Whose Responsibility Is It To Distribute K-1s?

Distributing K-1s** – Whose Responsibility Is It Anyway?

It is common knowledge that taxpayers like partnerships, LLCs, S-Corporations and Trusts are required to distribute annual K-1’s to their partners, shareholders, and beneficiaries, respectively reflecting their share of the taxable income or loss and other tax related items.

For our many CRE clients, the process of delivering K-1s is laborious. Managing investor expectations during the preparation, delivery, and communications, as well as investor support of hundreds if not thousands of K-1s across many states and countries can be very time consuming.

Over the years, IRS rules have been implemented to assure the secure distribution of these K-1s by the taxpayer (Keyword – Taxpayer), especially in today’s world of electronic delivery.

The IRS issued a Revenue Procedure providing requirements for these taxpayers to furnish K-1s electronically. In order to comply the taxpayer must receive consent from the K-1 recipient to receive K-1s electronically. The consent has to demonstrate that the K-1 recipient can access the K-1 in the electronic format in which it will be furnished. For example, if the taxpayer plans on e-mailing the K-1s, each K-1 recipient must provide consent to receive by email. If the taxpayer plans on furnishing the K-1s using it portal, the K-1 recipients must confirm that it can access the portal.

In addition to obtaining the K-1 recipient’s consent, the taxpayer must provide them certain required disclosures pertaining to their ability to otherwise or additionally receive a paper statement, the scope of the duration of their consent, post-consent requests for a paper statement, withdrawal of consent, notice of termination, updating of information, and hardware and software requirements. Due to the high volume of “identify theft” and electronic fraud, it is important for the taxpayer to assure the safeguarding of personal information such as the SS#, and it would be prudent for the taxpayer to comply with electronic consents, even if they intend to mail copies of the K-1s.

Using snail mail, on the other hand, also has its challenges. Outside of hand delivery, it is difficult to know who may have access to this information, for reasons, such as a change in address that was not communicated, or access to the K-1 by a disgruntled individual, like a separating or divorced spouse, and children. Assuring, the K-1’s access to their information would also require the K-1 recipient’s instructions to safely receive their K-1, such as requiring a signature or placing tracking information on the K-1. Many investors have multiple residences and business addresses, and the K-1 information may include the K-1 recipient’s prior year’s preference or may no longer current.

Obviously, the better solution for the taxpayer is “automation.” Investing in a fully integrated and secure software allowing their investors to access their information, update their profile and download their tax documents.

For all the reasons mentioned above, it is the Fuoco Group’s and TFG Accounting and Tax’s steadfast policy NOT TO distribute K-1s on behalf of the taxpayer.

CONTACT US: Distributing K-1s is the taxpayer’s responsibility. It is also their responsibility to ensure that the information on the K-1 is the most recent information, and it is their responsibility to comply with the IRS Revenue Procedure requiring consent. If you have questions regarding this information or need assistance in order to remain compliant, contact our team at CPA@fuoco.com.