It has become increasingly common for a partnership to electronically send to each of its partners Schedule K-1, "Partner's Share of Income, Deductions, Credits, etc." Now the IRS has issued guidance under which a partnership may provide a Schedule K-1 (a "K-1") electronically (e.g., by secure email or through secure website access) to a partner only if (1) the partnership has received, in a prescribed manner, the partner's consent to receiving the K-1 and (2) the partnership complies with specific requirements. A partnership always has the option to provide partners with paper K-1s.
Rev. Proc. 2012-17 (the "Revenue Procedure"), which became effective on February 13, 2012, provides, in general, that in order to send out K-1s electronically, a partnership must meet the following requirements:
The recipient "must have affirmatively consented" to receive the K-1 in an electronic format (and the consent cannot have been withdrawn). The consent is made electronically, or on paper and confirmed electronically, in any manner that reasonably demonstrates that the partner can access the K-1 in the electronic format in which the partnership will issue it to the partner. (Additionally, if a partnership changes hardware or software used to access the K-1, the partnership must receive a revised consent if there is a material risk that the partner will not be able to access the K-1.) The Revenue Procedure provides three methods for obtaining consent:
- Consent Requested by Letter: The partnership sends the partner a letter stating that consent to receive the K-1 electronically may be given by accessing a website, downloading the consent form, and emailing the consent back to the partnership; the consent form on the website uses the same electronic format that the partnership will use to furnish the K-1.
- Consent through Secure Email: The partnership sends the partner a consent form by secure email, using the same electronic format the partnership will use to furnish the K-1.
- Consent through Secure Webpage: The partnership posts a notice on its website instructing users how to access a secure webpage and consent to receive K-1s electronically; partners will receive K-1s through the secure webpage in the same format as the consent documents.
No later than the time it receives consent, the partnership must provide to the partner (electronically or on paper) a clear and conspicuous statement ("Statement") disclosing the following:
- That a K-1 will be furnished on paper if the partner does not consent to electronic receipt
- The scope and duration of the consent (e.g., the consent remains in effect for all K-1s until the partner notifies the partnership in writing, by letter or email, that the partner has withdrawn consent effective as of the date of delivery of the withdrawal of consent)
- How a partner may obtain a paper copy of the partner's K-1, and whether a request for a paper K-1 will be treated as a withdrawal of consent
- Terms of withdrawal of consent, including:
- That a partner may withdraw consent by writing electronically or by letter to the person whose contact information is provided in the Statement;
- When a withdrawal of consent takes effect;
- That the partnership will confirm, in writing, the effective date of withdrawal; and
- That a withdrawal of consent does not apply to a K-1 that was properly furnished electronically before the date the withdrawal of consent takes effect
- The conditions under which a partnership will cease furnishing K-1s electronically to a partner
- The procedures for updating the partner’s contact information, and any change in the partnership's contact information
- A description of the hardware and software required to access, print, and retain the K-1; the date that the K-1 will no longer be available on the website (if a website is used); and the fact that the K-1 may be required to be printed and attached to a federal, state, or local income tax return
- How to access and print the Statement
The electronic version of the K-1 must meet all the requirements applicable to a K-1 and substitute statements.
The partnership must notify the partner if the K-1 is posted on a website. The notice must provide instructions on how to access and print the K-1 and must include the following statement in capital letters, "IMPORTANT TAX RETURN DOCUMENT AVAILABLE." If notice is provided via email, those words must be the subject line of the email. If electronic notice is returned as undeliverable, and the correct email address cannot be obtained from the partnership's records or from the partner, the partnership must provide the notice by mail or in person within thirty calendar days after the emailed notice was returned.
The Revenue Procedure provides rules for notifying a partner of an amended K-1 and providing the amended form to the partner.
A K-1 (original or amended) which is provided on a website must remain on the website for the later of (a) twelve months after the end of the tax year to which the form relates or (b) six months after the K-1's issuance.
The partnership must provide a partner with a paper K-1 within thirty calendar days after the partnership receives the partner's withdrawal of consent to electronic receipt.
If the IRS deems the failure to comply with the Revenue Procedure as a failure to furnish a K-1, penalties may apply and, depending on the circumstances, the penalties can be very significant.
Although the Revenue Procedure describes the delivery of K-1s by secure email or a secure webpage, there is no mention of any penalties for failure to use a secure medium. The only penalty referred to in the Revenue Procedure is the penalty for failure to furnish a K-1. Thus, the importance of timely delivery of the K-1, despite the roadblocks created by the Revenue Procedure, cannot be overemphasized. The use of secure email or a secure webpage for the transmission of personal identification information is a best practice and all partnerships furnishing such information should do their very best to adhere to it.
For more details, please see the Revenue Procedure, which is available at this link: http://www.irs.gov/irb/2012-10_IRB/ar10.html
Should you have any questions concerning this Tax Flash, please contact your Marcum Tax Professional.