The IRS has made significant changes this year that will impact many pass-through entities (Partnerships and S Corporations) regarding how they will file their tax returns. In an effort to provide reporting consistency, the IRS created Schedules K-2 and K-3 which add a new level of reporting that many pass-through entities will have to complete. These forms were introduced to report items of international tax relevance, including business operations and foreign investments. If a pass-through entity has no international activity, the entity may still be required to complete the forms if the entity has partners/shareholders with foreign reportable activity, including foreign tax credits from other sources.
What has changed?
Through the 2020 tax filings, international activity was reported on Schedule K-1. For 2021 tax filings, Schedule K-3 has replaced what was originally reported on Schedule K-1, adding details that previously were not always reported.
Severe penalties may be imposed if a pass-through entity fails to comply with the new reporting requirements. For the 2021 filing year, the IRS, in an effort to work with tax advisors and taxpayers, has provided transitional relief from penalties if a good faith effort is made to fill out the new forms as accurately as possible. However, this may not be in the case for the 2022 filings in 2023. Please contact your Tonneson tax advisor if you have questions or feel you may be required to complete these new forms.