Why Am I Always Filing My Taxes Late

Now that we are in the final weeks of 2011 everyone’s attention will soon turn to the preparation of their personal tax returns.  As each tax season unfolds we tend to hear a common question, why am I always filing my taxes late?  For many clients the cause is the dreaded Schedule K-1.  A Schedule K1 is typically received from a trust, private business or private investment fund and is the scourge of every client and advisor!

Many individuals are engaged in certain business ventures including professional investment vehicles or are beneficiaries of certain trusts.  The activities that typically occur in these vehicles are more complex than normal stocks and bonds.  These activities require receiving and filing a Schedule K-1 form by the entity, which reports the distributed share of income from these relationships. 

The primary problem with K-1’s is that they almost always arrive late. Most tax information reporting forms, like 1099s and 1098s, are required to be sent to taxpayers by January 31^st.  This is not the case with the Schedule K-1 form.  Investors who receive K-1’s are lucky to receive them by the end of March.  In addition, many alternative investment vehicles and closely held businesses that issue K-1’s file tax return extensions which result in all related K-1’s being delayed even longer.

So what is the cause of these delays?  Many alternative investment strategies invest in active businesses, real estate, oil and gas, timber, commodities and futures.  Due to the nature of these businesses, they often generate unique deductions and credits that must be reported on any number of obscure supplemental tax forms and schedules. Even with today’s computer technology, each form and schedule takes a tremendous amount of time to complete.  With accountants facing tax preparer penalties for tax return errors, most accountants are unwilling to issue their K-1’s without a high level of confidence in the completed form.

Then why do individuals invest in Alternative Investments? Unfortunately, in today’s investment climate many of the unique business opportunities that are available to high net worth clients are only accessible through these vehicles.  When properly structured, these opportunities can present an enormous upside that is not typically available to retail investors.  As tax rates rise, many of these unique features become even more valuable and offer the liability protection that investor’s desire.  

So the next time you get frustrated about the delay just remember we feel your pain.

IMPORTANT DISCLOSURES This letter may include forward-looking statements.  All statements other than statements of historical fact are forward-looking statements (including words such as “believe,” “estimate,” “anticipate,” “may,” “will,” “should,” and “expect”).  Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct.  Various factors could cause actual results or performance to differ materially from those discussed in such forward-looking statements.”  Performance is not indicative of any specific investment or future results. Views regarding the economy, securities markets or other specialized areas, like all predictors of future events, cannot be guaranteed to be accurate and may result in economic loss to the investor. Investment in securities, including mutual funds, involves the risk of loss. Nothing in this letter is intended to be or should be construed as individualized investment advice. All content is of a general nature. Individual investors should consult their investment adviser, accountant, and/or attorney for specifically tailored advice. The S&P 500 Index (S&P) has been used as a comparative benchmark because the goal of the above account is to provide equity-like returns. The S&P is one of the world’s most recognized indexes by investors and the investment industry for the equity market.  The S&P, however, is not a managed portfolio and is not subject to advisory fees or trading costs. Investors cannot invest directly in the S&P 500 Index.  Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results.  Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.