The IRS 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 change to these new schedules. Those eligible for this limited 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. In addition, 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 the new schedules. The transition relief, appearing in new frequently asked questions (FAQs) on Schedules K-2 and K-3, allows an additional exception for tax year 2021 filing requirements by certain domestic partnerships and S corporations.
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 their 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.
This is a summary of some very complex rules. Be sure to work closely with your tax professional and call us with questions.