In recent years, many partnerships have transitioned to providing Schedule K-1s to their partners in an electronic format, rather than delivering paper copies by hand or by mail. Electronic delivery options include attaching the Schedule K-1 to an email or posting it on a secure website or investor portal. Historically, the switch to an electronic format has generally been made to reduce processing time and expense.
However, as a result of the COVID-19 environment, many more partnerships are expected to make the switch to electronic delivery for safety and logistical reasons.
Partnerships may be surprised to learn that in 2012, the IRS issued very specific procedures that must be followed for the electronic delivery of Schedule K-1s (Revenue Procedure 2012-17). If these procedures are ignored, the partnership may be treated as not having timely furnished Schedule K-1s to its partners — and significant penalties could be assessed by the IRS.
Note that these rules only apply to the electronic delivery of Schedule K-1s issued by partnerships and LLCs taxed as partnerships. Thus, they do not apply to the electronic delivery of K-1s issued by S corporations, estates or trusts. They also do not apply to partnerships that issue both a paper and electronic format Schedule K-1 to each of their partners.
The mandatory procedures cover disclosure, consent and delivery and apply to both original and amended Schedule K-1s. Key elements of the procedures are listed below.
You must provide a clear and conspicuous statement, in either paper or electronic format, to each partner prior to their consent to receive their Schedule K-1 in an electronic format. That statement must include the following disclosures:
- Paper statement default: A paper copy of the Schedule K-1 will be issued unless the partner consents to receive it electronically
- Scope and duration of consent: Indication of whether the partner’s consent only applies to the current year’s Schedule K-1, or also to all future Schedule K-1s until consent is withdrawn (the decision is at the partnership’s discretion)
- Procedure for obtaining a paper copy after consenting to electronic receipt and whether that request will be deemed a withdrawal of consent going forward
- Details and ramifications of how to withdraw consent
- Conditions under which a partnership will stop furnishing Schedule K-1s electronically (e.g., when a partner’s interest is sold or transferred)
- Instructions for how the partner must update their contact information
- Contact information for the individual that is designated to receive consents, withdrawals of consent and contact information changes from the partners
- Information regarding the hardware and software the partner will require to access and print their Schedule K-1, the date the Schedule K-1 will no longer be available to them on the website or portal, and the fact that the Schedule K-1 may be required to be printed so that it can be attached to their income tax return
- The partner must affirmatively consent to electronic receipt of their Schedule K-1
- The consent may be made electronically in a manner that demonstrates the partner can access the Schedule K-1 in the proposed electronic format (using email or accessing the website or portal); the consent can also be made in writing, but it then must still be confirmed electronically
- Before the partnership changes the hardware or software required to access the Schedule K-1, the partnership must notify its partners of the change if it creates a material risk that a partner will no longer be able to access the Schedule K-1, and then, after making such change, the partnership must obtain a new consent from each of the partners to receive their Schedule K-1 in an electronic format
- Withdrawal of consent:
- A partner can withdraw their prior consent, but they must do so in writing, either in paper or electronic format
- Upon receipt of such a withdrawal request, the partnership must provide written confirmation of withdrawal, including the effective date
- Note that each time there is an new partner — as a result of an existing partner’s sale, exchange, gift or death or a new partner acquiring an interest directly from the partnership — the partnership will be required to obtain consent from that new partner
- The electronic version of the Schedule K-1 must contain all required information
- The electronic version must comply with the instructions applicable to preparation of the Schedule K-1 and all revenue procedures and publications relating to providing substitute statements
- If the Schedule K-1 is posted on a website or portal:
- The partnership must notify the partner by mail, email or in person when the posting has occurred and provide instructions on how to access and print
- That notice must include the following statement in capital letters, “IMPORTANT TAX RETURN DOCUMENT AVAILABLE” — if the notice is provided by email, that statement must be on the email’s subject line
- The Schedule K-1 must be retained on the website or portal for 12 months following the end of the partnership’s related tax year or six months following the date the Schedule K-1 was issued, whichever is later
How can Wipfli help?
If you have questions or want further details, we can help. We can also assist with the preparation of your disclosure and consent statements. Contact us to get started.
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