Schedule K-1 is used to report income and other distributions from partnerships, S corporations and some estates and trusts. Accurate filing of the forms is important because the IRS matches income from Schedules K-1 to other tax returns.
The reminders issued by the IRS include:
- Report income in the proper location on individual returns as instructed by Schedule K-1, column (c).
- Avoid netting or combining income and deductions on Schedule E, except for passive activity income and deductions from Form 8582. Generally, income and related deductions (such as unreimbursed partnership expenses and the section 179 expense deduction) must be reported separately. For more details, refer to the Schedule E instructions.
- Report losses carried forward from prior years due to the at-risk and basis limitations on a separate line of Schedule E. Do not combine them with amounts reported for the current year.
- Refer to Form 8582, Passive Activity Loss Limitations, for instructions on properly reporting income and losses from passive activities. Beginning with tax year 2002, filers of Form 8582 must attach all three pages of Form 8582 (including the worksheets) to their tax returns.
- Report flow-through income even if a Schedule K-1 has not been received at the time the Form 1040 is filed. Except for partners in certain small partnerships, Form 8082 Notice of Inconsistent Treatment or Administrative Adjustment Request (AAR), must be attached to the tax return to indicate that the partner, shareholder or beneficiary either did not receive a Schedule K-1 or disagrees with the amounts reported on the Schedule K-1.
- Identify amended information by checking the “Amended K-1” box on the Schedule K-1. The flow-through entity is responsible for ensuring that the box is clearly marked.
- With changes in place, the matching program will begin issuing notices to some taxpayers later this year requesting more information about their 2001 tax return. For the enhanced matching program, the IRS will use additional filters during screening to substantially reduce the number of notices issued. The IRS expects the changes recommended by external stakeholders and implemented by the agency will reduce taxpayer burden and increase the overall effectiveness of the matching program.
For tax year 2003, more than 25 million Schedule K-1 forms were filed reporting approximately $1 trillion in income to partners, shareholders and some estate and trust beneficiaries.
New partnership and S corporation Schedules K-1 are available for 2004. The redesigned forms feature an improved layout similar to that of Form W-2 as well as streamlined instructions. A new Schedule K-1 for estates and trusts will be available for tax year 2005.
Changes to forms, greater outreach, and enhancements to the matching program were among the recommendations made in 2002 by a study group comprised of tax professionals and the IRS. Last year the form and instructions for 2003 Schedule E, Supplemental Income, contained enhancements designed to improve Schedule K-1 reporting accuracy.
