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Posted by Tracy Dalpe on Mar 18, 2022 1:40:01 PM

Financial paper charts and graphs on the tableOn February 16, the IRS issued additional relief for certain pass-through entities required to file new Schedules K-2 and K-3, along with a set of “Frequently Asked Questions.” The relief is outlined in News Release IR-2022-38 and Schedules K-2 and K-3 Frequently Asked Questions (Forms 1065, 1120S, and 8865). This additional relief was in response to the widespread commentary among tax return preparers and taxpayers in the current filing season. Under the new relief, certain taxpayers will not need to file the new Schedules K-2 and K-3 relating to partnerships and S corporations. 

The IRS released Notice 2021-39 in June 2021, which provided penalty relief for incorrect or incomplete reporting on Schedules K-2 and K-3 “if the filer establishes to the satisfaction of the Commissioner that it made a good faith effort to comply with the new reporting requirements.”

Under the latest guidance, in order to qualify for the exception, it states that the following 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.
    • 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 (refer to section 1.861-9(g)(3)).
  •  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 on the form or its attachments regarding:
      • 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, Sec. 250, Sec. 864(c)(8), Sec. 721(c) partnerships, and Sec. 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.

Generally, certain domestic partnerships and S corporations that meet these criteria are not required to file Schedules K-2 and K-3. However, there is an important stipulation to keep in mind. If a partner or shareholder subsequently notifies the partnership or S corporation that all or part of the information included on Schedule K-3 is required to complete their tax return, then the partnership or S corporation must provide the information to the partner or shareholder.

Generally, the newly provided filing relief by the IRS is of little value to most Private Equity funds and GP entities as the sophisticated tax situation of their investors and sponsors will typically require the disclosure of information necessary for their calculation of Foreign Tax Credits (FTCs).

For More Information

Currently, this exception only applies to 2021 tax returns. We will keep you up-to-date on any new developments as it relates to Schedules K-2 and K-3. For more information on how this may impact you, please contact your tax advisor.

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Tracy-Dalpe-Web-4x6Tracy Dalpe is a Tax Managing Director in New England and a member of the Private Equity & Venture Capital Practice. She can be reached at tdalpe@cbiz.com or 401.626.3210.

 

 

 

© Copyright 2022 CBIZ, Inc. and MHM. All rights reserved. Use of the material contained herein without the express written consent of the firms is prohibited by law. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

Tags: IRS, pass-through entities, Private Equity & Venture Capital, PE/VC, Schedule K-3, Schedule K-2

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