Change Country

Tax & Assurance Guidance

IRS Provides Relief on K-2 and K-3

Posted on February 17, 2022 by

Margaret Amsden

Margaret Amsden

Share This

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.

Continue the Conversation

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

Margaret Amsden

Shareholder

Margaret leads the firm’s private client services group as the point person for individual, estate and succession planning tax strategies.

Related Insights

Tax & Assurance Guidance

Keeping Up With Digital Taxes

Posted on September 6, 2022 by

Miroslav Georgiev
Sue Tuson
To the uninitiated, selling digital products and services can seem like a much easier business model than selling physical goods. While there may be advantages to skipping inventory and warehouse needs, the digital tax landscape can be tricky to navigate. 

Tax & Assurance Guidance

Insights from Washington: Inflation Reduction Act Signed

Posted on August 19, 2022 by

Sarah Russell
On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act of 2022, a bill to finance climate and energy provisions and an extension of the enhanced Affordable Care Act (ACA) subsidies totaling $369 billion in additional spending.

Tax & Assurance Guidance

Insights from Washington: Senate Passes the Inflation Reduction Act

Posted on August 9, 2022 by

Nick Lloyd
On August 7, 2022, the U.S. Senate approved the Inflation Reduction Act of 2022, a bill to finance climate and energy provisions and an extension of the enhanced Affordable Care Act (ACA) subsidies totaling $369 billion in additional spending.

The Sound of Automation Podcast

Industrial automation businesses are the driving force behind Industry 4.0, and Clayton & McKervey is here to help.

Skip to content