The IRS on February 16 provided, in a News Release, additional details about its recent statement that certain partnerships and pass-through entities without foreign activities won’t have to file Schedules K-2 and K-3 with their tax returns for 2021. The IRS also announced updated answers to frequently asked questions (FAQs) on the same subject.
In the News Release, the IRS announced an additional exception, for tax year 2021, to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations. This exception is discussed in the updated FAQs.
The FAQs flesh out the agency’s earlier statement that it’s granting “certain additional transition relief for this year” to filers of each schedule, on Forms 1065, 1120S, and 8865—mainly domestic partnerships and S corporations without foreign activities, partners, or shareholders. The relief from having to file Schedule K-2 or K-3 also will apply to entities without knowledge of partners or shareholders that need internationally relevant information, according to the IRS’s statement.
“For 2021, these qualifying domestic partnerships and S corporations will not have to file the new schedules,” read the statement. It was posted on the IRS’s new web page for updates on the current tax filing season. See IRS creates web page for tax filing season updates (2/16/2022).
Both schedules are new for the 2021 tax year, after the IRS in July 2020 proposed them as replacements for Schedule K, a form on which U.S. partnerships with international partners and activities had reported income. At the time, the IRS said the change was aimed at clarifying the process whereby partnerships report foreign-source income, and it said domestic partnerships with no foreign interests would continue using Form 1065 to report their income, gains, losses, and credits.
As finalized, Schedules K-2 and K-3 require each individual and foreign partner’s share of income, including deductions and tax credits.
In its earlier statement, the agency said the relief decision came “in response to feedback we received from the tax community and our stakeholders.” It added, “The IRS will provide full details of this relief soon.”
The newly issued FAQs and answers aim to provide those details. For example, one of the 16 questions asks whether the IRS is offering additional exceptions for tax year 2021 regarding Schedules K-2 and K-3. In answering “yes,” the agency specified that to qualify for the reporting relief, the following criteria must be met:
- In 2021, the direct partners in the domestic partnership weren’t foreign partnerships, corporations, individuals, estates, or trusts, and the domestic partnership or S corporation must have had no foreign activity. This includes “foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably expected to generate foreign-source income,” the IRS said, citing Reg. §1.861-9(g)(3).
- In tax year 2020, the domestic partnership or S corporation didn’t provide to its partners or shareholders, nor did the partners or shareholders request, information required on Form 1065, or attached Schedules K and K-1, regarding controlled foreign corporations and passive foreign investment companies, on Form 1120-F, under Code Sec. 250, Code Sec. 864(c)(8), and Code Sec. 721(c).
- 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 does not need to file Schedules K-2 and K-3 with the IRS or with its partners or shareholders,” the response to this FAQ said. It added, however, that if the partnership or S corporation was subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 was needed to complete its tax return, the partnership or S corporation must provide the information to the partner or shareholder.
To continue your research on what information must be provided to partners on Form 1065, Schedule K-1 and other schedules see FTC 2d/FIN ¶ S-2707.
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