In the midst of a pandemic and with the IRS overwhelmed by millions of unopened returns and pieces of correspondence, Treasury introduced new tax filing requirements that affected all partnerships and S-corporations. The purpose of the new forms was to gather information on international tax items and report that information to partners and shareholders. With the new guidance, partnerships and S-corporations were now required to generate new Schedules K-2 and K-3, in addition to the K-1s that have always been a part of those tax returns. However, the IRS recently released new guidance that may provide transition relief to qualifying partnerships and S-corporations preparing schedules K-2 and K-3 for the 2021 tax year.
The newly required forms do not qualify as “kinder and gentler” nor are they simple. Schedule K-2, which gathers information from the business tax form, is 19 pages in length, and Schedule K-3, which reports this information to partners and shareholders, is 20 pages long.
The new Schedule K-2 and K-3 forms are complex and extensive, and they may require numerous partnerships and S-corporations to file extensions. Many partnerships and S-corporations do not have any foreign operations or foreign owners, and the initial guidance was that Schedules K-2 and K-3 would not be required for entities that did not have “items of international relevance.” In January 2022, Treasury announced that even if flow-through entities operate entirely in the United States, these entities would now need to provide information on the K-2/K-3 filings to partners and shareholders regardless of any lack of international relevance.
On February 15, 2021, in what appears to be a reversal of position, Treasury announced an intent to provide additional transition relief for those entities without foreign operations or foreign partners. Seemingly, going back to the K-2/K-3 non-requirement filing for those entities that do not have “items of international relevance.” This will help many practitioners currently but will only delay the reporting requirement until the 2022 filing season.
Taxpayers must demonstrate that a good faith effort was made to comply with the new reporting requirements and clients will look to their advisors to meet this threshold. Failure to file the new forms could trigger significant penalties.
Our advisors are closely following new IRS guidelines will continue to publish insights to keep you informed. Contact an Anders advisor below to further discuss if your corporation meets these requirements.
Anders Tax Partner John Scott contributed to this article.All Insights