Arden Dale for the Wall St. Journal writes: As more investors diversify their portfolios with partnerships, their financial advisers are stuck with a growing summer headache: late Schedule K-1 statements.
The Internal Revenue Service requires these statements from trusts, hedge funds, private equity and other partnerships, and they often don’t arrive until just before Sept. 15, the extended deadline for filing tax returns on that form of income.
While the return is typically handled by accountants or tax attorneys, the adviser must guess in advance how much income a client’s K-1s are likely to report, and free up cash to make estimated tax payments. The documents’ late arrival creates even more hassles for advisers who help to manage partnerships.
“Making sure that clients have adequate liquidity to cover taxes is a No. 1 concern for investment advisers,” said Peter Disch, an adviser in Boston who manages around $150 million.
He has been struggling to process the recent late arrival of some K-1s. And for other clients, the forms still haven’t arrived. A client of Mr. Disch–a family that founded a now-publicly traded company–has a dozen different limited partnerships, and he is waiting for the K-1s from certain investments held by the partnerships.
Mr. Disch acts as “conduit” between the family and its accountants, and as such, he lets the tax professionals know the documents will be late so they can “hit the ground running” when it comes time to file the tax returns.
Investors in some exchange-traded funds, including those focused on energy investments, can also get caught up in K-1 troubles if a fund invests in partnerships.
A partnership K-1 is due to the IRS along with Form 1065 on April 15. The deadline to get the document to an investor, however, is the same day. That leaves little time to deal with a complicated document. Large partnerships may try to get an estimated K-1 out in March (a small subset has an official March 15 deadline.) Some K-1s come late because the partnership has to base its statements on K-1s from its own investments.
While some K-1s do arrive in investors’ mailboxes as early as March, others may get there as late as September, right before the extended filing date for tax returns for which they are needed.
Henry Bragg, a partner and director of planning at Horizon Advisors in Houston, speculates that investors in his part of the country may be especially hard hit with late K-1s because of the popularity of oil and gas partnerships in the area.
Mr. Bragg helps to manage a family partnership with more than 10 trusts and several individuals as partners. He has received most of the K-1s, but not all. He will have little time to help organize the tax returns if the missing documents don’t arrive soon.
The mountain of paperwork is harder to deal with because each trust may owe taxes in several states, as well as to the federal government.
“Some would say it is a high-class problem…I call it the effluence of wealth,” said Mr. Bragg, whose firm manages around $210 million. “It can be, and most often is, an absolute cluster of inefficiency.”
Late K-1 statements are a serious enough issue that Congress several years ago moved the deadline to file partnership tax returns from Oct. 15 to Sept. 15.
Congress is considering a bill to change other tax filing deadlines, and to help resolve the K-1 issue and improve the flow of information among taxpayers, the partnerships and the IRS, said Melissa Labant, director of tax at the American Institute of CPAs.
