The Case of the Missing K-1

John and Mary Smith came by my office yesterday. “We normally get to you in June,” Mrs. Smith told me, “but this year we have everything so we’d like to file today.” Well, they had almost everything.

Unfortunately, there was one K-1 from a partnership that they didn’t have. They own about 2% of a rental property; their share of income has been around $100 every year. Mrs. Smith pulled out her cellphone and called her uncle (who is responsible for the K-1) and asked when it’s coming. I could only hear her end of the conversation, but the response of “August” wasn’t what she wanted to hear…especially since the Smiths are getting a $2,000 (or so) refund from the IRS.

“Can’t you just file the return using an approximation for the K-1? After all, we know the income will be about $100 because it always is.” I told them no.

I can’t knowingly sign an incorrect tax return. We don’t have the K-1, and while it has been $100 of income for the last several years (and her uncle estimates $100 for this year) there’s no guarantee it will be. The estimated income is fine for determining what to pay with an extension; however, it’s not acceptable for filing a tax return. This is one of the drawbacks when you participate in a partnership: You must wait for all of your K-1s before filing your taxes. If one of your investments that generates a K-1 takes an extension, you are forced to extend your personal returns.

Tax returns need to report your exact income, not your estimated income. Yes, the Smiths’ estimated and exact incomes should be similar, but “should be” isn’t good enough here.

I did give the Smiths one piece of good news after we filed their extension: When you file a return after April 15th and are getting a refund, the IRS pays you interest. Interest works both ways in tax…but that interest the Smiths will receive is taxable.

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