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August 04, 2003 at 08:00 PM
NEW YORK (HedgeWorld.com)–New York State Society of Certified Public Accountants proposed a more detailed version of Schedule K-1 to facilitate the Internal Revenue Service’s effort to match income provided by partnerships and limited liability companies to information reported on tax returns from their partners, including hedge fund investors.
The IRS instituted a K-1 matching program in 2001 to identify under-reporting by such taxpayers, but because of the difficulty in matching certain income flows, this resulted in many people mistakenly being accused of not reporting income despite having complied with the rules.
In response to taxpayer complaints, the agency stopped sending these notices. The United States General Accounting Office is assessing the program at the request of the Senate Committee on Finance. “Sending under-reporter notices to compliant taxpayers wastes taxpayers’ time and money,” GAO stated in a report on this issue.
NYSSCPA is suggesting a more informative form that breaks out the various types of income aggregated as “other income” in the current K-1 schedule, such as non-portfolio short-term and long-term capital gains. The hope is that this will help the IRS match partnership and investor information, thus reducing instances of compliant taxpayers showing up as potential cheats on the IRS’s computers.
“For most partnerships, the current Schedule K-1 is fine,” said Leon M. Metzger, a member of the task force that drafted the alternative schedule. “But partnerships with more complex reporting needs, like hedge funds, might prefer to use the long form.”
