Recent IRS Guidance on Electronic Filing of Partnership Schedules K-1

The BNA Tax and Accounting Center is the only planning resource to offer expert analysis and practice tools from the world's leading tax and accounting authorities along with the rest of the tax...

By Todd Simmens, CPA, J.D., LL.M., and Greg Martinelli, J.D.  

BDO USA, LLP, Woodbridge, NJ, and Philadelphia, PA, respectively

SUMMARY  

The IRS recently issued Rev. Proc. 2012-17 in order to set forth procedures under which a partnership (including an electing large partnership, as defined in §775) that furnishes Schedules K-1 (Form 1065) to its partners electronically will be treated as satisfying the requirements of §6031(b). Prior to the issuance of the new revenue procedure, there was no specific guidance as to whether the furnishing of Schedules K-1 electronically met these requirements.

BACKGROUND  

Under §6031(b), a partnership is required to furnish certain information on a Schedule K-1 to each partner before the day on which the return for the year is required to be filed.  Prior to issuance of Rev. Proc. 2012-17, the IRS had issued private letter rulings concluding that electronic delivery is sufficient where the taxpayer meets the consent and notification requirements applicable to certain other federal tax information statements, but has not otherwise provided guidance with respect to the electronic delivery of Schedules K-1. By complying with the requirements of Rev. Proc. 2012-17, a partnership that delivers Schedules K-1 to its partners in an electronic format in lieu of a paper format will be treated as having furnished Schedules K-1 to its partners in a timely manner. If a partnership fails to comply with the revenue procedure, it may be deemed to have failed to furnish Schedules K-1 to the recipients and may be subject to penalties under §6722.

REV. PROC. 2012-17'S REQUIREMENTS  

A partnership that wishes to furnish Schedules K-1 electronically under Rev. Proc. 2012-17 must meet a number of specific requirements.

RECIPIENT'S CONSENT/WITHDRAWAL OF CONSENT  

Each recipient must affirmatively consent to receive a Schedule K-1 in an electronic format; if a furnisher does not secure a recipient's consent as provided under the revenue procedure, the furnisher must provide the recipient with a paper Schedule K-1.

A recipient can consent to receive an electronic Schedule K-1 in one of two ways. First, the recipient can consent electronically "in a manner that reasonably demonstrates that the recipient can access the Schedule K-1 in an electronic format in which it will be furnished to the recipient." Second, the recipient can also consent in a paper document, provided that the consent is confirmed electronically by the recipient and that consent "reasonably demonstrates that the recipient can access the Schedule K-1 in the electronic format in which it will be furnished to the recipient."

A recipient may withdraw consent to receive an electronic Schedule K-1, but the effective date of the withdrawal is determined by the furnisher as either the date it receives the withdrawal or some other date. If a recipient withdraws consent to receive a statement electronically and the withdrawal takes effect before the Schedule K-1 is furnished electronically, the furnisher must provide the recipient with a paper Schedule K-1. A paper statement furnished after the statement's due date is considered timely if it is furnished within 30 calendar days after the date the withdrawal of consent is received by the furnisher.

A furnisher is required to notify each recipient prior to making a change to any hardware or software required to access Schedules K-1 if such change creates a "material risk" that a recipient will be unable to access a Schedule K-1. The notice must describe the revised hardware and software required to access the Schedule K-1 as well as advise the recipient that the furnisher will have to obtain a new consent from the recipient after the change is implemented.

FURNISHER'S DISCLOSURE STATEMENT  

Prior to (or at the time of) the recipient's consent to receive a Schedule K-1 in an electronic format, the furnisher must provide the recipient, either electronically or on paper, with a "clear and conspicuous" disclosure statement that must:

  •   Provide instructions to the recipient on how to access and print the disclosure statement;
  •   Advise the recipient that a Schedule K-1 will be furnished on paper if the recipient does not consent to receive it electronically;
  •   Inform the recipient of the scope and duration of the consent;
  •   Advise the recipient of any procedure for obtaining a paper copy of the Schedule K-1, which shall include whether a request for a paper Schedule K-1 will be treated as a withdrawal of consent;
  •   Advise that (i) the recipient may withdraw consent by writing (electronically or on paper) to the person or department whose name, mailing address, telephone number, and email address is provided in the disclosure statement, (ii) any withdrawal of consent is effective either on the date it is received by the furnisher or on a subsequent date determined by the furnisher and communicated to the recipient within a reasonable period of time after the furnisher receives the withdrawal, (iii) the furnisher will confirm the withdrawal and the date on which the withdrawal is effective in writing (either electronically or on paper), and (iv) any withdrawal of consent does not apply to a statement that was furnished electronically before the date on which the withdrawal of consent was effective;
  •   Inform the recipient of the conditions under which the furnisher will cease to furnish statements electronically to the recipient;
  •   Prescribe the procedures the recipient must follow in order to update its contact information as well as advise the recipient that the furnisher will advise the recipient of any change in the furnisher's contact information; and
  •   Describe the hardware and software required to access, print, and retain the Schedule K-1, which shall include the date the Schedule K-1 will no longer be available on the Web site (as well as a statement advising the recipient that the Schedule K-1 may be required to be printed and attached to a federal, state, or local income tax return).

SUBSTITUTE ELECTRONIC SCHEDULE K-1  

The substitute electronic Schedule K-1 must contain all the information required under the Internal Revenue Code, the regulations, and applicable forms and instructions. A furnisher will not need IRS approval to use a substitute Schedule K-1 if the electronic copy of the Schedule K-1 it furnishes to recipients is an exact copy of the official Schedule K-1.

If the furnisher posts a recipient's Schedule K-1 to a web site, the furnisher must notify the recipient via mail, electronic mail, or in person. Such notification must provide instructions on how to access and print the statement. The notice must include the following statement in capital letters (which is to be included in the subject line if the notice is sent via email): "IMPORTANT TAX RETURN DOCUMENT AVAILABLE." A notice that is undeliverable is subject to special rules. Also, the revenue procedure requires that a Schedule K-1 (or amended Schedule K-1) posted to a web site be accessible for a certain minimum time period.

The revenue procedure contains special rules for issuance of electronic amended Schedules K-1. If a furnisher amends a Schedule K-1 that was furnished to a recipient electronically, the furnisher must furnish the amended Schedule K-1 to the recipient electronically within 30 calendar days of the date the Schedule K-1 has been amended. In the event the initial Schedule K-1 was furnished through a web site posting, the furnisher must notify the recipient that it has posted the amended Schedule K-1 on the web site within 30 days of such posting in the manner described in the revenue procedure.

For more information, in the Tax Management Portfolios, see Manning, 710 T.M., Partnerships - Conceptual Overview,  and in Tax Practice Series, see ¶4010, Partnership Taxation - Overview.

© 2012 BDO USA, LLP. All rights reserved.