K-2 & K-3 Schedules

[Randall]

Has anyone encountered these schedules for 1065 & 1120S?  I don't think they apply to any of my clients.  But I was looking for them in a client return (1120S).  They don't even seem to be available in ATX.  Schedule K has line 14 but no link to anything.

[Lion EA]

The partnership versions will be released later this season and the S-corporation versions 22 June or so. You can find a couple FREE short videos online by instructors such as Tom Gorczynski and CYA letters such as

 

Schedules K-2 and K-3 Client Statement

Owner Name:-----------------------------------------------Owner SSN:

Partnership Name:__________________________ Partnership FEIN:

The IRS has instituted 2 new form requirements (K-2 and K-3) comprising 39 pages of disclosures that could double or even triple your company’s tax preparation fee. These forms are not required if your partnership or S-corporation has no foreign activities and if the individual partners or shareholders are exempt from filing IRS Form 1116 (Foreign Tax Credit) with their 2021 individual Form 1040.

I you do not acknowledge that you are exempt from filing Form 1116 with your 2021 Form 1040, we are required to complete these new forms and your fee will increase dramatically. IRS Notice 2021-39 allows us to rely on a good faith safe harbor of your statement that you do not personally have to file IRS Form 1116 with your 2021 individual Federal income tax form. If you are not required to file Form 1113 with your 2021 individual Federal income tax return, please sign below. Please reproduce and have all other owners individually sign as well in order to awoid our required filing of Schedule K-2 and K-3.

“I confirm that I am not personally subject to filing Form 1116 (Foreign Tax Credit) with my 2021 individual Federal income tax return Form 1040.”

Signature of above individual:___________________

[Lion EA]

Or the one I'm using for the company and the partners or shareholders:

[Date]

[Entity Representative]
[Entity Name]
[Address]

Dear [Entity Representative],

Starting with 2021 tax returns, pass-through entities must file Schedules K-2 (at the entity level) and K-3 (with the Schedule K-1) to report various international activities. Until recently, it appeared this new, complex reporting requirement was limited to pass-through entities with international tax attributes.

The IRS recently released revised instructions on these new schedules that indicate otherwise. The revised instructions require all pass-through entities to determine if each partner or shareholder 2021 tax return contains Form 1116, Foreign Tax Credit, or other international-related tax form. If so, then you are required to file Schedules K-2 and K-3 with your 2021 tax return, even if you have no foreign income, no foreign assets, or no foreign taxes paid.

We enclosed a questionnaire you can use to solicit the partners or shareholders; we recommend you retain the completed responses for your records. You can choose your own method to collect this information, but we strongly advise it be in writing and that you retain responses with your tax return records.

If you prefer not to make these inquiries, we can simply prepare and include Schedules K-2 and K-3 with your 2021 tax return; additional fees will apply to the added compliance requirements.

Penalties may apply if you fail to properly include Schedules K-2 and K-3 on your tax return when they are required.

By [deadline], please sign by your choice. If you don’t meet this deadline, an extension may be required to complete your tax returns.

Sincerely,

[Preparer Name]
[Preparer Firm]

[COULD NOT KEEP THE FORMATTING, BUT THEN THREE BOXES TO CHOOSE 1 TO SIGN...]

Please prepare Schedules K-2 and K-3 with the entity tax return. We are not going to survey our partners or shareholders.

Please prepare Schedules K-2 and K-3 with the entity tax return. We surveyed our partners or shareholders and it is required.

Do not prepare Schedules K-2 and K-3 with the entity tax return. We surveyed our partners or shareholders and it is not required.

Developed by Fred Stein, CPA, EA and Thomas A. Gorczynski, EA, USTCP

[NEW PAGE]

Important Notice!

For [Entity Name] to prepare its 2021 tax return correctly and to give you accurate information
necessary to prepare your individual income tax return, please read the following and complete this document.

