The IRS is creating Schedules K-2 and K-3 to address the complexities introduced by the Tax Cuts and Jobs Act (TCJA) of 2017, which significantly increased the amount and types of information needed to calculate U.S. tax liability for items of international tax relevance. The new schedules aim to provide greater clarity and consistency in reporting international tax items, which were previously reported in a less structured format on Schedules K and K-1. This lack of standardization often led to confusion and inconsistent reporting, making it difficult for partners and shareholders to accurately determine their U.S. tax liabilities and for the IRS to verify the correct reporting of partnership and S corporation items.
The new Schedules K-2 and K-3 are designed to ensure that partners and shareholders have the necessary information to comply with their filing and reporting obligations. By standardizing the format and content of international tax information, these schedules help reduce the burden on both taxpayers and the IRS by minimizing unnecessary inquiries and examinations due to inconsistent reporting. The schedules are applicable to partnerships and S corporations with items of international tax relevance, such as foreign activities or foreign partners, and are intended to facilitate the accurate calculation of U.S. income tax liability for these entities.
Additionally, the IRS has provided filing relief for domestic passthrough entities with no foreign activities, foreign partners, or shareholders, and without knowledge of partner or shareholder need for information on items of international relevance. This relief is in response to feedback from the tax community and stakeholders, acknowledging the challenges and confusion faced by taxpayers and advisers regarding the new reporting requirements.
Sources:
Instructions for Form 1065 (2023)
Instructions for Form 1120-S (2023)
IRS Issues Draft Schedules K-2, K-3 for Passthrough International Reporting
IRS Announces Filing Relief for Schedules K-2 and K-3
