By Gary G. Wallace, CPA, Managing Partner | International Business Tax Team
Clarity for International Partnership Reporting on K-2 and K-3 Schedules and Penalty Relief
- On June 3 and 4, 2021, the IRS released new schedules K-2 and K-3. The schedules apply to taxpayers, including passthroughs and their partners and shareholders, that have international tax reporting requirements such as international activities and/or international partners.
- The schedules are designed to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.
- The IRS drafted instructions to provide more clarity in preparing K-2 and K-3 schedules (forms 1065, 1120-S, and 8865) for the 2022 filing season.
- In an effort to assist taxpayers with the increased complexity and preparation time, the IRS announced partnerships with international tax reporting requirements will also receive penalty relief if the taxpayer establishes good-faith effort to comply with the filing requirements.
New Schedules K-2 and K-3
The Treasury and the IRS released updated early drafts of new Schedules K-2 and K-3 for Forms 1065, 1120-S, and 8865 for tax year 2021 (filing season 2022). The schedules are designed to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.
The redesigned forms and instructions give guidance to partnerships, S corporations and U.S persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information. The updated forms will apply to any persons required to file Form 1065, 1120-S, or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners).
The changes do not affect partnerships and S corporations with no items of international tax relevance.
New Draft Instructions for Schedules K-2 and K-3
On June 30, 2021, the Treasury and IRS released draft instructions for the Schedules K-2 and K-3. The instructions respond to comments received with respect to the draft July 2020 instructions. Examples of the instructions, include:
- Clarify when each part of the schedule is applicable;
- Clarify that the preparer must only complete applicable parts of the Schedules K-2 and K-3; and
- Provide instructions for requested new separate schedules regarding determination of the section 250 deduction and the allocation and apportionment of expenses
Transition Period Penalty Relief for Schedules K-2 and K-3
In an effort to assist with transitional challenges and increased complexities with adoption of Schedules K-2 and K-3, the IRS is providing certain penalty relief for taxpayers for the 2021 tax year/2022 filing season. Penalties will be waived for any incorrect or incomplete reporting on the Schedules K-2 and K-3 if the filer establishes to the satisfaction of the Commissioner that it made a good faith effort to comply with the Schedules K-2 and K-3 filing requirements (and the Schedule K-3 furnishing requirements) per the instructions.
See IRS Notice 2021-39 for full details on the draft Schedule K-2 and K-3 requirements and the penalty relief.
About the Author
The information contained within this article is provided for informational purposes only and is current as of the date published. Online readers are advised not to act upon this information without seeking the service of a professional accountant, as this article is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant.