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Business Tax

CPA groups push delay of new partnership foreign-income schedules

· 5 minute read

· 5 minute read

CPAs’ Letter: Concerns Regarding Schedules K-2 and K-3 Reporting (2/24/2022)

The IRS should delay for a year its new requirement that some partnerships report foreign income because filing Schedules K-2 and K-3 is too burdensome, certified public accountants across the U.S. have complained in a letter to the agency.

The information demanded of certain pass-through entities, particularly partnerships with foreign activities as well as S corporations, on the schedules is overly broad and the rules for compliance unclear, according to the February 24 letter. It was sent to IRS Commissioner Chuck Rettig and Lily Batchelder, the Treasury Department’s assistant secretary for tax policy, by the American Institute of CPAs (AICPA) and professional accounting groups in every state plus Washington, D.C., and Guam.

In seeking a postponement to 2023 of foreign-income reporting on either of the two schedules, the CPA groups also cited ongoing burdens on pass-through filers and their tax preparers from COVID-19. This compounds the problem of the IRS not being able to accept e-filings of returns containing a Schedule K-2 or K-3 until March 20 for partnerships and mid-June for S corporations, the letter stated.

“Delay is essential until e-filings can be accepted and uncertainty regarding taxpayer filing obligations is resolved,” it said. In addition, the CPA groups urged Treasury and the IRS to suspend any assessment of penalties against partnerships or S corporations that fail to file or fail to timely provide Schedules K-2 and K-3 for the 2021 tax year.

The request goes beyond an IRS announcement February 15 that the agency was granting relief for the current tax year for filers—mainly domestic partnerships and S corporations with no foreign activities, partners, or shareholders—transitioning to the new schedules, which were finalized in 2021. The relief from having to file Schedule K-2 or K-3 with Forms 1065, 1120S, and 8865 also would apply to entities without knowledge of partners or shareholders that need internationally relevant information, the IRS said in its announcement and a subsequent list of frequently asked questions (FAQs). See IRS issues details, FAQs on filing exception for partnership Schedules K-2, K-3 (2/17/2022).

In the view of the CPA groups, no pass-through entity should have to report income on the new schedules until next year. Their letter reiterated some earlier complaints from the AICPA about the schedules but also questioned some recent IRS revisions to K-2 and K-3 filing instructions. It said making additional changes to the scope of data sought during the ongoing filing season “leaves the tax system confused and in disarray.”

Jan Lewis, chair of the AICPA’s tax executive committee, initially called for a one-year delay for entities required to file Schedule K-2 or K-3. At a February 17 hearing of the Senate Finance Committee, Lewis said that amid efforts by the IRS to process a pandemic-worsened backlog of tax returns, forcing the use of the new schedules this year would only add to the agency’s woes.

A Treasury Department spokesperson referred Checkpoint to the IRS’s February 16 FAQs regarding Schedules K-2 and K-3 when asked to comment on the CPA groups’ letter. An IRS representative didn’t immediately respond to a request for comment.

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