Walter & Shuffain - Certified Public Accountants & Business Advisors

IRS Offers New Details to Prepare Schedules K-2, K-3

The IRS has provided an additional exception for qualified domestic partnerships and S corporations to file their schedules K-2 and K-3 for tax year 2021 to further ease the transition to these new schedules.  The new schedules standardize international tax information to partners and flow-through investors while clarifying obligations and standardizing the reporting format. 

Simply put, eligible entities, those with no foreign activities, foreign partners or shareholders, and without knowledge of partners or shareholders needing information on items of international relevance, will not have to file the new Schedules K-2 and K-3 for tax year 2021. 

To qualify for this exception, partnerships and S corps must meet the following: 

  • Direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts in tax year 2021. 
  • The domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, generated, or may reasonably be expected to generate foreign source income (see section 1.861-9(g)(3)) in tax year 2021.  
  • In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request the information on the form or attachments regarding: 
    • Line 16, Form 1065, schedules K and K-1 (line 14 for Form 1120-S), and 
    • Line 20c, Form 1065, schedules K and K-1 (controlled foreign corporations, passive foreign investment companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S). 
  • The domestic partnership or S corporation has no knowledge that partners or shareholders are requesting such information for tax year 2021. 

If a partnership or S corporation qualifies for this exception, it does not need to file Schedules K-2 and K-3 with the IRS or its partners or shareholders. However, if a partner or shareholder notifies the partnership or S corporation that all or part of the information contained on Schedule K-3 is needed to complete their tax return, the partnership or S corporation must provide the information to the partner or shareholder.  

If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS. 

Click here to read the IRS notice regarding the relief options. More information can be found in the IRS’ updated Schedule K-2 and K-3 frequently asked questions. Please get in touch with our office today if you need help navigating this new relief or completing your schedules K-2 and K-3.