Schedule K-1 Compliance and the yK-1 Link Analysis Tool

MSATA ConferenceAugust 22, 2006

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Schedule K-1 Filings

Over 25 Million K-1s filed Over $1 Trillion income

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Flow through filings increasing while corporate filings decreasing

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

PY 2000 PY 2001 PY 2002 PY 2003 PY 2004

Nu

mb

er

of

Retu

rns

1120S

1065

1120

Assets $10M+

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Possible reasons for shift to flow throughs

M & A activity reducing the population of C corporation filers

New entities electing LLC & LLP structure

Lower audit coverage on partnerships and S corporations

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A History of Schedule K-1 Reporting

Prior to TY 2000 most K-1s filed on paper

Due to processing costs, K-1s were not transcribed

Only way to get K-1 data was to order returns

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A History of Schedule K-1 Reporting

Taxpayer Relief Act of 1997 requires e-filing of Forms 1065 by partnerships with 100+ partners

TY 2001 all paper Schedules K-1 are transcribed

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A History of Schedule K-1 Reporting

New Schedule K-1 developed Available TY 2004 for partnerships

and S corporations Available TY 2005 for trusts Modeled on Form W-2 Form is easily scanned

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yK-1 Link Analysis Tool

An Overview

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What is yK-1?

yK-1 is an interactive Java based software tool and database.

It is adapted from yFILES software by yWORKS and maintained by IRS Headquarters Research.

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What is yK-1?

yK-1 uses K-1 data from corporations, flow-through returns, Forms 851 and K-1, and High Income Individual returns to visually depict relationships and income/loss flows between payers and payees.

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What is yK-1?

K-1s Forms 1120(x) 1041, 1065, 990

Form 1040

TPI > $250,000

Form 851

Affiliations

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What does it do?

yK-1 draws graphs of nodes and links Nodes represent tax returns and

other entities Links between the nodes reflect K-1

activity, and parent-subsidiary or husband-wife relationships

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yK1 Display Symbol Legend

Shapes indicate return type

1120S

1040

1065

1041

1120

Other 1120

?????

TEGE

Group Node

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yK1 Display Symbol Legend

Colors indicate special attributes

Red TPI > $250,000

Orange Total Assets > $10M

Yellow

Black

Tax Shelter

Tax Haven Address

Dark Grey Foreign Address

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Link Analysis Example

Controlling Party

Starting Point

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A Different Perspective

Link analysis helps to look at the enterprise in different ways, asking questions such as: What are the related entities? Are there known high-risk patterns

present? Which related entities present risk? Who really controls the enterprise?

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yK-1 Uses

When used interactively, nodes and links can be queried to provide more detailed information (e.g., addresses, dollar amounts for transcribed fields).

When used interactively, graphs can be expanded to pursue more definitive views of nodes of interest and reorganized to make them clearer.

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+37,938,415

+36,163,318

+867,508-32,320,557

+1,114,909-40,149,462

+867,508-32,320,557

+543,458-20,074,731

+543,458-20,074,731

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yK-1 Uses Classification

Identifying potential issues based on relationships to other entities

Case Building Getting related returns into the case file Describing relationship between returns

Audit Planning Risk assessment

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What’s Available Tax Years

2000-2004 Form Numbers

1120(x) 1065 1041 990 1040 5500

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