New IRS Procedure Allows Partnerships to Electronically Deliver Schedule K-1s to Investors
Effective February 12, 2012, a new IRS Revenue Procedure allows partnerships to exclusively deliver electronic Schedule K-1 Statements (“K-1s”) instead of paper statements. In order to send electronic K-1s, a partnership (such as a hedge fund) must follow certain steps and obtain each partner’s consent. Many fund managers either have or will want to go through the process of switching to electronic K-1s. This post will provide more information on how to complete the process and managers should also feel free to contact us if there are additional questions.
Switching from Paper to Electronic K-1s
Provided that the electronic K-1 is an exact copy of the official Schedule K-1 and the partnership follows the procedures in the revenue procedure above, a partnership does not need to gain the approval of the IRS before switching to electronic K-1s. However, a partnership should be careful to comply with the requirements of the revenue procedure because a failure to do so could be deemed a failure to furnish a Schedule K-1 to partners possibly triggering penalties under Revenue Code Section 6722.
In general, a partnership must (1) provide certain disclosures, (2) obtain each partner’s consent in a manner that demonstrates that such partner has access to the technology required to access the electronic K-1, and (3) follow certain policies and procedures detailed in the revenue procedure.
1. Required Disclosures
When obtaining a partner’s consent the partnership must disclose the following:
i) That a partner will continue to receive paper K-1s unless the partner consents to receive electronic K-1s;
ii) If consent is effective until withdrawn or for a shorter duration;
iii) The procedure for obtaining a paper copy after consent;
iv) The procedure to withdraw consent, and when withdrawal of consent becomes effective;
v) Under what conditions the partnership will cease providing electronic K-1s to a partner;
vi) How a partner can update his contact information; and
vii) The hardware and software required to access electronic K-1s.
2. Obtaining Effective Consent
In addition to the disclosures above, a partnership must obtain consent from each partner
in a manner that demonstrates that the consenting partner has access to the technology that will be used to deliver the electronic K-1s. The simplest way to do this is to create a consent form that uses the same technology through which electronic K-1s will be delivered. For example, if a partnership intends to send electronic K-1s via secure email it should it send its consent form via secure email and require that each partner signs and sends back the consent form via secure email. Section 4 of the revenue procedure contains additional examples of how a partnership may obtain effective consent.
3. Required Policies and Procedures
In order for electronic delivery of K-1s to be permitted a partnership must institute policies and procedures so that
i) Electronic K-1s are identical copies of official K-1s;
ii) If electronic K-1s will be delivered by publication on the partnership’s website each partner must be given timely notice of the posting;
iii) If any email notice is returned as undeliverable, the partnership must, within 30 days of the return, email the notice to a correct email address or mail a paper copy of the notice;
iv) If electronic K-1s will be delivered by publication on the partnership’s website, a K-1 must be available on the website for the later of 12 months after the taxable year to which K-1 refers or 6 months after K-1 is posted; and
v) A partnership must deliver paper K-1s to any partner that withdraws consent to receive electronic K-1s.
Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm. Bart can be reached directly at 415-868-5345.