Feb 17 2021 K-2 / K-3 Relief

The IRS is providing tax year 2021 Schedules K-2 and K-3 filing relief for certain domestic partnerships and S corporations. If a partnership or S corporation qualifies for this exception, the domestic partnership or S corporation does not need to file Schedules K-2 and K-3 with the IRS or provide the forms to their partners or shareholders. To qualify for the exception, the following criteria must be met:

• 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 has 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):
  • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
  • Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 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 partner or shareholder subsequently notifies the partnership or S corporation that all or part of the information contained on Schedule K-3 is needed to complete their tax return, 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.

For any questions about Schedule K-2/K-3 relief, please feel free to reach out to Sax’s tax advisors by visiting www.saxllp.com .