake.
Three allocation-methodology choices govern how an adjustment flows across the classes: pro rata across all classes (the simplest), residual to Class VII (the default if the parties don't specify, since goodwill is the residual), or specific class allocation (tying the adjustment to specific assets — an accounts-receivable-driven working-capital variance flows to Class III). The purchase agreement should specify the methodology, because leaving it to post-closing negotiation invites disputes at exactly the moment both sides have the least incentive to agree. Earnout variance follows the same discipline: the original 8594 books the earnout at expected value, and each year's actual payment is reflected in that year's Part III — a three-year up-to-$600K earnout paying $150K, $200K, and $250K generates three Part III filings tracking $17K, $67K, and $116K of cumulative excess over the original expectation.
§ 04 · The running logKeeping it reconcilable.
The buyer should maintain a running allocation log: the original allocation (the purchase-agreement exhibit), every adjustment event (date, amount, type), every Part III filing (dates, amounts), and the current total consideration and class allocations. The log is what keeps the cumulative allocation reconcilable and audit-defensible across the life of the deal — without it, a multi-year earnout with annual true-ups becomes an unreconstructable tangle by year three. The coordination provision belongs in the purchase agreement too: a joint review obligation, 30-day pre-filing draft sharing, good-faith consultation on disagreement, and a 60-day dispute path to a binding determination by an independent tax accountant. Five mistakes recur — failing to file when triggered (treating an adjustment as mere "accounting"), inconsistent buyer-seller allocation (the same mismatch risk as the original filing), aggregating multiple years into one late filing, ignoring earnout variance, and using the wrong methodology — and the running log plus the coordination provision are what foreclose all five.
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Terminology on this shelf
- Part III
- The Form 8594 supplemental statement amending the original allocation when total consideration changes.
- Consideration-change triggers
- The five events — working capital, earnout, indemnification offset, escrow release, contingent payment — that require Part III.
- Year-of-event rule
- Part III is filed with the return for the year the adjustment occurred, not the original deal year.
- Allocation methodology
- Pro rata, residual to Class VII, or specific class — the basis for spreading an adjustment, set in the purchase agreement.
- Earnout variance tracking
- Booking the earnout at expected value, then reflecting each year's actual payment in that year's Part III.
- Running allocation log
- The buyer's cumulative record of allocation, adjustments, and filings — the audit-defensibility tool.