By Kenneth H. Bridges, CPA, PFS March 2012
Partnerships, LLCs, S-corps and trusts are required to distribute annual K-1s to their partners, members, shareholders and beneficiaries, respectively, reflecting their respective share of the taxable income or loss and other tax-related items of the entity.
Historically, this was done largely in paper format. However, in recent years the trend has increasingly been to distribute K-1s electronically (either via e-mail of a password protected pdf file or by download from a secure portal or website). The IRS has now issued a Revenue Procedure providing requirements for partnerships and LLCs which wish to furnish K-1s electronically rather than in paper format.
In order to comply with the Revenue Procedure, you must obtain the K-1 recipient’s consent to receive K-1s electronically rather than in paper format. The K-1 recipient’s consent can be provided electronically in any manner that reasonably demonstrates that the recipient can access the K-1 in the electronic format in which it will be furnished to the recipient, or the consent can be made in a paper document if the consent is confirmed electronically in a manner that demonstrates that the recipient can access the K-1 in the electronic format in which it will be furnished. In other words, if you plan to e-mail a pdf of the K-1, then getting the recipient’s consent via e-mail is probably sufficient; whereas if the K-1 recipient will need to download from your website, then the recipient should probably confirm consent at your website in the same manner.
In addition to obtaining the K-1 recipient’s consent, you must provide them certain required disclosures pertaining to their ability to otherwise or additionally receive a paper statement, the scope and 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.
It should be noted that the Revenue Procedure appears to only apply in situations where you wish to distribute K-1s electronically in lieu of distributing on paper. Accordingly, it appears that you can distribute K-1s electronically (e.g. for the convenience of the recipient) without complying with the terms of the Revenue Procedure, so long as you also timely distribute on paper. However, in an era of great concern over potential identity theft and safeguarding of personal information like social security numbers, it is probably prudent to obtain a K-1 recipient’s consent to electronic distribution prior to doing so, even in the absence of these IRS rules. Further, it is prudent to use passwords and other means to safeguard the recipient’s social security number (which is reflected on their K-1) and other confidential information.
Kenneth H. Bridges, CPA, PFS is a partner with Bridges & Dunn-Rankin, LLP an Atlanta-based CPA firm.
This article is presented for educational and informational purposes only, and is not intended to constitute legal, tax or accounting advice. The article provides only a very general summary of complex rules. For advice on how these rules may apply to your specific situation, contact a professional tax advisor.