In recent years taxpayers and their accountants have been pushed later and later in their tax filings due to the delinquent receipt of Forms K-1 from their investments in partnerships. In may cases the forms are received only days before filing deadlines, resulting in delinquent returns or costly amendments. The Government made a first step last year by moving the final extended deadline for Partnership returns up from October 15, to September 15.
The American Institute of CPA’s has published a draft of their proposal to suggest that Trust and S-Corporation extended return deadlines be set at September 30 and that C-Corporation return extended deadlines be moved back to October 15, the same date that extended Individual returns are due. We generally support these proposals as a way to help spread the pile up of last minute returns. The re-shuffled deadlines do not, however, help solve the problem of multi-tiered entities such as partnerships that own partnerships.
The AICPA’s proposal to change extended due dates to September 15 for Form 1065, September 30 for Forms 1120S and 1041, and October 15 for Forms 1120 and 1040, would be helpful. The proposal does not, however, help with the major cause of late K-1’s and the resulting work compression among accounting professionals; tiered entities not under common control.
The problem can be resolved at the regulatory level with a framework that severs the K-1 delivery date from the tax form delivery date, and assigns responsibility for timely delivery. The following structure would help relieve work compression for unrelated entities up to 3 tiers deep, and makes provision for penalty avoidance in deeper ownership tiers.
Regulations can have a positive impact if they make it clear to pass-through entity managers that they will have a higher burden with respect to deadlines for filing if they accept other pass-through entities as owners. Similarly, an investor entity must anticipate in advance the late receipt of underlying entity K-1’s, and either decide not to invest in tiered entities, make arrangements for costly last minute service and potential penalties, or exert enough influence on the underlying entity to be sure that it will furnish timely Forms K-1. The proposed deadline scheme will put the burden of compliance on both the underlying entity and the investor entity.
Consider this due date proposal that would apply to any pass-through entity that accepts another pass-through entity as a partner/member/beneficiary, etc. This proposal would require such an entity to submit Forms K-1 on the latest of the following dates –
- 15 days prior to the entity’s extended due date, if the entity does not own an interest in any other pass-through entity.
- 7 days prior to the entity’s extended due date, if the entity does own an interest in any other pass-through entity.
- 15 days prior to the earliest extended due date of any owner.
Penalties would be assessed only if an “up-stream” entity uses late receipt of Form K-1 in a request to avoid penalty on its own untimely Forms K-1.
Let’s look at two situations which assume AICPA’s proposed due dates are in force:
Situation — A partnership has Trusts and other partnerships, as well as individuals as partners. The partnership has no investments in underlying partnerships.
Result — The tax deadline for the production of Forms K-1 is 9/1, which is 15 days prior to the extended due date for its own return and that of any owners that are partnerships.
If the entity had only Trusts and S-Corporations as owners, K-1s would not be due until 9/15, which is the entity’s own extended due date and also 15 days before the Trust/S deadline of 9/30.
Situation — A partnership has Trusts and other partnerships, as well as individuals as partners. The partnership has an investment in underlying partnerships.
Result — The tax deadline for the production of Forms K-1 is 9/8, which is 7 days prior to the extended due date for its own return.
If the entity had only Trusts and S-Corporations as owners, K-1’s would not be due until 9/15, the returns’ extended due date and 15 days before the Trust/S deadline of 9/30.
And Here’s an FAQ…
A frequently asked question is, “My partnership (Tier 2), has another partnership as an owner (Tier 1). Tier 2 owns an interest in another partnership (Tier 3) that itself owns an interest in a partnership (Tier 4). Tier 4 delivers a timely Form K-1 on September 1 to Tier 3, which delivers its timely Form K-1 on 9/8 to Tier 2. Since Tier 2’s last day to deliver Form K-1 to Tier 1 is also 9/8, how could Tier 2 avoid a delinquency?”
The answer is that, absent same day production of Forms K-1, Tier 2 cannot avoid a delinquency and is subject to penalty. The only way to avoid penalty is to obtain agreement from Tier 1 that a later delivery will not cause its own Forms K-1 to be late. It is the responsibility of a pass-through entity to investigate prior to investing in another pass-through entity to determine that Forms K-1 will be delivered sufficiently ahead of deadlines to allow it to produce its own Forms K-1 on a timely basis.
These thoughts obviously do not consider all of the problems and details to be overcome in a regulatory system. But the implementation of this type of structure would at least provide a fighting chance for a two or three tier arrangement to produce timely K-1s and the means for a four or more tier arrangement to avoid penalties by cooperation between entities and investors. Mailing and transit times would seem to make the proposal difficult to manage and enforce, but this is an electronic age. Perhaps there should there be a requirement for electronic delivery of K-1s to provide instant delivery and time stamps.