Posted by: Howard Kass, CPA, CGMA, AEP®
As society continues to move away from paper-based documents toward electronic forms of those documents, one of the challenges facing businesses is how to strike the proper balance between the efficient delivery of such documents and the protection of the rights of those who may not choose to receive such documents digitally. Over the past several years, the number of partnerships and LLCs that offer electronic delivery of K-1s to their partners and members has increased significantly and, in light of this, the IRS has put rules in place to regulate the process of that electronic delivery. The purpose of this message is to inform you of those procedures, as stipulated by the IRS, and to explain how that affects our ability to facilitate the electronic delivery of K-1s to your partners, if you so choose.
As suggested above, the IRS has an interest in protecting the rights of those who still prefer to receive their tax documents in paper form. So, you will note that there are rules and procedures described below which are intended to meet that goal, as well.
Generally speaking, a partnership or LLC (furnisher) is required to furnish a written statement on Schedule K-1 to the partner or member (recipient). While the default form of the K-1 is paper-based, the partnership or LLC may furnish the Schedule K-1 to a partner or member in an electronic format, in lieu of a paper format. In order for the partnership or LLC to do this, the recipient must have affirmatively consented to receive the Schedule K-1 in an electronic format.
The consent may be made electronically in any manner that reasonably demonstrates that the recipient can access the Schedule K-1 in the electronic format in which it will be furnished to the recipient. In virtually all cases, this format will be as a PDF file. Alternatively, the consent may also be made in a paper document if that consent is subsequently confirmed electronically by the recipient, and that consent reasonably demonstrates that the recipient can and will be able to access the Schedule K-1 in the electronic format in which it will ultimately be furnished to the recipient.
In addition to having a procedure for a recipient to provide their consent to receive their K-1 electronically, the partnership or LLC must provide a process for the recipient to withdraw their consent. Note that the consent requirement will not be satisfied if the recipient withdraws the consent and the withdrawal takes effect before the K-1 is furnished.
There are also disclosures you must make to your partners and members in requesting their consent. Here is a sample letter for you to adapt to your specific circumstances and send to your K-1 recipients requesting their consent, as well as to provide the required disclosures.
How does this affect our ability to send K-1s electronically to your partners and members on your behalf? In order for us to directly deliver K-1s to your partners and members, the following steps must be followed:
Any partner or member who does not follow the above procedure will be ineligible to receive their K-1 electronically and must, instead, receive it by paper. Please note that not all partners must receive their K-1s from you in the same form. Some partners can choose to receive a paper K-1 while others receive theirs electronically. Please note that penalties may apply if K-1s are delivered electronically without first receiving consent as outlined in this notice.
If you would like us to provide only paper copies of schedules K-1 for your partners and members, there is nothing further you need to do. Issuance of paper K-1s is our default procedure.
If, on the other hand, you intend to deliver K-1s to your partners and members electronically, it is important that you begin your consent process immediately. We will be pleased to consult with you to adapt this procedure and documentation to your particular circumstances.
If you have questions on this, or any other tax or business related issue, please contact the experts at Zinner & Co.