The IRS has announced it will be rolling out the ability to electronically file the new Schedules K-2 and K-3 this year, but not at the beginning of the filing season. This will likely impact the timing of 1065/1120-S filings, especially those that have items of international tax relevance.
Schedules K-2 (Partners’ Distributive Share Items — International) and K-3 (Partner’s Share of Income, Deductions, Credits, etc. — International) are new for the 2021 tax year. If taxpayers have items of international tax that are relevant, they’re required to report the information on Schedules K-2 and K-3 if they file Forms 1065 or 1120-S.
Electronic filing of these forms will be available March 20, 2022 for partnerships and mid-June 2022 for S corporations. If you want to electronically file 1065/1120-S returns before these timeframes, you’ll need to submit schedules K-2/K-3 as separate PDF files attached to the return.
Generally, items of international relevance include the existence of foreign partners or foreign activities. The new forms are extensive (K-2 is 20 pages long, while K-3 is 23) and are designed to supplement and clarify the former Form 1065 international information and provide pass-through entities a “standardized format” for reporting international tax information.
Recognizing that the adoption of the new Schedules will create challenges, the IRS has provided transition relief. For tax years that begin in 2021, certain penalties will not be imposed for incorrect or incomplete reporting on Schedule K-2 or K-3 if the filer establishes to the satisfaction of the IRS that it made a good-faith effort to comply with the new reporting requirements.
For more information about this topic, including reporting requirements for all entities with international activities, please contact your Schneider Downs international tax advisor.
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