In December 2022, the IRS posted a revised draft version of the 2022 Partnership Instructions for Schedule K-2 and K-3 (Form 1065) and a similar revised version of the 2022 S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S). They were subsequently finalized.

On this Tax Section Odyssey episode, April Walker, CPA, CGMA, Lead Manager — Tax Practice & Ethics, AICPA & CIMA along with Tim Chan, Managing Director, Washington National Tax — Passthroughs — KPMG LLP and David Sites, National Managing Partner, International Tax Services — Grant Thornton LLP, sift through the changes between the draft instructions and dive into the particulars taxpayers need to know.

What you’ll learn in this episode

Who needs to file the Schedules K-2 and K-3 (2.41)
Domestic filing exception in the December 2022 draft instructions (5.06)
The two-prong test (5.47)
What no or limited foreign activity means (6.46)
How to report foreign-source income (8.33)
Requirement that all direct partners are US citizens/resident aliens (9.26)
Partner or shareholder notification (11.20)
Requirements for the schedules and the 1-month date (13.14)
Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), exception (18.21)
Risks and penalties associated with not completing or filing required schedules (22.55)
Final thoughts (25.05)

Related resources

IRS Schedules K-2 and K-3 guidance and resources — Access resources to advise clients on IRS Schedules K-2 and K-3, which are used to report items of international tax relevance from the operations of passthrough entities.
Tax potpourri — Form 1099-K, Schedules K-2/K-3 and tax legislation | Tax Section Odyssey — Schedules K-2 and K-3 aim to standardize international tax information reporting to flow-through investors, yet challenges in practical implementation exist.
K-2/K-3 — Making sense of new international passthrough reporting | Tax Section Odyssey — Listen to this podcast covering the new schedules and related past and future AICPA efforts.

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