Tax Alert 2022-1
/New for the 2021 tax year, the IRS has issued two new lengthy schedules (14 to 20 pages) that are required to be completed to report items of international tax activity, which could be as simple as holding investments that pay foreign taxes, or as complicated as activity related to the operations and ownership of a domestic partnership, an S corporation, and U.S. persons who are partners in foreign partnerships.
IRS Initial Reporting Guidance
In January 2022, the IRS released instructions that stated, even an S corporation or a partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still be required to file Schedules K-2 and K-3 if a shareholder or partner claims a foreign tax credit or otherwise needs information from the S corporation or partnership in order to complete IRS Form 1116, Foreign Tax Credit (Individual, Estate or Trust) or IRS Form 1118, Foreign Tax Credit – Corporations.
S Corporations
New Schedule K-2, Shareholders' Pro Rata Share Items – International, is an extension of Form 1120-S, Schedule K, used to report foreign activity at the S corporation level.
New Schedule K-3, Shareholder's Share of Income, Deductions, Credits, etc. – International, is an extension of Schedule K-1 and is provided to each shareholder to report their proportionate share of each item reported on Schedule K-2.
Domestic Partnerships
New Schedule K-2, Partners’ Distributive Share Items – International, is an extension of Form 1065, Schedule K, used to report foreign activity at the partnership level.
New Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc. – International, is an extension of Schedule K-1 and is provided to each partner to report their proportionate share of each item reported on Schedule K-2.
Possible Exceptions to Filing Requirements
In February 2022, the IRS provided limited guidance that allows for certain exceptions to the filing requirements if the following conditions are met:
In tax year 2021, the S corporation or partnership have no direct or indirect foreign partners, no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may be reasonably expected to generate foreign source income.
The S corporation or partnership knows for sure that none of the shareholders or partners are eligible to claim a foreign tax credit and are not filing either Form 1116 or Form 1118.
In tax year 2020, the S corporation or partnership did not provide to its shareholders or partners, nor did the shareholders or partners request the information regarding foreign transactions or other items and amounts as reported on Form 1120-S or Form 1065 Schedules K and K-1 and the S corporation or partnership has no knowledge that its shareholders or partners are requesting such information for 2021.
Caution!
If the S corporation or partnership is subsequently notified by a shareholder or partner that all or part of the information contained on Schedule K-3 is needed to complete their tax return, then the S corporation or partnership must provide the information to the shareholder or partner. Failure to file such forms or properly provide these information statements to shareholders or partners can result in significant penalties.
If a shareholder or partner notifies the S corporation or partnership before the 2021 income tax return is filed, the conditions for the exception are not met and the S corporation or partnership must provide the Schedule K-3 to the shareholder or partner and file the Schedules K-2 and K-3 with the IRS. If shareholder or partner notification is received after the return has been filed, it is not clear whether an amended return should be filed or an administrative adjustment request.
Citing the late release of these new requirements, complexity and lack of definitive guidance, and the continuing delay by the IRS in accepting these schedules for electronically filed returns, the AICPA and all state CPA societies have submitted comments on behalf of the tax community to IRS Commissioner Charles Rettig requesting a delay in the implementation of these new rules and filing requirements until the 2022 tax filing season. As of March 11, 2022, the IRS has not agreed to any such delay or determent.
As a result of these compliance issues, a 2021 tax return filing extension will more than likely be needed to allow for the preparation and filing of a complete and accurate return.
MSL assists individuals and businesses with tax strategies, planning, and compliance, by putting taxes in a perspective that you can understand. Contact one of our tax professionals today to find out how MSL can help you or your organization. Toll-Free at 1-800-683-5401 or email us at msl.info.@mslcpa.com
Kevin Murphy, CPA - Shareholder
Vicki Simmons-Hinz, CPA - Director
Harry E. Harp, CPA - Senior Manager
