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August 14, 2002

The IRS announced yesterday that it had stopped sending “matching” notices to recipients of K-1s from partnerships, trusts and S corporations. The 65,000 notices already sent are still valid and must be answered.

The IRS stopped sending notices after complaints, including one from Missouri Senator Bond. The complaints arose because some taxpayers apparently report their K-1 income due to “netting of gains and losses,” according to a report in Tax Notes. This makes it appear that many individuals report their K-1 items “net,” despite Form 1040 instructions requiring K-1 information to be reported in an itemized format on most tax return schedules. This improper reporting means there is no detail for the IRS to match to K-1 items.

The IRS earlier this summer started the matching program on returns filed in 2000 (see our report in the July 5 Tax Update). Over $1 trillion of income was reported on K-1s in 2000, according to the IRS. The IRS is to issue a report on the matching program this fall.

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