AICPA Comments on New International Reporting Requirements, Schedule K-2, K-3 for Tax Year 2021
Washington, D.C. (September 9, 2022) – The American Institute of CPAs (AICPA) identified several issues that practitioners are facing this filing season regarding Schedule K-2 and Schedule K-3 and, in a letter, are urging the Internal Revenue Service (IRS) to provide immediate guidance in these areas. The letter outlines specific items that urgently require clarification for taxpayers to property comply with the reporting requirements of Schedule K-2 and Schedule K-3 for the 2021 tax year and beyond. The items and recommendations are:
Provide broader exceptions to Schedules K-2 and K-3
Partner attribute requirement
The AICPA recommends that the IRS provide guidance adding the Relevance Exception to each part of the Schedules. If the broader principle of the Relevance Exception was applied to each of the parts, it would alleviate the partnership requirement to report data that has no relevance to any of its partners and mitigate the costs of reporting unnecessary information.
Additionally, the AICPA recommends that the IRS provide guidance clarifying the Partner Attribute Requirement and issue guidance removing the General Presumption from all parts of Schedule K-2 and K-3.
Provide a permanent extension of the exception from filing Schedules K-2 and K-3 for certain domestic partnerships and S corporations as provide in Frequently Asked Question (FAQ) 15
The AICPA recommends that the IRS issue guidance permanently extending the exception granted in FAQ 15, from filing Schedules K-2 and K-3, for certain domestic partnerships and S corporations.
In addition, the AICPA recommends that the IRS clarify that the exception from filing Schedules K-2 and K-3 provided in FAQ 15 be based upon whether the entity was required to file the form in the prior year, rather than if the entity actually filed Schedule K-2 or K-3, even if the forms were not required to filed. Since 2020 was the initial year the forms had been issued, many taxpayers faced uncertainty as to application of the filing requirements.
Allow for a consolidated Form 8082 disclosure filing
The AICPA recommends that the IRS update the instructions to Form 8082 to allow an upper-tier partnership (UTP) that did not receive Schedules K-1 or Schedules K-3 with respect to lower-tier partnerships to disclose all such partnerships in a single Form 8082.
Clarify and simplify the Foreign Tax Credit information reporting on partnership level on Schedules K-2 and K-3, Part II
The AICPA recommends that the IRS minimize the administrative burden on taxpayers by:
Removing the requirement to report gross income by specific country in Part II of Schedules K-2 & K-3 and replacing it with a question asking whether a partnership made payments for certain disallowed credits for refundable or noncompulsory payments.
Alternatively, the AICPA recommends allowing a partnership to aggregate all countries with foreign tax credits allocable to each partner of less than $600 into a single code designating an aggregation of countries.
Allowing the partnership to simply indicate a general code, such as “various” or “OC” (for other country) where the source of an item of gross income or gain is determined by the partner. Generally, the partnership does not know the specific country the income will be sourced to at the partner level, and this information could be provided to the IRS upon request.
Clarifying in the Instructions or FAQs, as to the proper use and application of the additional codes on the Schedules K-2/K-3.
Allow summarized information on Schedule K-3 when reporting gain on sale of personal property
The AICPA recommends that the IRS provide guidance allowing a partnership to report summarized information by country with respect to Schedule K-3, Part I, Box 1, rather than require detailed transaction-by-transaction information. In addition, the AICPA recommends that the IRS update the instructions to Schedule K-3, Part I, Box 1 to require the reporting of a partner’s distributive share of gain, instead of its allocable share of proceeds and basis.
“Many taxpayers have experienced difficulties with compliance requirements during the current tax season, and practitioners are struggling to help their clients meet these requirements,” said AICPA Senior Manager for Tax Policy & Advocacy, Arlene Schwartz, CPA. “Guidance is critical to taxpayer compliance with filing requirements, and we are asking the IRS to provide this guidance quickly.”
Contact: Veronica L. Vera