New Schedule K-2 and K-3 Guidance / Potential Filing DelaysPublished:
The IRS issued updated instructions in mid-January 2022 for new tax forms K-2 and K-3 applicable to tax year 2021 for S-Corporations and partnerships/LLCs. The Schedule K-2 and K-3 forms expand on the IRS’s objective of more transparency related to a business or individual’s foreign (non-U.S.) income or foreign investments. The updated instructions indicate that essentially ALL S-Corps or partnerships will be required to file these forms even if the business itself does not have any foreign activity.
In the accounting and income tax community, this is an unwelcomed update. When the Schedules K-2 and K-3 were first introduced early in 2021, the general consensus was these forms would only be needed if the business itself had foreign operations or foreign investments. The IRS’s most recent guidance unfortunately creates more unnecessary compliance work for small to medium-sized businesses that otherwise would have no foreign tax reporting or disclosure requirements.
To make matters worse, the Schedules K-2 and K-3 will not be available for tax year 2021 e-filing until after the initial filing deadline of March 15, 2022. The IRS has indicated the partnership K-2 and K-3 forms will be ready by the end of March 2022 and that the S-Corp forms will be available by the end of June 2022. Software providers for tax forms are at a standstill as they can not release the forms for CPAs to use in e-filed tax returns until the IRS officially approves the form. Despite the forms not being able to be e-filed, the IRS has approved the use of tax return attachments related to Schedules K-2 and K-3. While not guaranteed, it’s possible your S-Corp or partnership/LLC tax return may still be filed by the original March 15, 2022 due date.
Additionally, the Schedules K-2 and K-3 are voluminous – the partnership/LLC version of the forms is almost 20 pages in length and each individual partner/member would receive their own individualized Schedule K-3 as part of their normal K-1 packet.
As a business owner, you should expect to see additional time, professional fees, and complexity as it relates to your company’s business tax return and Schedules K-1, K-2, and K-3 forms.
If you have any immediate questions or concerns, please contact your Greenwalt CPAs professional.