The IRS is waiving the requirement to include international tax information Schedules K-2 and K-3 for most domestic partnerships and S corporations for tax year 2021 (IR-2022-38, February 16, 2022.)
This announcement changes previous instructions for the forms.
Here are the requirements to qualify for the exception to the requirement to include the forms:
- 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. (Note that most mutual funds and many stocks generate dividends with associated foreign income tax withholding.)
- 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) (1) Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and (2) Line 20c, Form 1056, 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 partner or shareholder notifies the partnership or S corporation that it needs information on Schedule K-2 or K-3 to complete its income tax return, then the partnership or S corporation must provide the information. If the partner or S corporation shareholder makes the notification before the tax return is filed, Schedules K-2 and K-3 must be included with the income tax return filed with the IRS.
This is welcome relief so that most domestic partnerships and S corporations with all of their operations in the U.S. It might save a forest, because Schedules K-2 and K-3 are multiple-page forms provided to each partner or shareholder.
If your business is organized as a partnership (including most LLCs) or S corporation, see your tax return preparer about whether this exception applies to your business.