New IRS Requirements for Electronic Distribution of K-1s

Lisa Henderson – Tax Services

The IRS recently issued specific procedures for the electronic delivery of Schedules K-1 by partnerships. Partnerships are required to furnish partners with their Schedule K-1 (Partner’s Share of Income, Deductions, Credits, etc.) on or before the due date of the partnership tax return. Failing to make this timely delivery subjects the partnership to penalties for late issuance. Furnishing Schedules K-1 to partners in an electronic format can be a much more efficient process than mailing or delivering by hand. However, it is important to note the IRS requirements in order for the electronic delivery of a Schedule K-1 to be considered timely furnished to the recipient.

Requirements for Delivery and Consent

  • The partner must affirmatively consent to receive the K-1 in electronic format.
  • The consent may be made electronically in any manner that reasonably demonstrates the partner can access the K-1 in the electronic format in which it will be furnished. Alternatively, the consent may be made in a paper document if it is confirmed electronically by the partner and that consent reasonably demonstrates he can access the K-1 in the electronic format in which it will be furnished.
  • If a change in hardware or software required to access the K-1 creates a material risk that the partner won’t be able to access it, the partnership must, before changing the hardware or software, notify the partner. The notice must describe the revised hardware and software required to access the Schedule K-1. After changing the hardware or software, the partnership must obtain a new consent or confirmation from the partner to receive the Schedule K-1 electronically.
  • The electronic version of the K-1 must contain all required information and comply with the instructions applicable to the K-1 and applicable revenue procedures and publications relating to substitute statements to recipients.
  • The partnership must notify the partner if the K-1 is posted on a website. The notice may be delivered by mail, email or in person. The notice must provide instructions on how to access and print the K-1. The notice must include the following statement in capital letters, “IMPORTANT TAX RETURN DOCUMENT AVAILABLE.” If the notice is provided by email, the foregoing statement must be on the email’s subject line.

Whether a partnership furnishes Schedules K-1 via an attachment to a secure email or via an electronic download from a secure Web site, it should notify the partners of this option and then obtain their consent using the identical electronic process. This demonstrates the partner’s ability to access the attached or posted Schedule K-1. Posted Schedules K-1 must be retained on the site for twelve months following the end of the partnership’s related tax year or six months following the date of the Schedule K-1 issuance, whichever is later.

Requirements for Disclosure

Before or at the time of a partner’s consent, the partnership must provide him a clear and conspicuous statement containing the following disclosures:

  1. Paper statement default. The Schedule K-1 will be furnished on paper if the partner does not consent to receive it electronically.
  2. The scope and duration of the consent. For example, the partnership must inform the partner whether the consent applies to each K-1 required to be furnished after the consent is given until it is withdrawn, or only to the first K-1 required to be furnished after the consent is given.
  3. Any procedure for obtaining a paper copy of the partner’s K-1 after he consents to electronic provision, and whether a request for a paper K-1 will be treated as a withdrawal of consent.
  4. Details of how to withdraw consent, including ramifications of withdrawal.
  5. The conditions under which a partnership will cease furnishing K-1s electronically to the partner (for example, upon withdrawal from the partnership).
  6. Procedures for updating the information needed by the partnership to contact the partner, and any change in the partnership’s contact information.
  7. The hardware and software required to access, print and retain the K-1, and the date when the K-1 will no longer be available on the website. The partnership must inform the partner that the K-1 may be required to be printed and attached to a federal, state or local income tax return.

The new IRS procedural requirements also include specifications for the delivery and accessibility of amended Schedules K-1, and for the withdrawal of consent to receive a Schedule K-1 electronically.

For more information about these new requirements, please contact Lisa Henderson or Shelley Chen with our Tax Services practice.