It’s tax time. The filing deadline for individual federal income tax returns is Tuesday, April 17, 2018. For many business owners, the Schedule K-1 is an integral part of their tax filing.
Schedule K-1 is the form promulgated by the IRS that reports the amounts of income to be passed through a limited liability company to its owners. Not to be confused with K2, which is shorthand for Mount Goodwin-Austen, the second highest mountain in the world. K2 towers 28,251 feet above sea level and is located on the border between Pakistan and China. Approximately one in four who attempt to summit K2, perish in the attempt.
What do the Schedule K-1 and the mountain K2 have in common other than a similar alphanumeric designation? With a little poetic license, both represent challenge, peril, and opportunity. One memorializes the climb to profitability, while the other represents the challenge of the climb.
For most LLC members, receiving an annual K-1 is perfunctory. But when disputes arise between and among LLC members, an all too common side effect is that dissemination of K-1s is delayed or denied entirely. IRS regulations require companies to send K-1s to all members on a timely basis so that income can be claimed and taxes paid. Yet, it is only the IRS that has the right to enforce the timely dissemination obligation regulations. So, what’s a member to do?
First, speak with your accountant, who may suggest seeking an extension, or filing a return with an estimated income along with an explanation for the absence of the K-1 and an expressed intent to amend the return when additional information is available.
Second, make a formal written demand on the company’s management, and its accountant, for the K-1. While you’re at it, demand access to all the books and records of the company, as discussed in a prior blog post, “You Want to See My What?!?: An Owner’s Right to Inspect Business Records.” If you’re not getting your K-1, it’s a red flag. The sooner you know what’s going on behind the curtain, the better.
If those efforts bear no fruit, consult with an attorney who can file a lawsuit to compel the production of your K-1, if necessary. Like a good Sherpa, an experienced lawyer can serve as your guide. Likely, your company’s operating agreement obligates management to provide you with your K-1. If so, the failure to do so would constitute a breach of contract. Even without a contractual provision, management has a fiduciary duty to operate the company in compliance with state and federal law, including IRS regulations. Failure to fulfill that obligation may give rise to a claim against an individual manager for breach of fiduciary duty.
Whether you are ascending a mountain or running a business with recalcitrant co-owners, having access to the right equipment, information, and support team is vital. Gather these components and keep climbing!