The IRS has added eight new questions and answers to its website's frequently asked questions (FAQs) on Schedules K-2 and K-3, clarifying that affected partnerships and S corporations need complete only the forms' relevant portions and addressing an array of special circumstances.
The new material supplements updates to the webpage in mid-February, when the Service also provided transition relief under which certain eligible passthrough entities do not have to file the two schedules, which are new for tax year 2021. The 19- and 20-page schedules, which must be filed with returns of partnerships and S corporations with "items of international tax relevance," have provoked much discussion, inquiry by taxpayers and their representatives, and some IRS guidance. (See the JofA podcast "Grappling With Schedules K-2 and K-3.")
Mostly, that guidance has come in the form of the FAQs, which, with the eight new ones, dated April 11, now number 26. Several of the new FAQs' answers indicate that the matter will be added to the forms' instructions.
New FAQ 19 builds on a crucial earlier one, FAQ 15, in which the IRS outlined the scope of an exception for tax year 2021 to filing the schedules for certain entities. Entities that do not qualify for that exception may not have to fill out the schedules in their entirety, FAQ 19 states. It refers to the forms' instructions stating that entities need only complete the relevant portions of Schedules K-2 and K-3.
Other new questions concern portions of the forms and whether and how they must be completed by affected entities of several types and in several circumstances. They include:
- Filers that would otherwise have to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships; and/or Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs), but qualify under the Code, IRS guidance, or those forms' instructions as not having to do so are not then required to file them by virtue of the instructions to Schedules K-2 and K-3. However, they may still be required to attach to their return certain required statements to qualify for an exception and, in the case of the Form 5471 multiple-filer exception, provide certain information from that form's filer on the Schedule K-3 issued to partners or shareholders (FAQ 20).
- A code RIC to indicate a regulated investment company may be entered on certain lines regarding exceptions from the requirement to report gross income and taxes by foreign country or U.S. possession (FAQ 21).
- Circumstances under which a filer must complete a section regarding research and experimental expenses apportionment factors (FAQ 22).
- When filers must complete a section on information to complete Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, when a foreign partnership has passive foreign investment companies for which a mark-to-market election has been made (FAQ 23).
- Sections concerning an entity's interest in foreign corporation income under Sec. 960 do not have to be completed with respect to dormant foreign corporations (FAQ 24).
- An approach by which a partnership may report its accrued original issue discount (OID) and OID income taxable on a gross basis to a foreign partner. The answer requests further comments on this issue and indicates it is "solely a recommendation for tax year 2021" (FAQ 25).
- Clarifications on reporting average worldwide assets, average U.S.-booked liabilities of a partnership, and directly allocated partnership indebtedness (FAQ 26).
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.