How to Avoid Penalties When Filing Taxes with Late K-1 Forms from PTP Investments?

[synaps]

I have invested in a few publicly traded partnerships (PTPs), and in recent years, I’ve experienced significant delays in receiving my K-1 forms. In 2020 and 2021, I didn’t receive some K-1s until October or later, which led to late filing penalties because I couldn’t file my tax returns on time. This has been very distressing, and I wasn’t sure if I should file without all the K-1s or if doing so would be considered incomplete by the IRS.

1. Can I file by April 15th (or sooner) with the K-1s I have on hand? If I file without all K-1s and then submit an amended return when the remaining K-1s arrive, would this approach avoid a late-filing penalty?

2. Would filing without all K-1s initially still meet the IRS requirement for filing, or could it be treated as an incomplete return? I’m worried that filing without complete K-1s might be seen as not filing at all.

3. What are the potential tax and penalty impacts of missing K-1s on my return? Would filing without them initially lead to a higher tax bill, and would this change once the K-1s are processed?

4. Are there any strategies for managing these chronically late K-1s to avoid penalties and interest in the future? Any guidance on the best practices for tax planning and compliance under these circumstances would be greatly appreciated.

Thank you for any advice on how to handle this situation more effectively and avoid penalties in the future.

[Juliane22]

Hi synaps! I understand the frustration with late K-1s. You have a few options. 

The most important thing is that you make sure you have paid any tax obligation by April 15. I know this can be complicated if you haven't received all of your information yet (i.e. the k-1s), but you can estimate based on previous years. Any late filing penalties and interest are calculated based on the your unpaid liability, so if you have no amount due, there is nothing to calculate the penalties on.

You could file without the K-1s and then amend once you receive them, but this complicates the tax payment issue as the IRS will not know you owe more until you amend and then you will be assessed penalties on that amount.

The best scenario for most people in this situation is to file an extension every year, which extends your filing due date to Oct. 15. When you file the extension, you can make an estimated payment to cover any tax liability you think you will have. You may need to pay a little extra just to be sure. You can prep your return with all of the information you have and then hopefully your K-1s will arrive by Oct 15 so you can add them and file. As long as you have no balance due and file by Oct 15, there are no late filing penalties.

I hope that helps!

[synaps]

Thank you, Juliane22! This is helpful, but I still have some questions.

It seems like K-1s from PTPs often result in a lower taxable income, at least initially, due to things like return of capital and potential losses. Is this generally the case?

You mentioned estimating tax liability. Since PTPs can be complex, what's the best way to estimate my taxes if I haven't received all my K-1s by April 15th? Can I rely on previous years' K-1s? My holdings have changed – I've bought more units in some PTPs and invested in new ones this year, so I don't have a good baseline.

To confirm, even with an extension, I should aim to pay any estimated tax due by April 15th to avoid penalties, correct? But I might still owe interest on that amount if it's paid after April 15th?

If I file initially without all the K-1s and then later file an amended return that results in owing taxes, will I be penalized as long as I paid at least 90% of my total tax liability by April 15th? What are the potential penalties if I underpay?

As a new investor, this is all quite overwhelming! Should I avoid PTPs entirely, or are there ways to manage the complexity? Any advice from a tax expert who has worked with many PTP investors would be greatly appreciated.

[Juliane22]

Hi synaps, regarding estimating the tax paid, it can be difficult when income is inconsistent. If your K-1's are routinely showing losses, then that can be "helpful" in that they won't add to your taxable income. Most people tend to estimate based on previous years, but of course when your investments are changing year to year that isn't always easy. If you are able to slightly overpay, that may be best for a few years until you can get a baseline. You will of course get any overpayment back in a refund or you can apply to the next year's estimates. 

100% of payments do need to be paid by April 15, anything still owed after that would be charged late payment penalties and interest. The 90% rule only applies to whether you paid estimates on time, not whether you still have a payment due after April 15. 

Here is a link to the IRS calculations on late filing penalties - https://www.irs.gov/payments/failure-to-pay-penalty 

Let me know if you have any further questions!

[synaps]

Thank you, Juliane22! This is helpful. To clarify, you mentioned late payment penalties and interest on any tax owed after April 15th. Can you provide more details on how the late payment penalty is calculated? I understand the maximum penalty is 25% of the unpaid tax, but is it charged monthly at 0.5% of the unpaid amount for each month or part of a month that the tax remains unpaid?

Also, to confirm, interest is only applied to the unpaid tax amount, not to the penalty itself, correct?

You mentioned the 90% rule only applies to whether estimated taxes were paid on time. Does this mean that even if I meet the 90% requirement but still owe tax after April 15th, I'll be subject to the late payment penalty and interest?

And to make sure I have the complete picture, are the late payment penalty rules and calculations different for California state taxes? If so, could you please provide those details as well?

I want to make sure I understand the potential costs of underpayment for both my federal and California returns so I can plan accordingly.

[Juliane22]

Hi synaps, 

In regards to your question - "Does this mean that even if I meet the 90% requirement but still owe tax after April 15th, I'll be subject to the late payment penalty and interest?" Yes that is correct, but only on the amount still due.

The late payment penalty is calculated at .5% of the unpaid balance per month, beginning April 16, up to 25%. The penalty for late filing is 5% per month, so it is definitely important to file on time even if the taxes aren't paid yet!

The interest is calculated on the balance due, so if you are assessed a penalty and haven't paid it, interest would accrue on that as well.

CA rules are similar to the IRS, here is a link for that information: https://www.ftb.ca.gov/pay/penalties-and-interest/index.html 

[Mike9241]

each PTP stands on its own for tax purposes.  losses (lines 1 through 3 and others as well ) are passive and can only be deducted in future years when there is passive income from the same PTP to offset the losses or you fully dispose of the PTP in a taxable transaction.

what you can do is extend the return and include as many of the PTPs as you get but file by 10/15 to avoid the 4.5% monthly (max 5 months) late filing penalty. then amend to include all the omitted k-1s. if you owe additional taxes, you are only subject to the late payment penalty of .5% a month. 

This still leaves the issue of omitted k-1s that you fully disposed of during the year. disposition may result in depreciation recapture to the extent depreciation was included in the income/losses reported in the current and all prior years you owned it. Currently, this is reported on line 20AB of the k-1 and also on the supplemental sales schedule that you should get as part of the k-1 package. Not all k-1s have this recapture - companies that conduct business activities. in some cases, the recapture can exceed the suspended losses.