IRS Schedules K-2 and K-3, new for 2021, may need to be completed to include items of international tax relevance from the operations of a pass-through entity.
If the entity has any international financial activity –– which could be as simple as holding investments that pay foreign taxes –– it may be required to report on these 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 specific amounts formerly reported on a partner's or shareholder's Schedule K-1 as foreign transactions. These schedules are more extended and will likely require additional time for us to complete.
There is a new exception for filing and furnishing Schedules K-2 and K-3 for the 2022 tax year. To qualify for this exception, the entity must meet the following criteria:
- No or limited foreign activity (this can include foreign taxes paid or accrued of $300 or less)
- All direct partners must be U.S. citizens or resident aliens for entities filing as a partnership.
- Partners/shareholders should be notified that Schedule K-3 will not be provided in advance. We will add a footnote to your Schedule K-1 informing the partners/shareholders that we used the "domestic filing exemption."
- The entity does not receive any requests for Schedule K-3 information on or before one month before the tax return is due. For calendar year returns filing timely, the request must be made by February 15, 2023, or if extending, the latest date would be August 15, 2023.
The new standardized format assists pass-through entities in providing partners or shareholders with the information necessary to complete their returns for international tax aspects. It also 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.
We understand that you may have questions or concerns about these reporting requirements. Our staff members are available to answer all questions you may have and can assist you with tax compliance.
Clients are encouraged to contact their Brinker Simpson tax advisor with any questions.
As always, we appreciate the opportunity to serve you.