On February 16th, 2022, the IRS updated its FAQs relating to Schedules K-2 and K-3. The objective of this update is to provide relief to certain domestic partnerships and S corporations who will be transitioning to the new Schedules K-2 and K-3.
For the 2021 tax year, an exception for filing Schedules K-2 and K-3 can be applied to certain domestic partnerships and S corporations if the following conditions are met (if one of the conditions below subsequently changes before the return is filed, the exception will not apply).
- In 2021, the domestic partnership has no direct foreign partners. This includes foreign individuals and foreign entities.
- In 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued, or ownership of assets that could generate foreign source income.
- In 2020, the domestic partnership or S corporation did not provide to its partners or owners any of the foreign-related information which appears on the foreign information portion of Schedule K-1.
- Line 16 Form 1065 Sch K and K-1 (line 14 for 1120S)
- Line 20C Form 1065 Sch K (line 17d for 1120S)
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting foreign-related information for 2021.
It is important to note that there may be cases where a partnership or S corporation is subsequently notified by a partner or shareholder that all or some of the information on Sch K-3 is needed to complete their tax return. In these cases, the partnership or S corporation must provide the information to the partner or shareholder and file Sch K-2 and K-3.
WG Observation: Schedules K-2 and K-3 are a comprehensive change to the reporting of international tax items by partnerships and S corporations. The initial guidance as to who was required to file these Schedules was controversial as it seemed to include partnerships and S corporations which had no obvious international aspects. These updated FAQs are intended to address this concern.