Formerly, Form 1120-S Schedules K and K-1 did not require any specific format to provide international information. As a result, many details needed for the accurate preparation of shareholders’ individual income tax returns were either lumped together on Schedule K-1, lines 14 and 17d, or missing altogether.
Plus, information on international informational filing requirements (such as IRS Forms 5471, 926, 8992, 8865, and 8621, which carry large penalties) was often referenced in a footnote with unintelligible details and a caveat to “see your tax preparer.”
Per the IRS, this resulted “…in what could be a confusing array of statements attached to the schedules K and K-1. The new schedules K-2 and K-3 provide greater certainty and consistency, helping partners and shareholders to voluntarily comply with their filing and reporting obligations.”
Now, the IRS is requiring the more detailed Schedules K-2 and K-3 to provide this clarity, and it is motivating S corporations and individual shareholders to comply by imposing $10,000 penalties.