With the 2021 tax filing season well underway, there has been uncertainty and controversy surrounding the IRS’s new schedules K-2 and K-3.
The IRS created Schedules K-2 and K-3 to provide greater certainty and consistency in reporting international information to partners and shareholders. The schedules are intended to make international tax items less obscure for partners and shareholders needing the information to file their own returns.
These schedules are new for tax year 2021 and are intended to be used by S corporations, partnerships, and filers of Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships) to report items of “international tax relevance.” The schedules replace, supplement, and clarify the reporting of certain amounts formerly reported on the Schedule K-1 as foreign transactions.
There has been a great deal of controversy surrounding what technically constitutes “international tax relevance” as well as the filing process for these new schedules. In response, on February 16 the IRS announced transition relief for certain domestic partnerships and S corporations intended to ease the change to the new schedules. This relief, while appreciated, has given rise to more questions than answers. The IRS also posted a series of FAQs to its website in an attempt to provide further clarification on the items that must be reported.
Tax practitioners have been strongly advocating for a delay to the schedules’ 2021 tax year implementation requirement. On February 24, the AICPA authored a letter to the IRS and the Treasury requesting that the implementation be delayed to 2023 (the 2022 tax year filing season), citing implementation difficulties due to software development and the ongoing challenges of the COVID-19 pandemic, as well as the lack of clarity regarding the filing instructions.
There has been no word from the IRS regarding a delay as of the time of this writing. Given that fact, Kreischer Miller’s Tax Strategies team is moving forward with filing Schedules K-2 and K-3, as applicable for our clients.
We recognize that this is a complex topic exacerbated by a lack of clarity and an environment in which IRS resources are significantly limited. If you have any questions or concerns regarding Schedules K-2 and K-3, including whether you have a filing requirement or whether certain international transactions would be applicable, please contact your Kreischer Miller relationship professional or any member of our Tax Strategies group at your earliest convenience.