On February 13, 2012, the Internal Revenue Service (the “IRS”) issued Revenue Procedure 2012-17 (the “Revenue Procedure”) which provides guidance on when a partnership (such as a domestic private investment partnership) can provide Schedule K-1s (“K-1s”) via exclusively electronic means to its partners. The Revenue Procedure is effective for K-1s issued on or after February 13, 2012. The Revenue Procedure is a significant change from current industry practice and should be carefully reviewed by fund managers.
In order to deliver electronic K-1s to a partner, the Revenue Procedure requires that (1) the partner affirmatively consent to receiving electronic K-1s, (2) the partnership make certain specific disclosures regarding the electronic K-1 procedure, and (3) the consent form be provided to partners in the same electronic format in which the K-1 will be provided.1
For example, in order to comply with the third requirement, if the K-1 will be provided in Adobe Acrobat (.pdf) format, then the consent form should also be provided in Adobe Acrobat format.2 In order to consent, a limited partner would need to print out the consent form and send it back to the partnership (for example, by mail, fax, or email). This ensures that the limited partner can access the K-1 when it is ultimately provided by the partnership.
A consent to receive electronic K-1s may be drafted so that it is applicable for all taxable years until revocation by the partner.
These specific IRS procedures must be followed in order to provide only electronic K-1s to partners. We understand that, in the past, many partnerships have obtained consent to distribute K-1s electronically via other means (for example, though a consent contained in the partnership’s subscription document). However, the Revenue Procedure appears to be the exclusive method for obtaining consent to distribute only electronic K-1s on or after February 13, 2012.
It is important to note that a partnership can provide K-1s electronically to its partners if it also provides the K-1 via mail. Nothing in the Revenue Procedure prohibits the distribution of K-1s by both electronic means and the mail.
We strongly recommend that, going forward, consent to provide only electronic K-1s be obtained from partners using the procedures outlined in the Revenue Procedure. The Revenue Procedure states that a partnership which does not follow the procedures contained therein could be treated as not “furnishing” K-1s to its partners and therefore be subject to monetary penalties.
If you have any questions regarding this memorandum, please contact one of the attorneys listed below.
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1 Fund managers should be aware that providing K-1s electronically may raise concerns under data protection statutes in various states (e.g., certain states impose encryption standards that are applicable to the electronic transmission of records containing personal information).
2 The consent form could be provided to partners via a secure email or secure website.
