IRS Guidance on the Distribution of Electronic Schedules K-1

Published by Tonya Phongsavanh on Sunday, April 1, 2012
Journal thumb April 2012

Internal Revenue Service Revenue Procedure (Rev. Proc.) 2012-17, effective February 13, 2012, provides the rules that partnerships must follow if they wish to distribute Schedules K-1, Partners’ Share of Income, Deductions, Credits, etc., (K-1s) electronically in lieu of paper format. Rev. Proc. 2012-17 does not apply to a partnership that distributes paper copies of the K-1s to its partners by the deadline (regardless of whether the partnership also sent electronic copies).

Consent
A partnership can distribute K-1s electronically in lieu of paper format only if the recipient’s consent has been provided in the same electronic format in which the K-1s will be distributed.  For example, if the partnership plans to distribute K-1s by uploading to a secure site for the recipient to download, then the consent form must be uploaded to the same secure site for the recipient to download. A new consent is not required if a partnership experiences a technical termination under Internal Revenue Code Section 708(b)(1)(b).  

If there is a change in the hardware or software needed by the recipient to access the K-1 and this change creates a material risk that the recipient will no longer be able to access the K-1, then the partnership must notify the recipient of the change before the change is made. After the change is made, a new consent form will be required in the new electronic format in which the K-1s will be distributed.

Required Disclosures
Before or at the same time as the partnership obtains the recipient’s consent, the partnership must provide the recipient with certain disclosures:  

  • Paper statement. The partnership must disclose that the K-1 will be distributed to the recipient via paper copy if the recipient does not consent to receive it electronically.
  • Scope and duration of consent. The partnership can decide, for example, whether the consent applies to only the current year K-1, or all subsequent years until either the consent is withdrawn or the recipient withdraws from the partnership.
  • Post-consent request for a paper statement. The partnership must disclose to the recipient the procedure for obtaining a paper copy of the K-1, and whether or not this request is considered a withdrawal of consent.
  • Withdrawal of consent. The recipient may withdraw its consent by writing (electronically or on paper) to the partnership. The partnership may provide that a withdrawal of consent takes effect either on the date it is received by the partnership, or on a subsequent date determined by the partnership and communicated to the recipient within a reasonable period of time after the partnership receives the withdrawal. The partnership must also confirm the withdrawal of consent and the date on which it takes effect in writing (either electronically or on paper). A withdrawal of consent does not apply to a statement that was furnished electronically in the manner described in Rev. Proc. 2012-17 before the date on which the withdrawal of consent takes effect.
  • Notice of termination. The partnership must disclose to the recipient the conditions that would cause the partnership to cease electronic distribution of the K-1s.
  • Updating information. The partnership must disclose the protocol for updating contact information by the recipient. The partnership must also disclose that it will inform the recipient of any change in the partnership’s contact information.
  • Hardware and software requirements. The partnership must provide clear instructions regarding how the recipient can access and print its K-1, as well as a description of the hardware and software that will be required to access, print and retain the K-1. If the K-1 is uploaded to a secure website, the partnership must also state how long the K-1 will be available on that site (a minimum of 12 months following the end of the partnership’s tax year, or six months after the K-1 is issued, whichever is later). The partnership must also disclose that the recipient may need to attach copies of its K-1 to federal, state or local income tax returns.

Notice that the K-1 is Available
The partnership must notify the recipient when the K-1 is available. The notice must provide instructions on how to access and print the statement, and must include the following statement in capital letters, “IMPORTANT TAX RETURN DOCUMENT AVAILABLE”; if the notice is provided via secure e-mail, the emphasized statement must be in the subject line of the secure e-mail. If the secure e-mail is returned as undeliverable, the partnership must furnish a paper copy to the recipient within 30 days following the return of the e-mail.

Amended Schedule K-1
If the partnership amends a K-1 that was distributed to the recipient electronically, the partnership is required to furnish the amended K-1 to the recipient electronically within 30 days following the amendment date.

Paper Statements After Withdrawal of Consent
The partnership must distribute the recipient’s K-1 via paper copy if the recipient withdraws its consent before the K-1 has been distributed. An amended K-1 is considered to be a new statement when the withdrawal occurs between the date the original K-1 was distributed and the date the amended K-1 is distributed. Distribution of a paper copy K-1 after the due date will only be considered timely if it was distributed within 30 days after the date the withdrawal of consent was received by the partnership.

Failure to Furnish
Failure to distribute K-1s to partners by the deadline (April 17 for 2012) via paper format or electronic format in compliance with Rev. Proc. 2012-17 will result in a penalty under Internal Revenue Code Section 6722.

For more information, please contact Tonya Phongsavanh, CPA, at tonya.phongsavanh@novoco.com.