International reporting for pass-through entities has been inconsistent in the wake of the Tax Cuts and Jobs Act (TCJA), and that’s caused problems for owners – and for the IRS. Information for owners has been left as footnotes on the K-1, which is used to report the income, losses, and dividends of a business or financial entity’s partners or an S corporation’s shareholders. For the IRS, it’s made auditing extraordinarily difficult as well.
Introducing Schedule K-2 and K-3 for International Tax Filing
On June 3rd and 4th, 2021, the IRS issued draft forms of Schedules K-2 and K-3 which are to be utilized for the 2021 tax year.
Schedule K-2 “Distributive Share Items – International” and Schedule K-3 “Share of Income, Deductions, Credits, etc. – International” are intended for pass-through entities so they can consistently report international tax information. The intent is to allow for clearer instructions for owners to report the international income, deductions, and information on their personal returns.
The updated forms apply to anyone who must file a Form 1065, 1120-S, or 8865 – but only in instances where the entity has items relevant to international tax (e.g., foreign partners or international activities). Entities that do not have items of international relevance will not need to file K-2 or K-3 forms.
More Reporting Time?
The new forms are long – the K-2 currently weighs in at 14 pages and the K-3 at 21 pages. Despite the length, the IRS has stated that they don’t expect the forms to require additional reporting time. But, given the length, it seems inevitable. The new schedules may get shorter (or longer) as they undergo revisions – both Schedule K-2 and Schedule K-3 are currently in draft form and are expected to be finalized by year-end.
Draft instructions are available on the IRS website.
Have questions about the new Schedule K-2, Schedule K-3, or international tax concerns? Our team of international tax professionals can help. Contact us for a free consultation. We’re here to help. (And don’t miss our video on international tax penalties and how to avoid them!)