IRS Issues Updated FAQs Related to Schedules K-2 and K-3

On Feb. 16, 2022, the IRS issued updated FAQs that provide some limited relief to the Schedule K-2 and K-3 filing requirements. There is a limited filing exception for Schedule K-2/K-3 for tax year 2021 only in the situation where:

• A partnership has no foreign partners,
• Partnership/S corporation has no foreign activity (including foreign taxes, foreign source income, foreign assets that generate income),
• Partnership/S corporation did not provide any information in formerly box 16 (1065) or box 14 (1120-S) and did not provide information on box 20c (1065) or box 17d (1120-S) in 2020, and
• Partnership/S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

However, the FAQs do state that if the partnership/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.

• If notified before the partnership or S corporation tax return is filed, the conditions for the exception are not met and the partnership/S corporation must provide Schedule K-3 to the partner or shareholder and file the Schedules K-2/K-3 with the IRS.
• If notified after the partnership or S corporation tax return is filed, the information must be provided to the partner or shareholder. We are awaiting additional guidance related to how that information must be provided.

Additionally, the FAQs indicate that if a partner believes they should have received a Schedule K-3 but did not, that they should use Form 8082 to notify the IRS. We are awaiting guidance on the risk to the partner/shareholder if that form is not filed as well as the risk to the partnership/S corporation if that form is filed and the Schedule K-3 information wasn’t provided.

Your KSM advisor will be in touch regarding updates and the best approach that suits your facts and circumstances, but please feel free to reach out to your advisor or complete this form if you have any additional questions or concerns.