The IRS has issued important updates to the instructions of the new Schedules K-2 and K-3 for tax year 2021 for partnerships and S corporations.
In general, partnerships and S corporations with international tax relevance are required to prepare Schedules K-2 and K-3, to the extent necessary. These schedules apply to taxable years beginning in 2021. However, in a recent update to the Schedule K-2 and K-3 instructions, the IRS stated that although the entity may not have had any foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued, a partnership or S corporation may still have to file the new schedules if an owner of the entity is eligible to claim a foreign tax credit.
This updated reporting is complex and requires considerable data and information gathering. There are penalties associated with the failure to file or report complete, accurate information. Although the IRS has offered relief in penalties for filing incomplete or incorrect schedules, there is no relief for failing to file the schedules when required.
Tax returns containing Schedules K-2 and K-3 will not be available to e-file until after the original filing deadline. The IRS anticipates e-filing containing the schedules to be available late March for partnership returns and late June for S corporation returns. As such, in most circumstances, it may be necessary to file for federal extensions for returns containing the Schedules K-2 and K-3.
Somerset is here to help our clients follow the updated tax regulations and avoid penalties. Please be mindful that the additional resources needed to navigate the complexity of the new instructions from the IRS may require additional fees and time to complete.