Bryan, by amending the 941s and 940 it should take care of the penalties. They would then amend the partnership and 1040s for any open year (within 3 years). If they can’t then they can’t. As long as the partners did pick up the income (whether incorrectly through W-2 or not) the IRS should not get too bent out of shape about it, but I see no reason why the three year window should be expanded to 6. Nothing you mentioned has any suggestion of fraud.