Investor Tax Responsibility for Missing K-1

[Curious One]

I am awaiting receipt of an investment partnership K-1.  The sponsor has been difficult to deal with and delinquent in providing both financial and tax reporting.  The filing deadline is looming and I'm not sure what I should do about this issue.  I don't think the investment has generated taxable income in 2019, but really don't know what's going on other than I haven't received any distributions for 2019.  I don't want be exposed to any potential interest or penalties.  Is there something I can do vis-a-vis the IRS to alert them and thereby protect myself?

[tagteam · Accepted solution]

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@Curious One wrote:

...Is there something I can do vis-a-vis the IRS to alert them and thereby protect myself?

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It makes no difference since you are going to be held responsible for the inclusion of any net income or gain that is passed through to you via the K-1 (once you finally receive it).

In other words, there is no way to "protect" yourself beyond making additional estimated payments and filing an amended return (if necessary) after you receive your K-1.

To be perfectly blunt, you might want to consider consulting your legal, tax, and financial advisors about the viability of investing in an entity that issues as K-1.

[Curious One]

Not entirely surprising, but concerning in any event given the complete lack of control by LPs over these things.  Someone had suggested I should contact the IRS and request some kind of assistance.  I think they mentioned a private letter ruling, but I suspect this would require a lot of formalities as well as time that I don't have before next week.  

As for your last sentence, are you suggesting that K-1 investing is problematic generally?  Or only in relation to the specific circumstance I've outlined?

[Critter-3]

Just like all things ... some LPs are good and properly report things timely and some are not.   Since the Partnership return had to be filed no latter than 9/15  and the K-1 forms mailed in a timely manner so you can file your personal return by 10/15  and you have not gotten them yet  AND  you say you cannot reach them then I would say these are one of the bad ones.   Some LPs have you download the K-1 forms online and they are not mailed ... did you see if you can download them ?  

[tagteam]

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@Curious One wrote:

....I think they mentioned a private letter ruling, but I suspect this would require a lot of formalities as well as time that I don't have before next week.  

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Formalities and lots of time, not to mention user and professional fees that can easily run into thousands (further not to mention that you could get an unfavorable result).

See https://www.irs.gov/pub/irs-news/other_irs_user_fees.pdf

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@Curious One wrote:

As for your last sentence, are you suggesting that K-1 investing is problematic generally?  Or only in relation to the specific circumstance I've outlined?

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Generally, and there are a plethora of questions that have been posted on this very board over the years concerning how to enter information (often cryptic) from a K-1 issued by a PTP/MLP and also how to handle the eventual sale of an interest (it is not pretty in most instances).

[Anonymous]

a domestic partnership with a calendar year-end was required to file by 9/15/2020. technically filing late subjects it to about a $200 penalty per month per partner for each month late with a maximum penalty for 12 months. however, you are still responsible for reporting any items of income. there is no harm if there are only items of loss.   however, that would require you to file an amended return to use any losses that would be deductible and carry forward any deductible losses that could not be used for 2019. 

don't even think about a PLR.  the cost ranges from $0 to $174.000. It takes 2 or more months for the IRS to issue or deny the request - I don't think you get your money back. the other cost is the lawyer or tax pro which would probably be needed to properly prepare the PLR.   I don't think the IRS would issue a ruling in your case.  

you may want to consult a lawyer because the managing partner apparently is not fulfilling his obligations both tax and financially (failure to issue financial statements if they are required).   

[Curious One]

@Critter-3 If only it were that easy ... Indeed others have provided the K-1 in this fashion.  Regrettably not the case in this instance.  

[Curious One]

@tagteam No kidding.  I asked a question a couple of weeks ago about disposal and consequent treatment of released suspended PALs, etc.  Suffice it to say it's a nightmare.  Difficult to plan for the year's results in advance so some of the benefits that would otherwise inure are unused, while other tax effects are detrimental to existing tax positions.  I spoke with a CPA about some of this and he suggested the only way to make headway is to reach out to the GP before year end to get some sense of what the K-1 will look like so as to allow planning that apparently can't be done otherwise.  

[Curious One]

@Anonymous Thanks for the input.  Lots of good responses from all.  As for pursuing the sponsor, interesting.  I didn't know about how the corporate deadlines dovetail with the individual ones.  This is a crowdfunding investment and the platform has been all over the sponsor, but can't get meaningful engagement.  I spoke with the sponsor ahead of making the investment and know someone who works (worked?) for him.  High credibility at the outset.  Virtually none at this point.  Still confident in the project, albeit with more modest return expectations, but what, where, when and how - who knows! I'd like to think I know why.  

[Critter-3]

You have to figure out if it is fiscally worth the extra effort/headaches this situation causes you ... if it is not worth the pain get rid of it.