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Expanded Exception for Partnerships to File Schedules K-2 and K-3

January 19, 2024

Background for new forms of Schedules K-2 and K-3

For tax years beginning in 2021, the IRS released new schedules for pass-through entities’ international tax reporting. 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.

The forms required for partnerships with an interest in foreign partnerships:

Schedule K-2, Partners’ Distributive Share Items – International; and

Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc. – International

Schedule K-2, which is a summary of all partners' shares of the partnership's items of international tax significance, functions similarly to Schedule K;

Schedule K-3, which shows each partner's separate share of the partnership's items of international tax significance that the partners include on their tax or information returns, functions similarly to Schedule K-1.

The IRS October 25, 2022, draft partnership instructions for Schedules K-2 and K-3 included an exception. A domestic partnership does not need to (a) complete and file the Schedules K-2 and K-3 with the IRS, or (b) provide K-3 to a partner who meets the following four requirements for its 2022 tax year:

  1. No or limited foreign activity,

  2. U.S. citizen/resident alien partners,

  3. Partner notification, and

  4. No Schedule K-3 requests.

Expanded exception for Schedules K-2 and K-3

In December 2022, the IRS expanded the domestic filing exception for partnerships to file Schedules K-2 and K-3 which revised draft partnership instructions released. The instructions expand the scope of the "domestic filing exception" introduced in October 2022 and make it easier for partnerships to take advantage of the exception.

The December draft instructions are expanded for a partnership to qualify for the domestic filing exception if the partnership:

  • had no foreign activity, defined as foreign income taxes paid or accrued, foreign source income or loss, or an ownership interest in a foreign partnership, corporation, foreign branch, or foreign disregarded entity during the tax year; or

  • had foreign activity that was limited to passive category foreign income on which no more than $300 of foreign taxes allowable as a credit were paid or accrued by the partnership (and shown on a payee statement)had no direct partners other than individual U.S. citizens or resident aliens, domestic decedent’s estates with only U.S.-citizen or resident-alien beneficiaries, domestic trusts(either grantor or not grantor) with only U.S.-citizen or resident-alien grantors and beneficiaries, S corporations with a sole shareholder, or single-member LLCs that are disregarded entities and have as their sole member any of the other eligible categories of partners.

  • notifies the partners no later than when it provides Schedules K-1 that the partners will not receive Schedules K-3 unless they request them  and

  • does not receive such a request from any partner by the date that is one month before the date on which the partnership files Form 1065 (for example, by February 15, 2024, for calendar-year partnerships).

Please refer to the URL below for further details.


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