NEW YORK (HedgeWorld.com)–In a development that is almost certain to affect hedge fund investors, the Internal Revenue Service is preparing a draft for a new Schedule K-1 that has codes for showing in greater detail income from partnerships and limited liability companies, such as certain types of capital gains.
The new form is expected to be ready for comment by interested parties in two months or so. It will have numerical codes in its instructions to help the taxpayer identify the nature and type of income or expense encoded in the K-1.
In addition, the IRS is working with software companies to design what are described as two-dimensional bar codes for the schedule. These plans are still at an early stage and are not meant for this year’s tax returns.
“Changing a major form like K-1 is a very serious undertaking, and the Service is very deliberate about it,” said Robert Goldstein, a member of New York State Society of Certified Public Accountants’ tax oversight committee and a partner at accounting firm Leipziger and Bresklin LLP, New York. “They are reaching out to stakeholders and other interested parties for input and advice.”
This effort stems from a K-1 matching program the IRS started in 2001 to identify under-reporting by taxpayers. Because of the difficulty in matching certain income flows, many people who had complied with the rules received IRS notices that said they had failed to report taxable income.
For a time, the tax collector stopped sending out notices because of complaints. The United States General Accounting Office prepared a report at the request of the Senate Committee on Finance.
The program has been reinstituted with some precautions to prevent the previous problems, and the tax collector wants to find way for its computer system to match accurately K-1 income data with taxpayer returns.