Electronic Schedules K-1

From the IRS

The IRS issued Rev. Proc. 2012-17, which contains rules partnerships must follow if they want to supply Schedules K-1, Partner’s Share of Income, Deductions, Credits, etc., electronically. The guidance is effective February 13, 2012.

Failure to furnish Schedule K-1 as required in Rev. Proc. 2012-17 can be deemed a failure to furnish a Schedule K-1 to the recipient, which is subject to penalties under Sec. 6722 for failure to furnish correct payee statements. Paper and electronic Schedules K-1 are required to be provided to recipients by the due date of Form 1065, U.S. Return of Partnership Income, which, for calendar-year partnerships, is April 15 (April 17 for 2012).

Consent to Receive an Electronic Schedule K-1

A person required to furnish Schedules K-1 to partners (furnisher) can furnish it in an electronic format provided the recipient has affirmatively consented to receive it in an electronic format, which can be accomplished by having the recipient consent electronically in a way that demonstrates that the recipient can access the Schedule K-1 in the format in which it will be supplied, or by paper, provided that the consent is confirmed electronically by the recipient in a way that reasonably demonstrates that he or she can access the document in the electronic format in which it will be furnished.

The IRS has three examples of the methods for obtaining consent. The first example involves the furnisher’s sending the recipient a letter stating that the recipient may consent to receive the Schedule K-1 electronically by accessing the website, downloading the consent form, and emailing the consent form to the furnisher, provided the website uses the same electronic format that will be used to furnish the Schedule K-1. The second example involves sending the consent form by secure email, again using the same electronic format that will be used to send the Schedule K-1. The third example has the furnisher posting a notice on its website explaining how recipients can access a secure webpage and consent to receive the statement electronically in the same format as the consent documents.

Withdrawal of Consent

The consent requirement will not be satisfied if the recipient withdraws the consent and the withdrawal takes effect before the statement is furnished, but the furnisher is permitted to require that a withdrawal be effective either the day it is received or at a later date that the furnisher communicates to the recipient in a reasonable time after receiving the withdrawal. The furnisher can provide that a request for a paper statement is treated as a withdrawal of consent.

Paper Statement After Withdrawal of Consent

A furnisher must provide a paper Schedule K-1 if the recipient withdraws consent and the withdrawal is effective before the electronic form is sent. An amended Schedule K-1 is considered a new statement for purposes of the consent requirement if the consent withdrawal occurs after the original Schedule K-1 was furnished and before the amended form is furnished. A paper statement furnished after the due date is considered timely if it is furnished within 30 calendar days of the date the furnisher received the consent withdrawal.

Change in Hardware or Software

If a furnisher changes its hardware or software and the change creates a material risk that the recipient will not be able to access the Schedule K-1, the furnisher must notify the recipient before it changes the hardware or software. The furnisher must explain that a new consent is required in the new electronic format to establish that the recipient is able to access the Schedule K-1 in that format.

Furnisher’s Required Disclosures

Before or at the same time as the furnisher obtains the recipient’s consent, the furnisher must provide an electronic or paper disclosure with the following information:

• That the Schedule K-1 will be provided on paper if the recipient does not consent to electronic delivery.
• The duration of the consent—whether the consent will apply to future Schedules K-1 until the consent is withdrawn or only to the Schedule K-1 that the recipient is consenting to receive currently.
• The procedure to be used in the future to request a paper statement and whether the furnisher will treat such a request as a withdrawal of consent.
• The procedures for withdrawing consent must be contained in the disclosure, including the contact information, the date a withdrawal will be effective (date of receipt or later), the requirement that the furnisher must confirm the withdrawal and the date it takes effect in writing electronically or on paper, and that a withdrawal of consent will not apply to a statement furnished electronically in the manner described in Rev. Proc. 2012-17 before the date on which the withdrawal of consent takes effect.
• The conditions in which the furnisher will cease providing electronic statements (such as withdrawal from the partnership).
• The procedures for updating a recipient’s contact information and that the furnisher will notify recipients of any change in the furnisher’s contact information.
• A description of the hardware and software needed to access, print, and retain the Schedule K-1, the date after which the schedule will not be available on the website, and the information that the recipient may need to attach copies to federal, state, or local income tax returns.

Notice that Schedule K-1 Is Available

If the Schedule K-1 is posted on a website, the furnisher must notify the recipient by mail, email, or in person. The notice must explain how to access and print the Schedule K-1 and must include this statement in capital letters: “IMPORTANT TAX RETURN DOCUMENT AVAILABLE,” which must be in the subject line if the notice is sent by email. If the notice is sent electronically and returned as undeliverable and the furnisher cannot obtain a corrected address, the furnisher must provide a Schedule K-1 by mail or in person within 30 calendar days after the electronic notice is returned.

A Schedule K-1 or an amended Schedule K-1 must be retained on the website until the later of 12 months after the end of the partnership’s tax year or six months after the form is issued.

Amended Schedule K-1

Any Schedule K-1 that was originally furnished electronically and then amended must be furnished electronically within 30 calendar days of the date that it was amended. A Schedule K-1 originally furnished through a website and then amended must be posted on the website, and the furnisher must notify the recipient about posting the amended Schedule K-1 within 30 calendar days of the posting. Amended Schedules K-1 or the notice of the amendment must be provided by mail or in person if an electronic notice of the original or amended Schedule K-1 was returned as undeliverable and the recipient has not provided a new email address.