The new Schedules K-2 and K-3 are required with partnership and S corporation tax returns for tax years beginning in the year 2021. Initially, the filing threshold was supposed to be based on whether the pass-through entity had items of international tax relevance for the 2021 tax year. The IRS released changes to the federal Form 1065 Schedule K-2 and K-3 instructions on January 18, 2022. At that time, the IRS update appeared to effectively require all pass-through entities to file the new schedules even if they did not have items of international tax relevance.
The IRS responded recently to the serious concerns expressed by tax professionals about the tax compliance burden to preparers and taxpayers. The IRS announced on Wednesday, February 16, 2022 the following transition relief for the 2021 Schedule K-2 and K-3 filing requirement.
U.S. partnerships and S corporations (2021 Form 1065 and 1120S filers) will not be required to file the 2021 Schedules K-2 and K-3 with the IRS if all of the following conditions are satisfied.
- The pass-through entity did not have any direct foreign owners in 2021.
- The pass-through entity did not have any international activity in 2021 (i.e., no foreign source income, assets producing foreign source income, or foreign tax paid or accrued).
- The pass-through entity did not provide to its owners and the owners did not request international information that would have been reported on the prior year 2020 Form 1065 Schedules K and K-1 lines 16 or 20c or the 2020 Form 1120S Schedules K and K-1 lines 14 or 17d, including any attachments to the tax return.
- The pass-through entity has no knowledge that the partners or shareholders are requesting any information that would be reportable on the Schedules K-2 and K-3 for the tax year 2021.
If a partner or shareholder notifies the pass-through entity that that they need the Schedule K-3 information then the pass-through entity would still have an obligation to provide the information to the owners. If the notification from the partner or shareholder is before the pass-through entity files the 2021 tax return then the Schedules K-2 and K-3 must be filed with the tax return and also provided to the partners or shareholders.