The IRS has provided exceptions to filing new schedules K-2 and K-3 for certain domestic partnerships and S corporations. As a result, partnerships and S corporations qualifying for the exceptions will not have to file schedules K-2 and K-3 for 2021.
Schedules K-2 and K-3 are meant to improve international tax information reporting to partners and shareholders, making it easier to report these items on their tax returns. The IRS took up a similar initiative many years ago when they standardized schedule K-1 reporting for partnerships and S corporations.
The IRS has provided penalty relief for good faith efforts to adopt reporting of Schedules K-2 and K-3. The IRS has addressed the exceptions to K-2 and K-3 appearing in their frequently asked questions for Schedules K-2 and K-3 on their website. frequently asked questions (FAQs) on Schedules K-2 and K-3
For tax year 2021 to qualify for the exceptions to filing schedules K-2 and K-3 for domestic partnerships and S corporations the following must be met:
- For tax year 2021, the domestic partnership has no foreign partners.
- For tax year 2021, the domestic partnership or S corporation has no foreign activity including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign source income.
- For tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
- Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
- Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
Entities qualifying for the exception will not have to file K-2 or K-3 or provide these forms to their partners or shareholders. However, if a partner or shareholder of the entity requests K-3 information needed to complete their tax return, the exception is not met, and the partnership or S corporation must provide the information to the partner or shareholder. If the partnership or S corporation is notified by a partner or shareholder before the entity files its return, the conditions for the exceptions are not met, and the entity must provide K-3 to the partner or shareholder and file the K-2 and K-3 with its tax return.
