The IRS has provided further details on additional transition relief for certain domestic partnerships and S corporations preparing the new schedules K-2 and K-3 to further ease the transition to these new schedules. Those eligible for the relief will not have to file the new schedules for tax year 2021. The new schedules K-2 and K-3 improve reporting by standardizing international tax information to partners and flow-through investors, making it easier for them to report these items on their tax returns. The changes ease flow-through return preparation compliance by clarifying obligations and standardizing the format for reporting. Notice 2021-39 provides penalty relief for good-faith efforts to adopt new schemes. This transition relief, appearing in the new frequently asked questions (FAQs) on Schedules K-2 and K-3, allows an additional exception for the tax year 2021 filing requirements by certain domestic partnerships and S corporations.
The following conditions must be met to qualify for this exception:
- In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts.
- In tax year 2021, the domestic partnership or S corporation had no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign source income.
- In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto): (1) Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and (2) Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, Code Sec. 250, Code Sec. 864(c)(8), Code Sec. 721(c) partnerships, and Code Sec. 7874) (line 17d for Form 1120-S).
- The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.
If a partnership or S corporation qualifies for this exception, the domestic partnership or S corporation need not file Schedules K-2 and K-3 with the IRS or with its partners or shareholders. However, if the partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete its tax return, then the partnership or S corporation must provide the information to the partner or shareholder. If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the conditions for the exception are not met and the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.
