K-2/K-3 — Making sense of new international passthrough reporting

Nov 17, 2021

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In June 2021, the IRS released final versions of two new international-related schedules that are being added to passthrough entity returns:

Schedule K-2, Partners' Distributive Share Items — International
Schedule K-3, Partner's Share of Income, Deductions, Credits, etc. — International

The new international-related schedules will be required for 2021 partnership and S corporation returns and 2021 Schedules K-1, Partner's Share of Income, Deductions, Credits, etc.

In this Tax Section Odyssey episode, April Walker, CPA, CGMA, from the AICPA Tax Section, welcomes Amy Miller, JD, CPA, from the AICPA Tax Policy and Advocacy team, David Sites, CPA, Managing Partner of International Tax Services — Grant Thornton, Kyle Dawley, JD, CPA, Principal — Clifton Larson Allen, and Tim Chan, CPA, Managing Director — KPMG, to discuss the new schedules and related past and future AICPA efforts.

What you’ll learn in this episode

Background of the AICPA Foreign Passthrough Reporting Task Force and its past activities (1.19)
Summary of the September 2020 AICPA comment letter (2.08)
AICPA recommendations that were adopted by the U.S. Treasury and IRS (3.24)
What the IRS is trying to achieve with the new schedules (4.20)
Timing of schedule furnishment to partners (6.29)
Thoughts on potential postponement of the Schedules K-2 and K-3 (8.06)
Status of form instructions and major issues that practitioners and clients need to be aware of (10.37)
Parts II and III reporting for those with 100% U.S. source activity (14.37)
Country-by-country reporting requirement (16.49)
Interaction between international forms (e.g., Forms 8858 and 5471) and new reporting requirements (18.00)
Filing requirements for entities that are not required to file Forms 1065 or 8865 (20.37)
What an upper-tier partnership should do if a lower-tier partnership does not provide any or all of Schedule K-3 information (21.30)
Next steps for the AICPA Foreign Passthrough Reporting Task Force (23.00)

AICPA resources

Comments on Proposed International Changes to Form 1065, Schedule K-2, and Schedule K-3 — The AICPA submitted comments on the proposed international changes to Form 1065, Schedule K-2 and Schedule K-3. The AICPA recommended 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

Notice 2021-39 — The IRS announced draft 2021 instructions for Schedules K-2 and K-3 for partnership and S corporation Forms 1065, 1120-S and 8865 as well as transition relief from penalties for any incorrect or incomplete reporting on the schedules.
About Form 1065 and About Form 1120-S — The recent developments section provides updates as Schedules K-2 and K-2 are finalized for the 2021 tax year.

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