Schedule K-1 Compliance and the yK-1 Link Analysis Tool MSATA Conference August 22, 2006

IRS LMSB SRPP2 Schedule K-1 Filings Over 25 Million K-1s filed Over $1 Trillion income

IRS LMSB SRPP3 Flow through filings increasing while corporate filings decreasing Assets $10M+

IRS LMSB SRPP4 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

IRS LMSB SRPP5 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

IRS LMSB SRPP6 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

IRS LMSB SRPP7 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

IRS LMSB SRPP8

yK-1 Link Analysis Tool An Overview

IRS LMSB SRPP10 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.

IRS LMSB SRPP11 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.

IRS LMSB SRPP12 What is yK-1? K-1s Forms 1120(x) 1041, 1065, 990 Form 1040 TPI > $250,000 Form 851 Affiliations

IRS LMSB SRPP13 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

IRS LMSB SRPP14 yK1 Display Symbol Legend Shapes indicate return type 1120S Other 1120 ????? TEGE Group Node

IRS LMSB SRPP15 yK1 Display Symbol Legend Colors indicate special attributes Red TPI > $250,000 Orange Total Assets > $10M Yellow Black Tax Shelter Tax Haven Address Dark GreyForeign Address

IRS LMSB SRPP16 Link Analysis Example Controlling Party Starting Point

IRS LMSB SRPP17 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?

IRS LMSB SRPP18 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.

IRS LMSB SRPP19 +37,938, ,163, , ,320,557 +1,114, ,149, , ,320, , ,074, , ,074,731

IRS LMSB SRPP20 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

IRS LMSB SRPP21 What’s Available Tax Years Form Numbers 1120(x)

IRS LMSB SRPP22