Formerly, Schedule K (on the business tax return) and Schedule K-1 (issued to you) did not require any specific format to provide international information. As a result, many details needed for the accurate preparation of your individual income tax returns were either lumped together on a few lines of Schedule K-1 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 businesses and individuals to comply by imposing $10,000 penalties.