The IRS recently issued new guidance for funds that deliver Schedule K-1s electronically to their investors. Under the new rules, fund managers must request the consent, in a particular form, of each investor that will receive Schedule K-1s electronically or the Schedule K-1s must be provided in hardcopy/paper format. Your legal representative should be able to provide you with a form consent that complies with these new IRS requirements, which are summarized below thanks in large part to Howard Rosenblum and Joseph (Tony) Hugg in DLA Piper’s Boston office.
What must be included in the Consent?
The request for consent to electronic delivery may be provided to the partners on paper or in electronic form, and must include the following items:
- The request must inform the recipient that the Schedule K-1 will be furnished on paper if the recipient does not consent to receive it electronically.
- The request must inform the recipient that the consent, if given, will apply to future Schedule K‑1s until it is withdrawn. (Alternatively, a fund could require a new consent each year.)
- The request must describe the procedure for obtaining a paper copy of the Schedule K-1 after providing consent to electronic delivery, and whether requesting a paper copy will be treated as a withdrawal of consent.
- The request must describe the procedure for withdrawing consent, including to whom the withdrawal should be addressed and the date the withdrawal will take effect. The request must inform the partner that the fund will confirm a withdrawal in writing (either on paper or electronically). The request must also inform the partner that withdrawal of consent does not apply to Schedule K-1s provided before the withdrawal takes effect.
- The request must describe the conditions under which the fund will cease furnishing Schedules K-1 to the recipient, for example, when the recipient withdraws from the fund.
- The request must describe the procedures for updating the information needed by the fund to contact the partner. (The fund must also inform the partner of any change in the fund’s contact information.)
- The request must describe the hardware and software required to access, print and retain the Schedule K-1, and the date on which the Schedule K-1 will no longer be available on the website.
- The request must inform the recipient that the Schedule K-1 may be required to be printed and attached to a Federal, state or local income tax return.
Form of Schedule K-1
The electronic version of the Schedule K-1 must comply with IRS requirements. Funds should confirm with their tax return preparers that this requirement is satisfied.
Notice of Electronic Delivery
The fund must notify the recipient if the Schedule K-1 is posted on a website. The notice may be by mail, email or in person, and must describe how to access the Schedule. This notice must include the following statement in capital letters: “IMPORTANT TAX RETURN DOCUMENT AVAILABLE.” If the notice is by email, the foregoing statement in capital letters must be on the subject line of the email.
Retention of Schedule K-1 on the Website
The electronic form of the Schedule K-1 must be retained on the fund’s website for 12 months following the end of the fund’s tax year or six months after the Schedule K-1 was issued, whichever is later.
The fund may be subject to penalties if it does not comply with these procedures. Although these new requirements were only released by the IRS in February, by their terms the new requirements were effective immediately. The IRS has not indicated whether it will attempt to assert penalties against funds and other partnerships that provided Schedule K-1s before they became aware of the new requirements.
Funds are advised to consult with their tax return preparers regarding all matters relating to delivery of the Schedule K‑1s.