IRS issues new instructions on providing partners with Schedules K-1 in exclusively electronic form

New instructions from the IRS—effective February 13, 2012—detail the procedure that partnerships must undertake when furnishing partners with Schedules K-1 in an electronic format.

Consent required.

Under the new procedure, persons required to furnish a paper statement on Schedule K-1 may provide the document in an electronic, rather than paper, format. Switching to an exclusively electronic document requires that recipients first “affirmatively consent to receive the Schedule K-1 in an electronic format.” This consent can be obtained “electronically in any manner that reasonably demonstrates that the recipient” can access the Schedule K-1 in the medium in which it will be furnished (e.g. .PDF format). The procedure also permits consent to be obtained through use of paper documents, so long as the consent is confirmed electronically by the recipient, and that consent “reasonably demonstrates” that the recipient can access the form in its electronic format.

Required disclosures.

Before obtaining a recipient’s consent, or at the time of receiving such consent, persons furnishing Schedules K-1 must provide “clear and conspicuous” disclosures including: informing the recipient that the Schedule K-1 will be furnished through a paper format unless the recipient consents to receive it electronically; informing the recipient of the scope and duration of the consent (e.g. whether the consent given by the recipient applies to all Schedules K-1 or merely to the first Schedule K-1 to be received after consent is given); a method for acquiring a paper copy of the Schedule K-1 after consent to receive it electronically; a process for withdrawing consent and the consequences of doing so; the conditions under which the furnisher will no longer provide Schedules K-1 electronically; a procedure for updating the recipient’s contact information; and the furnisher must detail the hardware and software that recipients must use to “access, print, and retain the Schedule K-1” as well as the date on which the particular electronic Schedule K-1 will be inaccessible.

Notice.

If the Schedule K-1 is posted on a website, then the furnisher must give notice to recipients on how to retrieve and print the statement. Such notice can take the form of mail, e-mail, or in person. Regardless of its form, the notice must include “IMPORTANT TAX RETURN DOCUMENT AVAILABLE,” and it must be in capital letters. If notice is by means of e-mail, then the statement in quotes must be in the e-mail’s subject line.

Retention period for Schedules K-1.

If the Schedule K-1 is furnished on a website, then the website must retain the statement for either twelve months “following the end of the partnership’s tax year to which the Schedule K-1 relates,” or for six months after the date on which Schedule K-1 is issued, whichever is later.

Failure to comply with the procedure.

To see the complete text of the IRS’ procedure, visit http://www.irs.gov/pub/irs-drop/rp-12-17.pdf.;