What are these two schedules? Schedule K-2 “Distributive Share Items – International” and Schedule K-3 “Share of Income, Deductions, Credits, etc. – International” are intended for pass-through entities (PTE) to consistently report international tax information. This allows for clearer instructions to owners to report the international income, deductions, and information on their personal returns.

In the summer of 2021, the IRS issued draft forms of Schedules K-2 and K-3 to be utilized for the 2021 tax year. Originally, it was perceived that only partnerships, S corporations, and filers of Form 8865 who had either foreign partners or international activities were required to file these forms.

Wrong! On January 18, 2022 – the IRS revised the instructions for these forms to include additional PTE that would be required to file. This change pulls in a significant number of PTE that only have domestic owners and US source income that were not expecting the extra compliance and burden of filing Forms K-2 and K-3. The K-2 alone is 19 pages!

Where’s the good news?

There was a lot of pushback on the IRS due to these revised changes for the following reasons:

  • Additional reporting that wasn’t originally considered
  • Forms are not available across most tax preparation software programs until after the March 15th deadline
  • Many additional returns to be extended because of the software limitation – which increases the backlog for the IRS
  • If returns were filed with the K-2/K-3 as a PDF attachment to avoid not being able to e-file, this would also increase the backlog for the IRS

The IRS responded on February 15, 2022, that they are granting transition relief for the 2021 tax year for certain partnerships and S corporations with:

  • No foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign-sourced income
  • No direct foreign partners or shareholders

For 2021, these PTEs will not have to file the new schedules. Please refer to Notice 2021-39, which provides relief from failure to file penalties under Section 6698 / 6699 that could be applied if Forms K-2 and K-3 are not completed.

Another good source of information is the IRS website FAQ page.

Have Questions?

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.