In our February 11 issue of This Week In Tax, we told you that your business tax return just got 39 pages longer. Well, sometimes the tax world changes faster than Clark Kent in a phone booth and it can be hard to keep up.
Our original article mentioned that the IRS added Schedules K-2/K-3 to 2021 partnership and S Corporation returns to report to partners and shareholders “items of international tax relevance” from the operations of the partnership or S Corporation. Entities that didn’t have such items didn’t have to complete the schedules. However, on January 18, the IRS changed the instructions for these forms, essentially making it necessary to complete them for all partnerships and S Corporations and provide Schedule K-3 to all partners/shareholders.
After much outcry from taxpayers, their tax preparers, and organizations such as the AICPA, the IRS has now reversed course. As Margo Channing said, “Fasten your seatbelts; it's going to be a bumpy night.”
In keeping with their new procedure for releasing guidance, the IRS issued Frequently Asked Questions ("FAQs") on February 16 providing, among other things, a new exception to filing. FAQ 15 says in part (emphasis added):
The IRS is providing an additional exception for tax year 2021 to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations. To qualify for this exception, the following must be met:
- In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
- In tax year 2021, the domestic partnership or S corporation has 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 source income (see section 1.861-9(g)(3)).
- In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
- Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
- Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
If a partnership or S corporation qualifies for this exception, then it doesn’t have to file Schedules K-2 and K-3 with the IRS or with its partners or shareholders. There is, however, an exception to the exception. If a partner or shareholder notifies the partnership or S Corporation that all or part of the information contained on Schedule K-3 is needed to complete their tax return, then the partnership or S corporation must provide the information to the partner or shareholder – on Schedule K-2/K-3 if the return hasn’t been filed yet.
We will evaluate the application of this exception to our clients when there is uncertainty. And remember, as of right now this exception applies only to 2021 tax returns.
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Your Friedman LLP advisor will keep you updated as these filing requirements continue to evolve and help you resolve any inconsistent guidance. Contact us now with any questions.
