Multiple K-1s, Escrow Distributions, and Refunds: What Are Your Options?

Someone on Reddit was granted shares in a company that was sold in 2021. They received an initial payout with part of the money held in escrow for distribution over the next two years. They received multiple K-1s (three for the initial payout, with restatements), and the numbers on the K-1s did not add up to the amount actually distributed. They had to file extensions and refile and were still waiting for their 2021 refund; escrow funds due in June 2022 were paid in January 2023 but the K-1 counted them as 2022 income, so more extensions and delayed 2022 refund. The company no longer exists in its previous form, so they had no one to ask about K-1 obligations or timing. They wanted to know what options they have. You report the income as stated on the K-1s you receive, even if it does not match actual distributions. Your options include getting a second opinion from a tax professional with K-1 experience, contacting the IRS Taxpayer Advocate Service for significant refund delays, and keeping thorough documentation of all K-1s and related communications.

Bottom line: When dealing with K-1s, you generally report the income as stated on the K-1s you receive, even if they do not match your actual distributions. The K-1 represents your share of the entity's income, deductions, and credits. Your options include: (1) Seek a second opinion from another tax professional with experience in K-1s and partnership/entity taxation if your current accountant does not seem concerned. (2) Contact the IRS Taxpayer Advocate Service if you face significant delays or issues with refunds. (3) Keep thorough documentation of all K-1s received and any communications about them; this helps with the IRS or a tax professional. The entity that issued the K-1s is responsible for accurate and timely K-1s, but if the company no longer exists in its original form, your ability to get clarity may be limited. For specific legal concerns, consult a tax attorney or a professional with expertise in partnership taxation. Margen can help you work through your K-1s, distributions, and carryovers in one place.

Question from Reddit

I was granted shares of a company I used to work for and when the company was sold in 2021 I got an initial payout with some of the money being held in escrow for distribution the following two years.

For that initial payout, I got 3 different K-1s. The first one was clearly indicated as estimated, but I heard through the grapevine that the 2nd one was going to be restated. I've had 3 total and none of the numbers seem to add up to the amount that was actually distributed to me. Not only do I have to keep paying my accountant to file extensions and refile our taxes, we're still waiting for our 2021 refund based on the 2nd K-1. After we receive that, she'll need to file yet again.

Then I should have gotten more money in June of 2022 but it wasn't actually paid until January 18 of 2023. Even though these funds were distributed in 2023, on April 14 of 2023 I got an estimated K-1 counting these funds as 2022 income. Once again my accountant has to scramble to file an extension and calculate our taxes and now we aren't going to get our 2022 refund any time soon.

The company doesn't actually exist in its previous format, so I have no idea to whom I should go with questions or how I could get information about when funds and K-1s will actually be sent. And I'm wondering what their obligations are regarding K-1s. How is it OK for them to keep sending them at the last minute, constantly restating them and counting 2023 distributions as 2022 income?

And I don't understand why the amounts don't ever match the actual distributions. I know they can classify certain amounts differently, but how can it be that my accountant can't make them add up to the amount that was actually distributed.

My accountant doesn't seem to be concerned, but then again she's making money on all this extra work. Do I have any options here? Or do I just have to accept this all as normal, keep paying her to refile and keep waiting years for our refunds?

Source: Reddit

Analysis

The inquiry revolves around the complexities of dealing with multiple K-1s from a former employer following the sale of the company and the subsequent distributions. Key issues include:

Discrepancies between reported income and actual distributions
The timing of K-1 forms
The obligations of the entity that issued the K-1s

The user is concerned about the operational transparency of the former company and is seeking potential options to address these issues.

Answer

K-1 discrepancies

When dealing with K-1s, it's crucial to report the income as stated on the K-1s you receive, even if they do not match your actual distributions. The K-1 represents your share of the entity's income, deductions, and credits.

Timing and reporting

The timing of K-1 distributions can be confusing, especially if the company is not in operation in its previous form. The entity is responsible for providing accurate and timely K-1s, but as it no longer exists in its original format, your options to obtain clarity may be limited.

Options for recourse

Contacting a tax professional: If your current accountant does not seem concerned, consider seeking a second opinion from another tax professional who has experience with K-1s and can assist in navigating these complexities. You can also create an account with Margen so we can help you work through your K-1s, distributions, and carryovers in one place.
Taxpayer Advocate Service: If you are facing significant delays or issues with your refunds, you may contact the IRS Taxpayer Advocate Service, which provides assistance to taxpayers who are experiencing challenges.
Documentation: Keep thorough documentation of all K-1s received and any communications regarding them, as this can be helpful in discussions with the IRS or any tax professional.

Applicable Sections

Federal / IRS

IRS Publication 541 discusses partnerships and their obligations regarding K-1s, including necessary information that should be provided to partners (IRS Publication 541).
IRS Form 1065 instructions elaborate on how partnerships report income, deductions, and distributions to their partners.

Practical Notes

Be proactive in resolving discrepancies by consulting with a tax professional who understands K-1 issues.
Maintain communication with the IRS if you experience delays in refunds due to K-1 discrepancies.
Understand that K-1s can sometimes be amended, and you may need to file an amended return if the final figures differ from what you initially reported.

Limitations

This answer does not cover specific legal actions against the former company or detailed procedures for amending tax returns. For specific legal concerns, you may want to consult with a tax attorney or a professional with expertise in partnership taxation.

For a deeper analysis of your situation, consider creating an account so that Margen can help you work through your K-1s, distributions, and carryovers in one place.

Are you experiencing a similar problem?

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Multiple K-1s, Escrow Distributions, and Refunds: What Are Your Options? (Reddit Q&A)