RubinBrown Team Member Manual

Section: Providing Copies of K-1s to Clients 1213

Policy Title: Policy Number:

Risk Management

Effective Date:

Supersedes Policy Dated:

06/01/2024

06/01/2023

Background: The Internal Revenue Code requires the trustee of a trust that distributes or allocates income to trust beneficiaries, the tax matters partner of a partnership, and the managing shareholder of an S corporation (or their representatives) to furnish copies of K-1s to each trust beneficiary, partner, or shareholder. In the case of all three types of pass-through entities, there are specific code sections covering this requirement. §6722 provides the same penalty provision in all three cases for failure to do so. The penalty is $260 for each failure to provide a K-1 to the proper recipient up to a maximum for the calendar year (2018) of $3,218,500 for large businesses (>$5M average annual gross receipts) and $1,072,500(<$5M average annual gross receipts). If the requirement to provide the K-1s is intentionally disregarded the penalty for each failure is $530 or, if greater, 10% of the aggregate amount of items that were required to be reported, with no annual maximum. Often, in our preparing returns for pass-through entities, we find that one or more of the pass-through taxpayers (trust beneficiary, partner, S corporation shareholder) is also a client whose tax return we prepare. In those situations, it may understandably seem unnecessary to send copies of the K-1s to the pass-through entity representative, and it would be more convenient simply to put the K-1s in the file of the pass-through taxpayer whose return we prepare. This would eliminate the circular flow of K-1s first going to such taxpayers and then coming back to us. However, there are many circumstances where we do not prepare the returns for the pass-through taxpayer, and we need to consider the confusion of giving detailed and varying instructions to our assembly group regarding the sending of K-1s to our clients. More important, there is no exception to the penalty provisions for failing to provide K-1s that is based on the convenience of the tax return preparer. It is highly doubtful that such convenience would constitute "reasonable cause" and may, in fact, be seen as an intentional disregard of the rules. Policy: It is the policy of the Firm that we will send separate copies of K-1s along with the tax returns of all pass-through entities to the person representing the pass-through entity (e.g., the trustee, the tax matters partner, the managing shareholder of an S corporation). This policy applies whether or not our Firm also prepares the tax returns for the pass through entity's beneficiaries, partners, or shareholders. No instruction should be given to our tax return assembly group that is inconsistent with this policy.

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