The Internal Revenue Service is providing relief from filing a Schedule K-2 or K-3 information report this year for some partnerships without foreign activities.
The move by the IRS comes in response to requests from tax professionals who have asked for relief from the new filing requirements.
“The IRS intends to provide certain additional transition relief for this year from the Schedule K-2 and K-3 reporting for certain domestic partnerships and S corporations with no foreign activities, foreign partners or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance,” said the IRS in a statement Tuesday. “For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules. We are taking this step in response to feedback we received from the tax community and our stakeholders. The IRS will provide full details of this relief soon.”
For tax years starting in 2021, a partnership is supposed to file a Schedule K-2 (Partners’ Distributive Share Items - International) and Schedule K-3 (Partner’s Share of Income, Deductions, Credits, etc.- International) if it has international tax obligations. S corporations with international tax issues, along with some Form 8865 filers, were also supposed to have similar Schedules K-2 and K-3 filing obligations for tax years starting in 2021. Last year, the IRS offered penalty relief in
“That’s for domestic partnerships that do not have international investments for nonresident clients,” said Brent Lipschultz, a partner in the Personal Wealth Advisors Group at EisnerAmper, a Top 20 Firm in New York. “It’s going to get the W-8BEN’s or W-9’s from all your partners to make sure there are no international individuals within the partnership. It applies to a lot of partnerships because nowadays they’re all making international investments. You have to wonder how much relief was given here. Given the world we live in, with investments all over the world, did the IRS really do us a favor?”
On Wednesday, the IRS offered further details on the transition relief for certain domestic partnerships and S corporations preparing the new schedules K-2 and K-3 to further ease the change to these new schedules. The IRS indicated that those who are eligible for the relief won’t have to file the new schedules for tax year 2021.
The new schedules K-2 and K-3 aim to improve reporting by standardizing international tax information to partners and flow-through investors, making it simpler for them to report such items on their tax returns. The changes promise to ease flow-through return preparation compliance by clarifying tax obligations and standardizing the format for reporting.
The notice issued last year,
The IRS is offering an additional exception for tax year 2021 to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations. To qualify for this exception, the following conditions need to be met:
- 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 expect to generate foreign source income (see section 1.861-9(g)(3)).
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, section 864(c)(8), section 721(c) partnerships, and section 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.
If a partnership or S corporation qualifies for this exception, the domestic partnership or S corporation doesn’t 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 later 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.
The requirements aim to increase the transparency of international transactions to the IRS, but they make the process more complex. “I think over time a lot of partnerships haven’t been able to provide the kind of information that clients are looking for in order to do an accurate return, foreign tax credit information and otherwise,” said Lipschultz. “This is the government’s attempt to rectify that issue, while making it more complicated at the same time. It increases the tax cost of compliance at the partnership level, which ultimately reduces the return to investors because somebody‘s got to absorb the cost of all this.”
The IRS is asking for additional comments on Schedules K-2 and K-3. Comments and inquiries can be emailed to lbi.passthrough.international.form.changes@irs.gov.
