Tax & Assurance Guidance

IRS Provides Relief on K-2 and K-3

Posted on February 17, 2022 by

Margaret Amsden

Margaret Amsden

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In an attempt to provide more transparency with regard to reporting of foreign activity and/or information to foreign owners, the IRS came out with two new forms:

• Schedule K-2 (an addendum to the Schedule K)
• Schedule K-3 (an addendum to the Schedule K-1)

These forms are being rolled out for the 2021 tax year, but the implementation is running behind schedule so the forms won’t be available for e-filing until either late March (partnerships) or mid-June (S Corporations).

This has caused significant consternation among the members of the business community as well as those who are working to meet the filing requirements and information needs of the many investors that are waiting for their Schedule K-1s.

As feedback about these issues made its way to the IRS (with a fair amount of pressure), the IRS issued some updates to the Frequently Asked Questions late in the day on 2/15/22. The end result is a significant pull back with regard to who needs to file the forms for 2021.

To qualify for the filing exception, the following must be met:

  • In tax year 2021, the direct partners in a 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, have generated or may reasonably expected to generate foreign source income
    • 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 regarding Foreign Transactions, Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874
  • The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021

If the pass-through entity qualifies for this exception, they do not need to file Schedules K-2 and K-3 with the IRS or with its partners or shareholders. However, if the partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete their tax return, then 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 conditions for the exception are not met and 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.

If you have any questions, please feel free to reach out to us.

Margaret Amsden

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Leading the firm’s private client services group, Margaret’s strategic & educational approach fosters a culture of learning among clients and colleagues.

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