New IRS Reporting Requirements for Controlled Foreign Partnerships

 Posted on August 10, 2021 in Taxation Law

The requirements that taxpayers must follow when reporting their income to the IRS can be complicated. This is especially true for those who have foreign investments, including individual taxpayers, corporations, and partnerships. Recently, the IRS issued a notice that taxpayers with an interest in controlled foreign partnerships will need to file some new forms starting in 2022. By understanding these requirements, taxpayers can ensure that they are providing the correct information and taking steps to avoid potential tax penalties.

Schedule K-2 and K-3

U.S. taxpayers who have an interest of 10 percent or greater in a partnership that was formed in a foreign country are required to provide information about the partnership to the IRS, including details about a partner’s ownership interest and their allocations of income and tax deductions and credits. Starting in the 2021 tax year, the IRS will be requiring partnerships, S corporations, and individual partners to report information of international tax relevance on two new schedules, K-2 and K-3. These schedules will be included in the following forms:

• Form 1065 - U.S. Return of Partnership Income

• Form 1120-S - U.S. Income Tax Return for an S Corporation

• Form 8865 - Return of U.S. Persons With Respect to Certain Foreign Partnerships

Schedule K-2 will detail a taxpayer’s international distributive share of ownership in a partnership or a shareholder’s pro rata share of an S corporation. Schedule K-3 will detail a partner’s or shareholder’s share of international income, deductions, credits, etc. These forms will be required in tax returns filed in 2022 for the tax year of 2021.

Taxpayers may be subject to penalties for failing to file a partnership return, failing to file the correct information returns, failing to furnish the correct payee statements, or failing to furnish required information, including any information included in Schedule K-2 or K-3. However, the IRS is providing penalty relief during the transition to the new forms. If a partnership, partner, or S corporation made an effort in good faith to ensure it is in compliance with all reporting requirements on Schedule K-2 or K-3, it will not be subject to these penalties. To determine whether a taxpayer qualifies for relief, the IRS will look at whether a partnership has changed its procedures for gathering the relevant information, whether a taxpayer has taken steps to obtain the necessary information, and whether a partnership agreement or the governing instrument of an S corporation has been modified to ensure that the relevant information is shared with partners or shareholders.

Contact Our San Jose, CA Foreign Tax Compliance Attorney

Taxpayers with foreign investments are required to meet certain requirements when reporting information to the IRS, and failure to do so can result in multiple types of tax penalties. If you have questions about your reporting requirements, or if you are facing penalties related to ownership of a foreign partnership, John D. Teter Law Offices can help you determine your best options. We will work to help you avoid or minimize penalties whenever possible. Contact our San Jose international tax compliance lawyer by calling 408-866-1810.

Sources:

https://www.irs.gov/pub/irs-drop/n-21-39.pdf

https://www.irs.gov/newsroom/draft-instructions-for-the-schedules-k-2-and-k-3-released-to-enhance-reporting-of-international-tax-matters-by-pass-through-entities