IRS Provides 2021 K-2 and K-3 Filing Relief for Certain Domestic S Corporations and Partnerships

In response to concerns expressed by tax professionals and others, the IRS has issued FAQ 15 providing an "additional exception" for the 2021 tax year to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations.

If a partnership or S corporation qualifies for this exception, the entity is not required to file Schedules K-2 and K-3 with the IRS or with its partners or shareholders.

How to Qualify for Filing Exception

• In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts. 
• In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign source income (under Code section 1.861-9(g)(3)).
• In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
  • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
  • Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, Code section 250, Code section 864(c)(8), Code section 721(c) partnerships, and Code section 7874) (line 17d for Form 1120-S).
• The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

Subsequent Developments May Affect Exception to File

If a partnership or S corporation is subsequently notified by a partner or shareholder that all or part of the information contained on Schedule K-3 is needed to complete their tax return, the partnership or S corporation must provide the information to the partner or shareholder.

If a partner or shareholder notifies the partnership or S corporation before the partnership or S corporation files its return, the conditions for the exception are not met, and the partnership or S corporation must provide the Schedule K-3 to the partner or shareholder and file the Schedules K-2 and K-3 with the IRS.

Applicability of the "Additional Exception"

The FAQ specifically refers to tax year 2021 filings. Presumably, unless the FAQ is updated or other subsequent IRS guidance is issued, this exception to filing K-2s and K-3s for “qualifying entities will not apply to subsequent tax years.

• Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, Code section 250, Code section 864(c)(8), Code section 721(c) partnerships, and Code section 7874) (line 17d for Form 1120-S).
• The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.