K-1 compliance update.

• Author: Lerman, Jerry L.
• Position: Income listed on IRS Schedule K-1.

With the creation of new operating divisions through the IRS's restructuring, new compliance initiatives are being put into place. The Service's Small Business and Self-Employed Division (SB/SE) is developing a matching process for the income listed on Schedule K-1. The SB/SE Division handles individuals filing Schedules C, E and F, and all other businesses with assets under $5 million. Currently, the IRS is focusing its K-1 matching on Form 1041, U.S. Income Tax Return for Estates and Trusts, based on research that indicates that the underreporting of trust income is a fast growing area. For 2001, the SB/SE will test the matching of Schedule K-Is for partnerships and S corporations to ensure the data is captured and matched. For 2002, the Service is planning more comprehensive Schedule K-1 matching.

Although document matching is nothing new, practitioners are concerned that the matching of K-1s might present more complexities than the matching of Forms 1099 and W-2. Although many individuals and small businesses may have difficulty with properly completing a K-1, all the relevant information is generally reported. This may create additional administrative burdens in responding to Service notices and audits. The initiative is being put in place, however, and the goal is to increase voluntary taxpayer compliance in reporting K-1 income.

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