In a prior edition, we discussed how the IRS recently expanded the universe of partnerships and S corporations required to file Schedules K-2 and K-3 related to international tax attributes.
In a IRS Frequently Asked Question (FAQ) released today, the IRS provided filing relief for tax year 2021 only:
There are four requirements to qualify for this exception:
In tax year 2021, the direct partners in the 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 (on the form or attachments thereto):
Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, §864(c)(8), §721(c) partnerships, and §7874) (line 17d for Form 1120-S).
The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
There is an important caveat: 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 (though not on the schedules themselves). If this is prior to the filing of the 2021 entity return, then 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.
This is temporary relief — be prepared next year to file these schedules if any partner or shareholder requires the information next year (e.g. Form 1116, etc.) unless the IRS alters its instructions.
In the off-season, I would work to develop a strategy to gather this information from the entity, and alter your pricing appropriately for this additional compliance work.
Schedule K-2 and K-3 Education
Compass Tax Educators will be doing a Schedule K-2 and K-3 class in July 2022 to review these forms in-depth. You can register here or buy our 2022 ComPASS to get access to all live webinars during 2022.