Mandatory electronic filing of partnership returns delayed.
A provision in the Taxpayer Relief Act of 1997 mandated that partnerships with more than 100 partners file their partnership tax returns (Form 1065) and partner Schedules K-1 on magnetic media. Originally, partnerships were required to electronically file for tax years beginning on or after Dec. 31, 1997. However, the effective data of the provision amending Sec. 6011(e)(2) was modified by the Internal Revenue Service Restructuring and Reform Act of 1998 (IRSRRA '98) to apply to partnership tax years beginning after 1997. Further, Notice 97-77 notified taxpayers that the IRSRRA '98's amendment was not self-executing. Rather, the Service would first have to issue regulations that require partnerships with more than 100 partners to file their partnership returns on magnetic media and develop appropriate procedures. On Oct. 22, 1998, the IRS issued proposed regulations under Sec. 6011(e)(2) that would apply to partnership returns for years ending on or after Dec. 31, 1999. However, partnerships and their return preparers expressed concerns that the proposed effective date would place a significant burden on the partnership community. As a result of these concerns, the IRS issued the final regulations postponing the effective date for one more year.
While the language of Sec. 6011(e)(2) and the final regulations require the filing of returns on magnetic media, the Service plans to require partnerships with more than 100 partners to file their returns electronically. Electronic filing requirements will be issued in applicable revenue procedures or publications annually. The final regulations provide that the IRS may waive the requirement to file on magnetic media, to the extent that a partnership can show that the requirement will impose a hardship on the partnership.
Notwithstanding the approval of the final regulations, on March 15, 2000, the Service will be prepared to accept electronically filed partnership returns for tax years ending on or after Dec. 31, 1999. All electronically filed partnership returns must be transmitted to the IRS's Tennessee Computing Center in Memphis, Tennessee. The IRS Andover Service Center will no longer process electronic or magnetic-media-filed partnership returns as it has in the past. Despite the fact that such filing will not be mandatory, the Service is requiring large partnerships with the capability of filing their 1999 returns electronically to do so.
Under the final regulations, a partnership will be treated as having more than 100 partners if, over the course of its tax year, it had more than 100 partners, regardless of whether a partner was a partner for the entire year, or whether the partnership had more than 100 partners on any particular day of the year.
Partnerships with 100 partners or fewer will also be able to file their returns electronically. Partnerships that voluntarily file electronically can discontinue their participation in the program at any time.
The reasons for wanting partnerships with more than 100 partners to file electronically are obvious. The IRS can process electronically transmitted returns more efficiently than it can process paper returns. In addition, with the proliferation of large partnership investment vehicles, electronic filing allows the Service to more easily match partnership income reported on partners' Schedules K-1 to income reported on their personal returns. Successful matching is significantly enhanced if the Schedules K-1 are filed electronically.
The final regulations provide that electing large partnerships, which file Form 1065-B, U.S. Return of Income for Electing Large Partnerships, are not required to file their returns electronically for tax years ending before 2001. Nor will partnerships with foreign addresses be required to file their 2000 returns electronically.
Practitioners anticipate a number of issues related to the electronic filing of large partnership returns.
Lack of a paper-parent option. Filers who participated in the voluntary program at the Andover Service Center in prior years were able to file partnership K-1s electronically, while also filing a paper Form 1065. Partnerships that used different firms to prepare their Forms K-1 and Form 1065 used this option to avoid the need to combine work prepared by unrelated preparers. At this time, the IRS has indicated that a similar option will not be available in the new electronic filing procedures.
Missing and incorrect partner taxpayer identification numbers (TINs). Large partnerships frequently find that they have partners who have not provided (or do not have) TINs. For example, nonresident aliens do not have Social Security numbers and are not required to obtain individual TINs. However, it would appear that partnerships filing electronically will be required to provide TINs for all partners. Further, for a variety of reasons, partnerships frequently record incorrect TINs for their partners. Incorrect TINs may be provided by a partner (or his broker in the context of a publicly traded partnership) or other middleman, or the partnership may make a mistake in recording the partner's TIN in its records. Again, it would appear that partnerships filing electronically will be required to provide valid TINs for their partners and, eventually, the Service may develop the ability to confirm name or TIN matches (or both) on partner K-1s.
Potential penalties for failure to file.
According to the final regulations, if a partnership fails to file its return in the required manner, the partnership will be deemed to have failed to file a return. However, the IRS has not issued any guidance for potential failure to file penalties, to the extent that a partnership attempts to file electronically, but fails to do so became its filing is rejected for failure to meet the requisite data specifications. Such guidance will be needed before the 2001 filing season.
Treatment of fiscal-year and short-year partnership returns. At the present time, the Service does not anticipate that its electronic filing program will be capable of accepting more than one year's returns at a time. As a result, the IRS will not be able to accept fiscal-and short-year returns prior to the general effective date. Therefore, partnerships that use fiscal years, and partnerships with short tax years, may not voluntarily file electronically before 2001.
BY DEBORAH J. PFLIEGER, CPA, PRICEWATERHOUSECOOPERS LLP, WASHINGTON, DC
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|Author:||Pflieger, Deborah J.|
|Publication:||The Tax Adviser|
|Date:||Jan 1, 2000|
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