Partnerships and S Corporations with certain foreign activity or foreign owners may have a surprise in their returns this year — in the form of additional reporting via Schedules K-2 (Partners’ Distribute Share Items – International) and K-3 (Partner’s Share of Income, Deductions, Credits, etc. – International).
While these new reporting requirements for certain pass-through entities are effective for tax years beginning in 2021, the IRS recently offered relief for partnerships and S Corporations that meet certain qualifications.
Why Are Schedule K-2 and K-3 Required in 2021?
Schedules K-2 and K-3 are an extension of the current Schedules K and K-1 and are designed to provide a streamlined way to report items of international tax relevance. In many cases, a taxpayer may have already been reporting some of the required information either directly on Schedule K or K-1, or by including footnotes to the owners on attachments to Schedule K-1. The new schedules, if required, will generally result in partnerships and S Corporations spending significantly more time on reporting this information to the IRS and their owners than in prior years.
What Taxpayer Relief is Available for Filing K-2s and K-3s in 2021?
Last summer the government released Notice 2021-39 providing transition relief for tax years beginning in 2021 related to the new schedules. Under this notice, taxpayers will not be subject to various penalties for incorrect or incomplete reporting if they can show they made a good faith effort to comply with the reporting requirements.
However, revisions to the Schedules K-2/K-3 instructions in January 2022 drew the attention of the tax community. Specifically, a note was added in the instructions that stated: “[a] partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3…” This statement, along with other portions of the instructions, lead to the conclusion that the pool of taxpayers required to complete various parts of the schedules was larger than originally thought.
Based on the tax community’s response to the changes, on February 16, 2022, the IRS released guidance via FAQs on filing relief for the 2021 tax year. To qualify for the filing exception, a taxpayer must:
- Have no direct foreign owners,
- Have no foreign activity,
- Have not provided certain international tax relevant information to its partners for tax year 2020, and
- Not have knowledge that an owner is requesting K-3 information for tax year 2021.
As noted above, a taxpayer will not qualify for the filing exception if it knows an owner has requested K-3 related information and the taxpayer has not yet filed its return.
If, however, the taxpayer receives the request after filing its return, it would remain eligible for the exception for 2021 but must provide the requested information to the owner.
Taxpayers should discuss the filing requirements and exceptions to the Schedule K-2 and K-3 with their tax advisers to help avoid potential penalties or additional work to obtain information requested by an owner.
Contact Robert Venables at email@example.com or a member of your service team to discuss this topic further.
Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.