No Schedule K-1 From LLC

[Sandy26]

Hi Everyone,

In 2006, my client invested $10k in an LLC doing oil drilling. Instead of sending out a Schedule K-1 to each member, the LLC sent out a group email on 4/15/07 with some tax info and told the members if they wanted to claim any tax deductions they would need to fill out their own K-1 schedule. I told my client it was the LLC's job and not mine to file out a Schedule K-1 and since the LLC had made no income during 2006 and my client had already filed his 2006 tax return and received his refund, he decided to forget the whole thing for the 2006 tax year.

During 2007, my client received $839 of income from the LLC. I asked him for a copy of his Schedule K-1 from the LLC and of course he has not received one. He has asked the LLC for a Schedule K-1 for 2007 and does not feel confident that he will receive it anytime soon if at all. My client is eager to file his return and wants to know if there is any way for me to include the $839 of income on his return without receiving a Schedule K-1 from the LLC? Is there a proper way for me to include this income on my client's return without a K-1 form? Should I file my client's return without including the the LLC income and if he receives a K-1 form amend his return to include this income? I would greatly appreciate any suggestions on how to handle this situation.

Thanks in advance for your help, Sandy26

[Roland Slugg]

F-8082

An LLC can elect to be taxed as a corporation, so the absence of a K-1 might imply that the LLC in question as made that election, although the comment about completing one's own K-1 would suggest otherwise. The client may wish to inquire, and if the LLC is filing as a partnership, he should insist on receiving the required K-1s.

If the LLC is taxed as a partnership, and no K-1 is received, consider using F-8082. In fact, I believe F-8082 is required in cases such as this. Keep in mind that the $839 cash received may bear no relation to the actual taxable income or loss. Remember too that a partnership isn't required to issue K-1s until April 15th.

[winnie]

Don't know how you would classify the income?

It is the LLC's responsibility to tell you that information. At a most conservative approach, you could treat it all as ordinary income and your client would be safe and probably overpay. How does anybody know that it wasn't a return of capital or interest,... without the k1? Most of the oil/gas business partnerships that I have seen have some odd amounts for depletion and there are often some preference items for AMT.

Along with the new preparer penalties, I thought the IRS had initiated tougher penalties for failure to file a k-1 and for the first time, penalites for late filing of S corp tax returns. You might check that out.

[oceanlovin'ea]

My thoughts too

Just because he received money from the LLC, doesn't mean that there was taxable income to flow through to him. There might even be losses.

Also without K-l, you wouldn't know what kind of income this was.

If the client wants to file, you could file based on the information you have now. If he gets a K-l later, he would have to do an amended return to include whatever is on the K-1. Inform him of additional charges.

Linda F

[winnie]

TTB reference

I was looking for some other information on partnership and look what I saw in TTB:

check out the first page of the section on partnerships.

Penalties
Failure to file Form 1065. The penalty for late filing of a partnership return is
$50 per month (or part of a month) times the number of partners, up to five
months. Exception: The penalty will not be imposed if the partnership can
show reasonable cause for its failure to file. Domestic partnerships with 10
or fewer partners will meet the reasonable cause test if:
1) All partners are individuals (other than nonresident aliens), estates, or
C corporations,
2) All partners have timely filed income tax returns, fully reporting their
shares of the partnership’s income, deductions, and credits,
3) The partnership has not elected to be subject to the rules for consolidated
audit proceedings, and
4) Each partner’s share of each partnership item is the same as the partner’s
share of every other item.
Other penalties. Additional penalties may apply for failure to furnish Schedules
K-1 to partners, not supplying a TIN, and not furnishing information on
tax shelters. Reasonable cause exceptions apply.
Filing Deadlines
Form 1065, U.S. Return of Partnership Income. Form 1065 is due by the 15th
day of the fourth month following the end of the tax year, which is April 15th
for calendar year partnerships.
Schedule K-1 (Form 1065), Partner’s Share of Income, Deductions, Credits,
etc. The partnership is required to provide Schedule K-1 to each partner on
or before the day on which the partnership return is required to be filed.
Electronic Filing
Partnerships with more than 100 partners are required to file Form 1065

[Sandy26]

Thanks for the help!

Just wanted to thank everyone for their help. I think I've finally been able to get my client to see the importance of receiving a filled out Schedule K-1 from the LLC and we are now on the same page. The advice and information that you shared was invaluable in helping me to put a game plan in motion on how to handle this situation and bring my stress levels down to a normal range for the tax season.

Thanks again,
Sandy26