Transitional challenges for Schedules K-2 and K-3

The new Schedules K-2 and K-3 aim to improve reporting by standardizing international tax information to partners and flow-through investors, making it easier for them to report these items on their individual tax returns. However, implementing the required changes continues to cause transitional challenges for the tax community. Although the IRS has released IR-2022-38 and a series of frequently asked questions (FAQs), more guidance is needed.

On this episode of the Tax Section Odyssey, April Walker, CPA, CGMA, Lead Manager — AICPA Tax Section, talks with  guest Stephanie L. Chapman, CPA, Director, International Services — Belfint, Lyons, Shuman, CPAs, about where we are with Schedules K-2 and K-3 reporting and discusses procedural tips for preparation.

What you’ll learn in this episode

• Timeline of Schedules K-2 and K-3 information releases and AICPA resources and comment letters (0.47)
• The potential for a full delay in implementation (2.28)
• Who must file the new schedules (4.58)
• Filing requirement exceptions (8.12)
• What taxpayers can do in tax software if country codes are unknown (11.02)
• Woes with PDF attachments when forms aren’t available in software (13.08)
• Client management guidance, billing practices and engagement letters (15.23)

AICPA resources

• IRS Schedules K-2 and K-3 guidance and resources — Access resources to advise clients on IRS Schedules K-2 and K-3, such as a client information letter and an earlier podcast episode from November 2021, which are used to report items of international tax relevance from the operations of pass-through entities.
• AICPA additional comments regarding Schedules K-2 and K-3 reporting – The AICPA submitted comments on Feb. 18, 2022, requesting a delay in the implementation of Schedules K-2 and K-3 to 2023 and recommending the IRS provide additional guidance.
• AICPA comments on proposed international changes to Form 1065, Schedule K-2, and Schedule K-3 — The AICPA submitted comments in 2020 on the proposed international changes to Form 1065, Schedule K-2, and Schedule K-3, including the recommend transmittal of Schedule K-3 in portions and minimizing overreporting by allowing partnerships the ability to determine the reporting needs of its partners.

Other resources

• Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865) — A set of FAQs released by the IRS on the new schedules and their reporting requirements.
• News Release IR-2022-38 — The IRS announced further details on additional relief for certain partnerships preparing Schedules K-2 and K-3 for 2021 on Feb. 16, 2022.

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