On February 16, 2022, the IRS issued updated FAQs that provide some welcome but limited relief to the Schedule K-2 and K-3 filing requirements for partnership and S corporation taxpayers that meet a defined set of facts for the 2021 tax year. These requirements also give additional context to the original instructions regarding items of international tax relevance. This updated guidance along with the relief provided in Notice 2021-39 now equips many tax advisors and taxpayers to move forward with some comfort in the filing position of the Schedule K-2 and K-3 for the 2021 tax year.
Updated FAQ K-2 and K-3 Key Changes
Taxpayers that meet the facts below now may claim a filing exception for Schedule K-2/K-3 for tax year 2021:
- In tax year 2021, a domestic partnership has no foreign partners;
- In tax year 2021, a partnership/S corporation has no foreign activity. This includes paid or accrued foreign taxes, ownership in assets that have or may reasonably will generate foreign source income.
- In tax year 2020, a partnership/S corporation did not provide any information pertaining to foreign items including items in box 16 (partnerships) or box 14 (S corps) and did not provide information on box 20c (partnerships) or box 17d (S corps), and
- The partnership/S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
It should be noted that the FAQs do state that if the partnership/S corporation is subsequently notified by a partner or shareholder that any part of the information on Schedule K-3 is needed by them, then the partnership/S corporation must provide the information to the partner or shareholder. If the partnership/S corporation has not filed their tax return at the time of the request, then they are deemed to not qualify for the above relief and must file Schedules K-2 and K-3.
Additionally, the FAQs indicate that if a partner believes they should have received a Schedule K-3 but did not, they should use Form 8082 to notify the IRS.
The additional FAQ guidance, while providing some relief for partnerships/S corporations that have only domestic partners and domestic operations, does leave some additional questions to consider. What constitutes having no knowledge of a partner or shareholder requesting Schedule K-3 information? Should a taxpayer be requesting confirmation from their partners/shareholders about their Schedule K-3 needs? Are there other items of international tax relevance not explicitly laid out in the instructions or FAQs that should be considered for the limited filing exemption? If I have extended my return, am I required to supersede my filing if Schedule K-3 information is requested before the extended due date?
Calvetti Ferguson tax advisors are ready to discuss these questions, the application of the limited exemption to your facts and circumstances, and the future impact of Schedule K-2/K-3 with you. If you have questions about the information outlined above or need assistance, Calvetti Ferguson can help. For additional information, click here to contact us. We look forward to speaking with you soon.