K-1 Compliance Update

With the creation of new operating divisions through the IRS's restructuring, new compliance initiatives are being put into place. The Service's Small Business and Self-Employed Division (SB/SE) is developing a matching process for the income listed on Schedule K-1. The SB/SE Division handles individuals filing Schedules C, E and F, and all other businesses with assets under $5 million. Currently, the IRS is focusing its K-1 matching on Form 1041, U.S. Income Tax Return for Estates and Trusts, based on research that indicates that the underreporting of trust income is a fast growing area. For 2001, the SB/SE will test the matching of Schedule K-1s for partnerships and S corporations to ensure the data is captured and matched. For 2002, the Service is planning more comprehensive Schedule K-1 matching.

Although document matching is nothing new, practitioners are concerned that the matching of K-1s might present more complexities than the matching of Forms 1099 and W-2. Although many individuals and small businesses may have difficulty with properly completing a K-1, all the relevant information is generally reported. This may create additional administrative burdens in responding to Service notices and audits. The initiative is being put in place, however, and the goal is to increase voluntary taxpayer compliance in reporting K-1 income.

Partnership Electronic Filing Requirement

Sec. 6011(e) requires large partnerships (those with more than 100 partners at any one time during the year) to file partnership returns on magnetic media, which includes electronic filing for tax years ending on or after Dec. 31, 2000. Announcement 2000-101 refers to IRS Publication 1524, which excludes certain partnership returns from the electronic filing requirement and provides procedures for requesting a waiver. For tax year 2000, the IRS has excluded from the electronic filing requirement partnerships with the following types of returns:

• Fiscal-year filers;
• Final-year returns;
• Short-year returns;
• Foreign-address partnerships; and
• Delinquent and amended returns.

The regulations permit the Service to waive the electronic filing requirement if a partnership demonstrates that a hardship would result. Partnerships requesting a waiver for tax years ending on Dec. 31, 2000 must file a written request containing information de-tailed in Announcement 2000-101. As the IRS continues to expand its electronic filing requirements, large partnerships need to plan to meet them.

From Gabrielle Kaufman, CPA, Rockville, MD