The authority underlying Schedules K-2 and K-3 is primarily derived from the Internal Revenue Code (IRC) and the accompanying Treasury Regulations. Specifically, Treasury Regulation section 1.6031(a)-1(a)(1) and (2) provides that every domestic partnership must file a return of partnership income under section 6031 for each taxable year on the form prescribed for the partnership return. The partnership return must contain the information required by the prescribed form and the accompanying instructions. This regulation mandates that partnerships include all necessary information to determine their tax liability, which forms the basis for requiring Schedules K-2 and K-3.
Schedules K-2 and K-3 are designed to provide detailed information on items of international tax relevance, ensuring that partners and shareholders can accurately calculate their U.S. income tax liability. These schedules replace, supplement, and clarify the reporting of certain amounts formerly reported on other parts of the partnership and S corporation returns, such as Form 1065, Schedule K, and Schedule K-1, and Form 1120-S, Schedule K, and Schedule K-1. The changes aim to enhance compliance and provide greater clarity for taxpayers with international tax items.
Sources:
Instructions for Form 1065 (2023)
Instructions for Form 1120-S (2023)
Notice 2021-39
IRM Part 3. Submission Processing. Chapter 0. General. Section 101. Schedule K-1 Processing
IRM Part 21. Customer Account Services. Chapter 7. Business Tax Returns and Non-Master File Accounts. Section 4. Income Taxes/Information Returns
IRS Issues Draft Schedules K-2, K-3 for Passthrough International Reporting
