2019 Draft K1 expands tax reporting for asset management

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November 2019

Overview

The Internal Revenue Service (IRS) recently released draft partnership tax forms for the 2019 tax year, including modifications to Form 1065, U.S. Return of Partnership Income, and Schedule K-1, Partner’s Share of Income, Deductions, Credits, etc., along with draft Instructions for Form 1065. The IRS indicated that the changes “aim to improve the quality of the information reported by partnerships both to the IRS and the partners of such entities.” The modified partnership forms address changes to the law made by the 2017 tax reform act and issues of IRS focus. The additional information required by the IRS on the Draft K-1 may assist officials in selecting partnerships for audit and to facilitate examinations under the new centralized partnership audit rules.  

The asset management sector experienced an increased compliance burden in 2018 as a result of federal tax reform. If finalized, the Draft K-1 will continue to increase the administrative costs and burdens on funds and their investors, as well as to expand the size and complexity of partners’ Schedule K-1s.  While there are a number of new items requested on the Draft K-1, perhaps the most significant and potentially burdensome is the requirement to provide partner tax capital accounts.  

The takeaway

The Draft K-1 will significantly increase reporting for the asset management sector. While the sector anxiously awaits a response to the accounting firms’ joint request to delay the new reporting requirements until the 2020 tax year, the IRS might delay only portions of the new reporting requirements (perhaps those more burdensome, such as tax capital) while keeping some of the items they perceive to be more readily available, or offer no delay at all.  Regardless, partnerships should work with their tax preparers now to address the data collection and process changes necessary to comply with these reporting requirements in the very near future.

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Brian Rebhun

Asset Management Tax Leader, PwC US

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