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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).

  1. In 2021, the domestic partnership has no direct foreign partners. This includes foreign individuals and foreign entities.
  2. 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.
  3. 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.
    1. Line 16 Form 1065 Sch K and K-1 (line 14 for 1120S)
    2. Line 20C Form 1065 Sch K (line 17d for 1120S)
  4. 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.

Questions? Ask a WG Advisor