The IRS has provided practitioners with a surprise gift for the 2021 filing season. They recently released drafts of new Schedule K-2 and Schedule K-3 to be included with Form 1120S for S corporations, Form 1065 for partnerships and Form 8865 for controlled foreign partnerships. These schedules each add 14 to 19 pages of additional informational reporting for items of international relevance.
The record-keeping requirements of engaging in international transactions continue to grow with each added documentation burden. It is almost prohibitive for small taxpayers and for minority shareholders as it is often not possible to obtain all required information. Taxpayers can almost certainly anticipate additional tax preparation costs associated with these additional filing requirements.
Schedule K-2, prepared by the partnership in a similar manner to Schedule K, is designed to replace and augment the former Line 16, Partners’ Distributive Share Items, Foreign Transactions of Schedule K and K-1. Schedule K-3 effectively acts as the foreign portion of the K-1, requiring the partnership to report each partners’ portion of the items included on Schedule K-2. While most of the requested information should have been provided previously by a taxpayer, such information was rarely provided in such extensive detail. For those who did provide such detail, these schedules formalize what had previously been included as footnotes to the Schedule K-1
In anticipation of the added complexity, the IRS has issued Notice 2021-39 which provides penalty relief for incorrect or incomplete reporting associated with the new filing requirement, if the filer establishes that it made a good faith effort to comply with the new reporting requirements. For purposes of determining whether a filer has made a good faith effort to complete the schedules, the IRS will take into account the extent to which the filer has made changes to its systems, processes and procedures for collecting and processing information relevant to filing and the extent to which a filer has obtained information from relevant parties or applied reasonable assumptions.
It would behoove affected taxpayers and their tax preparers to take an early look at the information required to begin to determine how they might begin to gather the requested information.