Preparing New Schedules K-2 and K-3: Qualifying for Penalty Relief, Who Must File, Reporting Foreign Activity

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, June 28, 2022

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Course Materials

This course will discuss new required Schedules K-2 and K-3 for reporting partners' income, deductions, and credits from foreign activity. Our panel of highly experienced tax specialists will explain each part of each schedule so that tax practitioners can efficiently meet this new reporting obligation and review the latest requirements concerning which entities are required to file the new schedules.

Description

Designed before the 2017 Tax Act, the current Schedule K-1 has only one line for reporting all foreign transactions. This requires practitioners to attach narratives and supplemental schedules explaining foreign reportable items that partners must interpret and report on their individual income tax returns. The IRS must manually review these same attachments.

The lack of consistency in reporting foreign items creates confusion for all. For partnerships, new Schedules K-2 and K-3 have been added for the 2021 tax year reported in 2022. Schedule K-2 is similar to the current Schedule K, and Schedule K-3 is similar to the current Schedule K-1, but both include foreign reportable items.

The new Schedule K-2 has nine parts, while Schedule K-3 has 10. These parts contain the partnership's share of current international transactions, foreign tax credit limitation information, IRC Section 250 deduction for FDII, GILTI inclusions, and other essential information needed to properly report foreign income, credits, and deductions on partners' returns. These schedules will also allow the IRS to easily match the same items to the individual partners' individual income tax returns. For this reason, international tax practitioners must understand how to complete these new mandated schedules correctly.

Perhaps the greatest complexity with Schedules K-2 and K-3 is determining which partnerships are required to file the new schedules. The IRS has purportedly eased filing requirements including offering penalty relief for taxpayers who make a good faith effort to comply (IRS Notice 2021-19). However, even under the latest guidance tax practitioners are required to provide Schedules K-2 and K-3 when requested by any partner or shareholder.

Listen as our panel of international tax experts explains how to complete new Schedules K-2 and K-3, including advice on preparing for this upcoming reporting obligation.

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Outline

  1. Background
  2. Who is required to file forms K-2 and K-3?
  3. Schedule K-2: Parts I-IX
  4. Schedule K-3: Parts I-X
  5. Best practices

Benefits

The panel will review these and other key issues:

  • Preparing additional required attachments for specified international transactions in Part I
  • Which partnerships are required to include schedules K-2 and K-3 in returns?
  • Complexities in reporting funds and private equity investments on Schedules K-2 and K-3
  • Correctly reporting CFC income and GILTI inclusions in Part V
  • How foreign tax credits and income are recorded on the new schedules

Faculty

Dougherty, Alison
Alison N. Dougherty, J.D., LL.M., CPA
Partner
Aronson

Ms. Dougherty specializes in U.S. international tax reporting, compliance, consulting, planning, and structuring as a...  |  Read More

Wiesen, Dina
Dina A. Wiesen
Managing Director, National Tax Office, Passthroughs
Deloitte

Ms. Wiesen specializes in partnership taxation, specifically the use of partnerships and limited liability companies in...  |  Read More

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