We need this information to determine if we need to prepare and file Schedules K-2 and K-3 with our tax return and to provide you a Schedule K-3 to accompany the Schedule K-1 we usually give you. If you file Form 1116, Foreign Tax Credit, or another international-related tax form on your individual tax return, we must prepare these schedules.

By [deadline], please complete the appropriate selection and return it to us. If you don’t meet this
deadline, there will be a delay in providing your Schedule K-1 and accompanying documents. If you are unsure how to complete this notice, please consult a tax professional.

Thank you in advance for your cooperation in this matter.

Sincerely,

[Entity Representative]
[Entity Name]

Name:

[FOUR BOXES FOR PARTNER OR SHAREHOLDER TO CHOOSE 1 AND SIGN]

I will file or anticipate that I will file Form 1116 on my 2021 Form 1040 return, or another international-related tax form that impacts my federal tax liability.

I did not pay or accrue foreign taxes during tax year 2021 and have no foreign tax credit carryover to tax year 2021, so I will not file Form 1116 with my 2021 Form 1040 return.

I paid or accrued foreign taxes during tax year 2021, but the total is $300 or less ($600 joint), and I plan to take a foreign tax credit on my 2021 Form 1040 without filing Form 1116.

I paid foreign taxes during tax year 2021 but will elect to deduct them on my 2021 Schedule A and will not file Form 1116 on my 2021 Form 1040 return.

[Lion EA]

FREE class here: https://on-demand.compasstaxeducators.com/ 

[Abby Normal]

These rules are going to change because it's unworkable as is.

[KenO]

As it currently stands this is what the ATX knowledge base says about the topic: 

ATX™ and TaxWise® will not be supporting Schedules K-2 or K-3. If you need to file these forms, please reach out to your account manager for information on using CCH® ProSystem fx® Tax or CCH Axcess™ to access these forms.

 

[Lynn EA USTCP in Louisiana]

KenO - I reached out to my account manager; so far all I've heard is crickets.

[Lion EA]

Here's a link that than links to both FREE short classes (15 minutes and 10 minutes, maybe):

https://on-demand.compasstaxeducators.com/courses/k2-k3-brief-discussion?fbclid=IwAR3cqKMeUC4XhEUBT_i-5QAxtikiYk8EstgBAH2fvtIWlFj342h7tN_5yW8

[Randall]

15 hours ago, Abby Normal said:

These rules are going to change because it's unworkable as is.

The AICPA and all 50 state CPA societies have formally requested the IRS postpone the schedule requirements another year.  Hopefully IRS will do so and quickly.

[michaelmars]

They announced about 2 weeks ago that they are suspending these forms 1 year for entities without foreign income items to report.  Some exceptions so do your research. 

[robclaytoncpa]

The decision by ATX regarding Schedules K-2 and K-3, along with a total lack of communication from ATX, makes ATX completely unusable for 2021.  Either ATX is "all-in" on a bet that the IRS will back off on the K-2 and K-3 requirements or Wolters Kluwer has made a corporate decision to force ATX users into another Wolters Kluwer program.  Either reason is unconscionable.  I have tried repeatedly to obtain input from ATX and Wolters Kluwer.  Crickets!!!!!!!

My insight from various CPA groups is that the IRS is NOT going to back off on the K-2 and K-3 requirements, despite the well-written letter from the AICPA and all 50 state CPA societies. 

What the hell is an ATX user with the March 15th deadline bearing down on us . . . and . . . clients browbeating us for their K-1's supposed to do. 

This is "malpractice" by ATX. 

[Lion EA]

If your PTEs polled their partners or shareholders and have no requests for K-3 (or you prepare the individual returns and know), then the PTE does NOT have to prepare K-2/K-3 for 2021 only. If you DO have to prepare for one or more, extension.

Sounds like we'll be preparing for all for 2022.

[Abby Normal]

https://www.journalofaccountancy.com/news/2022/feb/irs-offers-further-k-2-k-3-relief.html

The relief announced Wednesday applies where:

In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts. 

In tax year 2021, 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 (see Regs. Sec. 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.