By William R. Stromsem, CPA, J.D., Assistant Professor, George Washington University School of Business
The IRS recently released updated drafts of new Schedules K-2 (Partners’ Distributive Share Items—International) to be filed with the pass-through’s return and K-3 (Partner’s Share of Income, Deductions, Credits, etc.—International) to be provided to each owner. (See IR-2021-98 dated April 30, 2021.) Similar forms will be provided for other pass-through entities.
The forms are only required for those filing Forms 1065, 1120-S and 8865 (controlled foreign partnerships) if they have items of international tax relevance—generally foreign activities or foreign owners. If required, the forms must be included with 2021 returns that will be filed next year, although the IRS has already announced that there will be some penalty relief for the first year, with details to follow. The forms “help” pass-through businesses and their owners comply with their U.S. tax requirements, such as claiming credits, deductions and other items related to international taxes. The revised forms are intended to provide information to owners in an organized way and will also provide standardized information in an orderly way for collection and analysis by the IRS.
Firms with clients who are pass-throughs with international owners or activities should watch for and review the forms and instructions that will be released later this summer. You might alert clients to be sure to collect sufficiently detailed information to meet the new form requirements.
(The initial draft of the Form K-3 highlights the significant complexity in complying with this reporting requirement. The draft K-3 is 20 pages long and contains 13 sections, one of which, alone, has 55 lines.)