2/22/2022 | Read Time: 3-4 minutes
New this year, IRS Schedules K-2 and K-3 will need to be completed to include items of international tax relevance from the operations of a pass-through entity.
If the entity has international financial activity –– which could be as simple as holding investments that pay foreign taxes or making sales to customers in a foreign county –– it will be required to report on these new schedules if it files:
• Form 1065, U.S. Return of Partnership Income
• Form 1120-S, U.S. Income Tax Return for an S Corporation
• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
Schedules K-2 and K-3 replace, supplement, and clarify the reporting of certain amounts formerly reported on a partner’s or shareholder’s Schedule K-1 as foreign transactions. These new schedules are substantially longer (19 & 20 pages each) and will require additional time, IRS guidance that we are still waiting for, and subsequent training for us to complete.
The new standardized format assists pass-through entities in providing partners or shareholders with the new information necessary to complete their returns with respect to international tax aspects as revised by the IRS and allows the IRS to verify tax compliance more efficiently. Failure to file such forms or properly provide these information statements to partners or shareholders can result in significant penalties if they are required but not filed.
There are nuances to the reporting requirements, including determining whether partners’ or shareholders’ respective income tax returns contain Form 1116, Foreign Tax Credit, or other international tax forms. If applicable, the pass-through entity will be required to file Schedules K-2 and K-3. We will assist you in determining if Schedules K-2 and K-3 are needed.
The IRS provided some transitional relief that may apply to your business for the 2021 tax year only. We will help you determine if any exception to the reporting requirements applies to you.
Because of these new rules, significant delays with the IRS accepting these schedules for electronically filed returns, and ever-changing guidance from the IRS, an extension may be needed to file a complete and accurate return. As such, individual extensions may be needed for partners and shareholders as well. Any individual with foreign components in their pass-through investments should anticipate filing an extension for their individual return.
We understand that you may have questions or concerns about this new reporting requirement. Please contact your tax advisor today with any questions.
As always, we appreciate the opportunity to serve you.
