Improving the K-1 process

A Q&A with Neal Schneider

Neal Schneider
Improving the K-1 Process

Software developer Neal Schneider is one of the architects behind the Crowe K‑1 Advantage product suite, which will be rolled out later this year. Crowe K‑1 Advantage contains tools to help K‑1 recipients and producers more efficiently manage their tax filings. The Crowe K‑1 Exchange, which sits at the center of the product suite, facilitates much more streamlined communication between recipients and producers.

In the conversation below, Schneider reflects on the long-standing challenges in the K‑1 process and how Crowe K‑1 Advantage seeks to address those challenges.

What is your role at Crowe, and how did you get involved with K‑1s?

I’m in the product engineering group at Crowe, which is charged with software development for the firm. I lead the group responsible for our tax technology products. I am involved in the entire process, from design, development, and launch to supporting the technology out in the market.

My first foray into K‑1s was inside our C-TRAC® suite when Crowe built the Alternative Investment Module, a tool for K‑1 receivers that helped aggregate and analyze K‑1 data for tax reporting purposes. After a year or two, I was introduced to the preparer side and helped develop products to streamline partner K‑1 communication and allocations.

What are the biggest challenges in the K‑1 process today for producers? How does the Crowe K‑1 Advantage product suite help to address those challenges?

While producers of K‑1s each have their own unique challenges, we continually see two common issues. On the front end, producers need information about their partner group that is difficult to wrangle. On the back end, by the time they get the needed information, they don’t have a lot of time to incorporate the data, analyze it, and issue the K‑1s. The time period between gathering information and issuing K‑1s is very short, and it can be even tighter with complex entity structures like funds-of-funds or tiered partnerships, where a K‑1 from one entity must flow into another and another, and so on, until it gets to the top of the partnership.

Crowe K‑1 Advantage attempts to help producers get partner information in a streamlined fashion and put it into their work papers as quickly as possible. From there, producers can model their data and create their K‑1s faster. The final piece is connecting that work to the Crowe K‑1 Exchange, which is a medium to distribute the K‑1s to their recipient group in a standardized, digital manner.

What about receivers? What are their challenges in the K‑1 process, and how does the Crowe K‑1 Advantage product suite address those challenges?

Receivers (the partners) need to provide all their demographic information at the start of the K‑1 process to the K‑1 producers. The partners must get the same information out to each and every investment manager where they have holdings. Depending on the volume, partners can find themselves repeating the same information over and over and experiencing a very disconnected, inefficient process.

On the back end, once partners have received their K‑1s, they are again working within a short timeframe – they must quickly turn the K‑1s around and plug them into their main tax returns. Some large investors could have hundreds or even thousands of K‑1s, and their tax preparers have to aggregate them all together.

Compounding the stress of managing a rushed process, interpreting white papers, supplemental statements, and footnotes adds layers of complexity for receivers trying to aggregate their K‑1s to have a common analysis. Nine times out of 10, there is a substantial number of white papers behind the first page of the K‑1, and they contain additional information and disclosures relevant to the investment. There’s no standardization, no common structure between accounting firms that prepare the K‑1s, so the process is cumbersome and error-prone.

Our K‑1 product suite aims to address both issues: the inefficient transfer of information and the lack of standardization in the K‑1s themselves. Like producers, recipients will benefit from the ability to communicate more efficiently through the Crowe K‑1 Exchange and receive standardized data through a digital K‑1.

How do you get constituents on both sides of the K‑1 process to buy into the Crowe ecosystem so there’s a critical mass of participants?

Today, producers largely influence the overall timing and reporting of the K‑1 process. At Crowe, we’re talking about flipping that trend so the process is more centered around the partner or investor – the K‑1 recipients. Recipients want to provide their information once and receive it in a standardized format.

Through the Crowe K‑1 Advantage product suite, all parties can be on a common schema, and we then can optimize each party’s set of challenges. Producers have greater incentive to use the product suite if their recipients already are using the suite. Recipient information is there for producers’ benefit, as it saves them the time and energy normally required to gather all of it. Recipients too will have a greater incentive to use the product knowing their producers are preparing and communicating their K‑1s in a consistent manner so they can better plan and more quickly aggregate to their tax returns.

Once the Crowe K‑1 Advantage suite is rolled out later this year, what will be your next focus with K‑1s?

Crowe has a collection of products that everyone can use to standardize K‑1 preparation and distribution. The Crowe K‑1 Exchange, in particular, has the potential to dramatically change the nature and dynamic of interactions between producers and receivers as it standardizes and increases transparency between the two parties, starting with K‑1s.

One focus area that will evolve is understanding how the Crowe K‑1 Exchange will create continual opportunities to improve these interactions. After the product suite rolls out, ongoing feedback will help us further enhance and improve the software for our users. I’m looking forward to our rollout later this year and continuing to engage with the K‑1 community on how we can deliver a better – and digital – K‑1 for all.

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Neal Schneider
Neal Schneider