HomeFAQs for Individuals Who File Forms 8865
FAQs for Individuals Who File Forms 88652022-03-10T17:28:41-05:00

New Schedules K-2 & K-3:

Frequently Asked Questions (FAQs) for Individuals Who File Forms 8865

Posted March 10, 2022

Will the new Schedule K-2 and K-3 filing requirements affect me?2022-03-10T16:54:24-05:00

Yes. The new Schedule K-2 and K-3 filing requirements apply to all individuals who file Form 8865 to report an interest in a foreign partnership as part of their Form 1040, Individual Income Tax Return.

In addition, if you typically receive a Schedule K-1 from a US partnership or S corporation, you may also receive a Schedule K-3 this year, to be used in the preparation of your individual returns.

What are Schedules K-2 and K-3?2022-03-10T16:55:02-05:00

Schedule K-2 is a new 14-page form with 8 total parts. It is filed as part of your Form 8865, Foreign Partnership Return, within your individual tax return. It is basically an expansion of the Form 8865 Schedule K to provide greater detail on items of international tax relevance from the operation of the partnership. The Schedule K-2 may also include certain international informational forms, such as Forms 5471, 926, 8621, and 8992. Many of these forms have a $10,000 penalty for failure to file.

Schedule K-3 is a new 15-page form with 8 total parts. Like Schedules K-1, Schedules K-3 are filed along with your Form 8865 and are provided to certain partners to provide information on those partners’ shares of pass-through items from the foreign partnership. In this case, they provide details on the partners’ share of international items reported on Schedule K-2. They also provide the pass-through data needed for any international informational forms (such as Forms 5471, 926, 8621, and 8992) that must be filed as part of each partner’s Form 1040, Individual Income Tax Return.

Why is the IRS requiring these?2022-03-10T17:36:33-05:00

Formerly, Form 8865 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 partners’ individual income tax returns were either lumped together on Schedule K-1, lines 16 and 20c, or missing altogether.

Plus, information on international informational filing requirements (such as IRS Forms 5471, 926, 8992, 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 partnerships and individual partners to comply by imposing $10,000 penalties.

 

 

 

 

 

Do I really need to do this? Are there any exceptions?2022-03-10T17:11:18-05:00

All filers of Form 8865 must file the new Schedules K-2 and K-3, without exception.

What happens if I don’t file the Schedules K-2 and K-3?2022-03-10T17:11:50-05:00

The penalty for failing to file or filing an incomplete Schedule K-2 or K-3 is $10,000. This penalty can be applied at both the entity level and the individual partner level. The IRS has provided temporary relief for this penalty for 2021 under Notice 2021-39.

How will this affect the timing of my Form 8865 and Form 1040, Individual Income Tax Return?2022-03-10T17:13:08-05:00

In late 2021, the IRS announced that it would not begin accepting Schedules K-2 and K-3 until end of March 2022 at the earliest. It also indicated that it would begin accepting these forms for domestic partnerships and S corporations first, before individuals who file Forms 8865.

Given that individuals who file Forms 8865 are last on the list for the rollout of the new forms, individuals who file Form 8865 should plan to file an extension for their individual income tax returns.

If you generally file before April 15, we understand that this can be frustrating.

However, this year, it may behoove you to wait a bit longer—even beyond the earliest date available for filing of the new forms. As of March 2022, the guidance on Schedules K-2 and K-3 was still evolving:

  • In late January 2022, the IRS updated its guidance and filing instructions for the Schedules K-2 and K-3
  • In mid-February, the IRS released new Frequently Asked Questions, which contained a number of surprises.
  • As a result, in March, partnerships and tax practitioners were still seeking additional guidance from the IRS on completion of these forms.

Given the ongoing changes and updates, those can wait a bit longer are expected to have a smoother, most cost-effective process. We expect that filers of Form 8865 will be able to start filing more efficiently around May or June 2022.

Will I be able to e-file this year?2022-03-10T17:17:34-05:00

Most likely. The IRS FAQs released in mid-February 2022 indicated that the IRS would not accept e-filed Schedules K-2 and K-3 from individuals with Forms 8865 until January 2023!

Form Number                                                  Date Available
Form 1065, Schedules K-2 and K-3                 March 20, 2022
Form 1120-S, Schedules K-2 and K-3             Mid-June 2022
Form 8865, Schedules K-2 and K-3                January 2023

However, the IRS has provided a workaround that should allow e-filing of returns during 2022.

Individuals should be able to e-file later in 2022 if Schedules K-2 and K-3 are included as an attachment to the return (rather than as forms within the return). This method is not typically allowed for e-filing of mandatory tax forms and schedules. In this case, however, the IRS has made a temporary exception.

 

The partners want their Schedules K-1 and K-3 by April 18 so that they can file their individual returns by then. What should I tell them?2022-03-10T17:18:29-05:00

While the IRS is working diligently to enable individuals and entities to file their 2021 returns with the new schedules as soon as possible, guidance on the new forms continues to evolve. Since failure to properly complete or file the new schedules may subject the partnership and its partners to separate $10,000 penalties, many filers are taking a conservative approach. As a result, individual partners will need to file extensions for their personal individual income tax returns this year.

You may also refer them to our Frequently Asked Questions for individuals waiting on K-1s.

 

 

How will the new Schedules K-2 and K-3 affect the partners’ individual tax returns?2022-03-10T17:19:09-05:00

We have compiled Frequently Asked Questions for individuals to help explain how the new Schedule K-2 and K-3 will affect their individual tax filings. These explanations can be shared with any partners to help address their questions.

 

What should I do if I don’t receive a Schedule K-3?2022-03-10T17:19:55-05:00

If you (or your foreign partnership) typically receive Schedules K-1 from partnerships or S corporations, and you are expecting Schedules K-3 this year, then you will generally need to wait for them before you can file your individual tax return.

If you are expecting a 2021 Schedule K-3 but do not receive it, then you may need to disclose this on your Form 1040, Individual Income Tax Return, to protect yourself against the $10,000 penalty. IRS FAQ 16 indicates that a Form 8082, Notice of Inconsistent Treatment, may need to be filed to alert the IRS of the missing Schedule K-3.

 

 

Is there anything else I need to know?2022-03-10T17:20:38-05:00

At the time of this blog post, the IRS was still making changes to its approach to Schedules K-2 and K-3 in response to push-back from tax professionals and other parties. In particular, the American Institute of Certified Public Accountants (AICPA) and other organizations were encouraging the IRS to delay the new Schedule K-2 and K-3 filing requirements, offer greater relief for 2021 filings, or otherwise waive first-year penalties.

We expect that the IRS’s requirements and guidance will continue to evolve over the coming weeks.

At The Wolf Group, we are monitoring these developments and continuing to evaluate the approaches that are in the best interest of our clients. If you have questions on the new Schedules K-2 and K-3 or need assistance complying with the additional foreign reporting, please contact us. The Wolf Group has assisted clients with foreign disclosures and related tax form preparation for nearly four decades.

 

Pursuant to Circular 230, promulgated by the Internal Revenue Service, any US tax advice contained in the body of this writing is not intended or written to be used, and cannot and should not be used, by any recipients as specific tax advice related to their facts and circumstances. Taxpayers should consult their local tax professional and/or attorney to obtain specific tax advice related to their facts and circumstances.

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