{"id":15948,"date":"2022-03-28T13:09:02","date_gmt":"2022-03-28T18:09:02","guid":{"rendered":"https:\/\/sfwpartnersllc.com\/?p=15948"},"modified":"2022-03-28T13:09:02","modified_gmt":"2022-03-28T18:09:02","slug":"the-irs-again-eases-schedules-k-2-and-k-3-filing-requirements-for-2021-2","status":"publish","type":"post","link":"https:\/\/www.sfw.cpa\/news-and-guides\/the-irs-again-eases-schedules-k-2-and-k-3-filing-requirements-for-2021-2\/","title":{"rendered":"The IRS again eases Schedules\u00a0K-2 and K-3 filing requirements for 2021"},"content":{"rendered":"

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The IRS has announced additional relief for pass-through entities required to file two new tax forms \u2014 Schedules\u00a0K-2 and K-3 \u2014 for the 2021 tax year. Certain domestic partnerships and S\u00a0corporations won\u2019t be required to file the schedules, which are intended to make it easier for partners and shareholders to find information related to \u201citems of international tax relevance\u201d that they need to file their own returns.<\/p>\n

In 2021, the IRS released guidance providing penalty relief for filers who made \u201cgood faith efforts\u201d to adopt the new schedules. The IRS has indicated that its latest, more sweeping move comes in response to continued concern and feedback from the tax community and other stakeholders.<\/p>\n

A tough tax season for the IRS<\/strong><\/p>\n

The announcement of additional relief comes as IRS Commissioner Charles Rettig has acknowledged that the agency faces \u201cenormous challenges\u201d this tax season. For example, millions of taxpayers are still waiting for prior years\u2019 returns to be processed.<\/p>\n

To address such issues, he says, the IRS has taken \u201cextraordinary measures,\u201d including mandatory overtime for IRS employees, the creation and assignment of \u201csurge teams,\u201d and the temporary suspension of the mailing of certain automated compliance notices to taxpayers. In addition, the partial suspension of the Schedules\u00a0K-2 and K-3 filing requirements might ease the burden for both affected taxpayers and the IRS.<\/p>\n

K-2 and K-3 filing requirements<\/strong><\/p>\n

Provisions of the Tax Cuts and Jobs Act, which was enacted in 2017, require taxpayers to provide significantly more information to calculate their U.S. tax liability for items of international tax relevance. The Schedule\u00a0K-2 reports such items, and the Schedule\u00a0K-3 reports a partner\u2019s distributive share of those items. These schedules replace portions of Schedule\u00a0K and numerous unformatted statements attached to earlier versions of Schedule\u00a0K-1.<\/p>\n

Schedules\u00a0K-2 and K-3 generally must be filed with a partnership\u2019s Form\u00a01065, \u201cU.S. Return of Partnership Income,\u201d or an S\u00a0corporation\u2019s Form\u00a01120-S, \u201cU.S. Income Tax Return for an S\u00a0Corporation.\u201d Previously, partners and S\u00a0corporation shareholders could obtain the information that\u2019s included on the schedules through various statements or schedules the respective entity opted to provide, if any. The new schedules require more detailed and complete reporting than the entities may have provided in the past.<\/p>\n

In January of 2022, the IRS surprised many in the tax community when it posted changes to the instructions for the schedules. Under the revised instructions, an entity may need to report information on the schedules even if it had no foreign partners, foreign source income, assets generating such income, or foreign taxes paid or accrued.<\/p>\n

For example, if a partner claims a credit for foreign taxes paid, the partner might need certain information from the partnership to file his or her own tax return. Although some narrow exceptions apply, this change substantially expanded the pool of taxpayers required to file the schedules.<\/p>\n

Good faith exception<\/strong><\/p>\n

IRS Notice\u00a02021-39 exempted affected taxpayers from penalties for the 2021 tax year if they made a good faith effort to comply with the filing requirements for Schedules\u00a0K-2 and K-3. When determining whether a filer has established such an effort, the IRS considers, among other things:<\/p>\n

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The extent to which the filer has made changes to its systems, processes and procedures for collecting and processing the information required to file the schedules,<\/li>\n
The extent the filer has obtained information from partners, shareholders or a controlled foreign partnership or, if not obtained, applied reasonable assumptions, and<\/li>\n
The steps taken by the filer to modify the partnership or S\u00a0corporation agreement or governing instrument to facilitate the sharing of information with partners and shareholders that\u2019s relevant to determining whether and how to file the schedules.<\/li>\n<\/ul>\n
The IRS won\u2019t impose the relevant penalties for any incorrect or incomplete reporting on the schedules if it determines the taxpayer exercised the requisite good faith efforts.<\/p>\n
Latest exception<\/strong><\/p>\n
Under the latest guidance, announced in early February, partnerships and S\u00a0corporations need not file the schedules if they satisfy all of the following requirements:<\/p>\n
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For the 2021 tax year:\n
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The direct partners in the domestic partnership aren\u2019t foreign partnerships, corporations, individuals, estates or trusts, and<\/li>\n
The domestic partnership or S\u00a0corporation has no foreign activity, including 1)\u00a0foreign taxes paid or accrued, or 2)\u00a0ownership of assets that generate, have generated or may reasonably be expected to generate foreign-source income.<\/li>\n<\/ul>\n<\/li>\n
For the 2020 tax year, the domestic partnership or S\u00a0corporation didn\u2019t provide its partners or shareholders \u2014 nor did they request \u2014 information regarding any foreign transactions.<\/li>\n
The domestic partnership or S\u00a0corporation has no knowledge that partners or shareholders are requesting such information for the 2021 tax year.<\/li>\n<\/ul>\n
Entities that meet these criteria generally aren\u2019t required to file Schedules\u00a0K-2 and K-3. But there\u2019s an important caveat. If such a partnership or S\u00a0corporation is notified by a partner or shareholder that it needs all or part of the information included on Schedule\u00a0K-3 to complete its tax return, the entity must provide that information.<\/p>\n
Moreover, if the partner or shareholder notifies the entity of this need before the entity files its own return, the entity no longer satisfies the criteria for the exception. As a result, it must provide Schedule\u00a0K-3 to the partner or shareholder and file the schedules with the IRS.<\/p>\n
Temporary reprieves<\/strong><\/p>\n
The IRS guidance on the exceptions to the Schedules\u00a0K-2 and K-3 filing requirement explicitly refers to 2021 tax year filings. In the absence of additional or updated guidance, partnerships and S\u00a0corporations should expect and prepare to file the schedules for current and future tax years. We can help ensure you have the necessary information on hand.<\/p>\n
\u00a9 2022<\/em><\/p>\n
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The IRS has announced additional relief for pass-through entities required to file two new tax forms \u2014 Schedules\u00a0K-2 and K-3 \u2014 for the 2021 tax year. Certain domestic partnerships and S\u00a0corporations won\u2019t be required to file the schedules, which are intended to make it easier for partners and shareholders to find information related to \u201citems […]<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7,59,10],"tags":[8,11,12],"class_list":["post-15948","post","type-post","status-publish","format-standard","hentry","category-articles","category-etra","category-news","tag-articles","tag-news","tag-updates"],"_links":{"self":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15948","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/comments?post=15948"}],"version-history":[{"count":0,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/posts\/15948\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/media?parent=15948"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/categories?post=15948"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.sfw.cpa\/news-and-guides\/wp-json\/wp\/v2\/tags?post=15948"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}