IRS unveils new draft Schedules K-2 and K-3


The IRS has released updated drafts of partnership return schedules implementing new international reporting requirements. The new schedules are meant to provide greater clarity for partners and shareholders on how to compute their U.S. income tax liability with respect to deductions, credits, and other items relevant to international tax.

The updated drafts include Schedule K-2, “Partners’ Distributive Share Items—International,” and Schedule K-3, “Partner’s Share of Income, Deductions, Credits, etc.—International.” The forms are scheduled to be effective for tax years beginning in 2021 (i.e. taxpayers must complete these new forms for the 2022 filing season). The IRS also plans to release an early draft of the related instructions this summer. Prior proposed draft Schedules K-2 and K-3 were released in July 2020. For more details, please see our prior coverage.

Some notable differences between the current draft and the previous draft include:

  • It appears taxpayers will only need to complete the applicable parts of Schedules K-2 and K-3, as shown by the new check boxes included at Line E on page 1 of the forms
  • Dual consolidated losses, partner loan transactions, high-taxed income, and several other categories are now included in Part 1, Partner’s Share of Partnership’s Other Current Year International Information, as additional items requiring statements
  • Part IV and Part V of the schedules were modified, with Part V retaining the request for information related to “Distributions from Foreign Corporations to Partnership.” Presumably further guidance will be forthcoming on the IRS approach related to distributions under the aggregate theory for the Global Intangible Low-Taxed Income (GILTI) and Subpart F
  • Both forms were reduced by one page from the previously issued proposed forms, bringing the K-2 to 19 pages and the K-3 to 20 pages

The updated forms will apply to persons required to file Forms 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally speaking, foreign activities or foreign partners). To promote compliance with adoption of the new Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the IRS intends to provide certain penalty relief for the 2021 tax year in future guidance.




Tax professional standards statement

This content supports Grant Thornton LLP’s marketing of professional services and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the topics presented herein, we encourage you to contact us or an independent tax professional to discuss their potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein. To the extent this content may be considered to contain written tax advice, any written advice contained in, forwarded with or attached to this content is not intended by Grant Thornton LLP to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.

The information contained herein is general in nature and is based on authorities that are subject to change. It is not, and should not be construed as, accounting, legal or tax advice provided by Grant Thornton LLP to the reader. This material may not be applicable to, or suitable for, the reader’s specific circumstances or needs and may require consideration of tax and nontax factors not described herein. Contact Grant Thornton LLP or other tax professionals prior to taking any action based upon this information. Changes in tax laws or other factors could affect, on a prospective or retroactive basis, the information contained herein; Grant Thornton LLP assumes no obligation to inform the reader of any such changes. All references to “Section,” “Sec.,” or “§” refer to the Internal Revenue Code of 1986, as amended.


More tax hot topics