New schedules have been released for pass-through international tax reporting for tax year 2021. The new standardized format assists pass-through entities in providing partners and shareholders with the information necessary to complete their returns with respect to the international tax aspects of the Code and allows the IRS to verify tax compliance more efficiently.
Regulations generally require a U.S. person that controls a foreign partnership or holds at least a 10-percent interest in a foreign partnership that is controlled by U.S.persons holding at least 10-percent interests (a U.S. partner) to furnish information relating to the partnership (a controlled foreign partnership or CFP), including information relating to the U.S. partner’s ownership interests in the partnership and allocations to the partner of partnership items. A U.S. partner that controls a CFP may also need to provide information relating to another U.S. partner’s ownership interest in the partnership and allocations to that partner of partnership items.
For tax years beginning in 2021, two new forms may be required for partnerships, S corporations, and U.S. persons with an interest in foreign partnerships:
(1) Schedule K-2, Partners’ Distributive Share Items – International or Shareholders Pro Rata Share Items-International; and
(2) Schedule K-3, Partner’s or Shareholders Share of Income, Deductions, Credits, etc.
Recognizing the transitional challenges with the adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the IRS issued guidance providing certain penalty relief for the 2021 tax year. Partnerships, S corporations and U.S. persons with interests in foreign partnerships may rely on transition relief from penalties for tax years beginning in 2021 with respect to new Schedules K-2 and K-3.
For tax years beginning in 2021, penalties will not be imposed for incorrect or incomplete reporting on Schedules K-2 and K-3 if the partnership or S corporation establishes to the satisfaction of the IRS that it made a good faith effort to comply with the requirements to file or furnish the schedules. A good faith effort will be measured based on the extent the taxpayer has made changes to its systems, processes, and procedures for collecting and processing information relevant to filing and the extent information obtained from partners or shareholders or reasonable assumptions made when information is not obtained.
Please contact the Crosslin tax team at (615) 320-5500 if you would like greater detail or information on the new requirements for pass-throughs and their reporting of international tax information. We are here to help!