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

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

• MSATA Conference
• August 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
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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(No Transcript)
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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?
Forms 1120(x) 1041, 1065, 990
K-1s
Form 851 Affiliations
Form 1040 TPI gt 250,000
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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
1065
Other 1120
1041
?????
1120S
1120
TEGE
1040
Group Node
Shapes indicate return type
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yK1 Display Symbol Legend
Red
TPI gt 250,000
Orange
Total Assets gt 10M
Yellow
Tax Shelter
Black
Tax Haven Address
Dark Grey
Foreign Address
Colors indicate special attributes
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Link Analysis Example
Starting Point
Controlling Party
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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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36,163,318
543,458 -20,074,731
867,508 -32,320,557
37,938,415
1,114,909 -40,149,462
543,458 -20,074,731
867,508 -32,320,557
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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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Whats Available

• Tax Years
• 2000-2004
• Form Numbers
• 1120(x)
• 1065
• 1041
• 990
• 1040
• 5500

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Demonstration