Dear ,

IRS posted additional guidance on how partnerships and S-Corps should file the new Schedules K-2 and K-3. The new guidance could require domestic partnerships and S Corps without foreign transactions or assets to prepare schedules K-2 and K-3.

The guidance clarifies ‘who needs to file’ the schedules, and the information below explains it.

If any of these two happens:

1. If a partner or shareholder files Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), or
2. If a partner or shareholder files Form 1118, Foreign Tax Credit

Then, it means corporations, the partnership, or an S Corp now must file Schedules K-2 and K-3, even if it has no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued.

What does this mean?

First, this means more complexity (and, perhaps, the time needed) for preparing and submitting the new requirements. Secondly, this means not only companies with international transactions file Schedules K-2 and K-3, but those without any foreign assets, transactions, and source of income may also need to file.

But as your tax professional, I will keep you updated on what you must provide on your end as I also ensure that we meet all the deadlines regardless of the changes.

For your information, IRS announced the following dates for the availability of e-filing for the new Schedules K-2 and K-3:

• Form 1065: March 20, 2022
• Form 1120-S: Mid-June 2022
• Form 8865: January 2023

I will be working with those dates and communicating whenever I need anything from you. It’s unfortunate that these changes are all with effect from the 2021 tax year – which is why it could make things a little complicated since we now have less time to go back and reorganize everything. But if we work together, we will catch these deadlines with less effort.

Why the new changes?

The IRS implemented these new changes to:

1. Standardize the reporting of the foreign tax information provided by pass-through entities
2. Give the IRS an additional level of detail beyond what had previously been reported using Forms 1065, 1120-S, and 8865.

The above justifies what I have been saying since last year – that the IRS is doing anything possible to ensure that they catch every tiny detail about your business. This is why it is important to work closely with me as I prepare your tax return. It is the only way to avoid IRS penalties and fines.

Thank you, and you should look forward to further communications from me regarding these changes. If you have any burning questions about this, call my office at 202) 618-1297.