IRS Revises Instructions for New Schedules K-2 and K-3 To Significantly Expand Scope of Who Must File

On Jan. 18, 2022 the IRS issued important updates to the instructions related to filing the new Schedules K-2 and K-3 for tax year 2021 for partnerships and S corporations. The purpose of the new reporting obligation is to report items of international relevance to the owners of the entities. The IRS’s new instructions clarified that even if the entity has no foreign income, no foreign taxes paid or accrued, no foreign assets, and no other foreign activities, they may still need to file Schedules K-2 and K-3 if the owners of the entity are eligible to claim a foreign tax credit.

This reporting is complex and could include more than 20 pages for each Schedule K-2 and K-3 that are required to be filed, including gathering significantly more information about identification of indirect owners. There are penalties associated with the failure to file or report complete information. The IRS has provided limited relief from these penalties for 2021 for taxpayers that make a good faith effort to comply with the new reporting requirement, but the extent to which this relief can be relied upon is unknown.

The IRS has announced that the new schedules will not be available to e-file until after the original filing deadlines. The IRS is targeting late March for e-filing partnership returns containing Schedules K-2 and K-3, and late June for e-filing such S corporation returns. We are awaiting updates from our tax return software provider for full functionality in preparation of Schedules K-2 and K-3.

Taxpayers should anticipate additional time and fees related to this additional reporting. 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.