Investment Club Tax Filing
A reader asks about the necessity of filing a partnership income tax return. Names have been omitted to protect the innocent <g>.
Is there any way that a club can get out of having to file those silly 1065 K1 forms? We got hit with an erroneous $600 penalty for supposedly filing late. It seems funny to have to pay a penalty for a form that does nothing but tell them who you are. Is there anyway legislation could be passed to make investment clubs exempt from the frivolous 1065s?

I'll try to answer the last part of your question first. I do so with some trepidation, since I can see that you are in no mood to hear a spirited defense of our income tax system. Rightly or wrongly, we are in a system where our income from various sources is reported to the IRS. This includes W-2 income and dividend and interest income. The IRS attempts to match this reported income to returns filed with them. In the case of an investment club, the broker reports income earned by the partnership to the IRS under the partnership tax ID. The partnership income tax return (Form 1065) is used by the IRS to see how that partnership income is allocated to each partner, so they can check that figure against each partner's individual 1040.

Therefore, I don't see any legislation coming that would exempt investment clubs from having to file. There used to be an election for certain partnerships to avoid having to file a 1065 return. You can read about this at

Does an investment club have to file a partnership return

Now let's talk about your penalty of $600. This has happened to quite a few unwary clubs. The IRS, in this wonderful age of computers, sends out automatic penalty notices to clubs who are late in filing. The penalty is assessed at $50 per member per month for a maximum total of 5 months. Very often, you can get this penalty waived if you are persistent enough to actually talk to a live human being. The penalty is usually way out of proportion to the amount of partnership income involved. One convincing argument for waiving the penalty is that each member has reported his/her share of the club's income on his/her individual tax return (1040). [Of course, if your members haven't picked up their rightful share, your argument is considerably weakened.]

There is another case, involving clubs of 10 members or less, where no penalty will be assessed for non-filing of a partnership return. You can read about this at.....
So, my advice to you is two-fold. File your partnership tax return, and try to recover the $600 penalty if it has, indeed, been paid.

Thanks for using bivio, and good luck!!!!!
Rip West
Saint Paul, MN