Hardship Waiver from Electronic-Filing Requirement for Large Partnerships

Recently, the IRS determined that K-1 information reported by partners, S shareholders and beneficiaries was not accurate in approximately 15% of the cases it reviewed. To boost efficiency and enhance compliance and document-matching capabilities, the Service now requires partnerships with more than 100 partners to file their partnership returns electronically. The rule applies to tax years ending after Dec. 30, 2000. The IRS will assess a $50 penalty for each Schedule K-1 over 100 if a partnership fails to comply. However, it might grant a waiver from electronic filing if the partnership can establish hardship in an application made in accordance with applicable revenue procedures authorized by Regs. Sec. 301.6011-3(b). In addition, certain types of partnership returns are exempt from the electronic-filing requirement.

How to Request a Waiver from the Electronic-Filing Requirement

Ann. 2002-3, which provides guidance on how to request a waiver for the tax year ending Dec. 31, 2001, directs partnerships to file a written request containing the following information:

1. A notation at the top of the request stating (in larger letters): "Form 1065 e-file Waiver Request: IRC Section 6011(e)(2)."

2. The partnership's name, Federal tax identification number and mailing address.

3. The tax year for which the taxpayer is requesting the waiver.

4. A detailed statement that lists:

—The steps the partnership took in attempting to meet its requirement to file its return electronically.

—The reason(s) why the steps were unsuccessful.

—The hardship that can result, including any incremental cost to the partnership of complying with the electronic-filing requirements. Incremental costs are costs above and beyond the costs to file on paper. The taxpayer must support the incremental costs with a detailed computation, including a schedule detailing the costs to file on paper and the costs to file electronically.

5. A statement as to what steps the partnership will take to assure its ability to file its partnership return electronically for the next tax year.

6. The following statement, signed by the tax-matters partner:

"Under penalties of perjury, I declare that the information contained in this waiver request is true, correct and complete to the best of my knowledge and belief."

The partnership must file all requests for a waiver with the Ogden Submission Processing Center, Internal Revenue Service, P.O. Box 9941, Ogden, UT 84409, Attn: Form 1065 e-file Waiver Request, Stop 1057, during one of the following periods:

1. For returns due April 15, 2002 (Form 8736, Application for Automatic Extension of Time To File U.S. Return for a Partnership, REMIC, or for Certain Trusts, not filed): Jan. 15, 2002–March 1, 2002;

2. For returns due July 15, 2002 (Form 8736 extension filed): Jan. 15, 2002–June 1, 2002;

3. For returns due Oct. 15, 2002 (Form 8800, Application for Additional Extension of Time to File Return for a Partnership, REMIC, or for Certain Trusts, filed and approved): Jan. 15, 2002–Sept. 15, 2002.

Requests from the partnership's tax adviser must be accompanied by a valid power of attorney. The waiver request should not be attached to the partnership's paper return. Also, extension requests should not be filed with the waiver.

The Service will approve or deny waiver requests based on the facts and circumstances of each request. In determining whether to approve or deny a waiver request, it will consider the partnership's ability to file its return electronically without incurring an undue economic hardship. Factors the IRS will consider include the reasonableness of the incremental compliance costs and any hardship created by equipment breakdowns or the destruction of magnetic media filing equipment.

Within 30 days after it receives the waiver request, the Service will send a letter to the partnership, either approving or denying the request for waiver. Partnerships cannot appeal a denial of a waiver request. However, they may request a waiver of the penalty imposed by the IRS for failing to file their returns electronically; see IRS Notice 746.

Exemptions from Electronic Filing

According to Ann. 2002-3, the Service has excluded partnerships with the following characteristics from the electronic-filing requirement for tax year 2001:

1. Fiscal-year filers;

2. Final-year returns;

3. Short-year returns;

4. Foreign-address partnerships, and

5. Delinquent and amended returns.

From Joseph Lee, CPA, New York, NY