February 18, 2022 Don’t be surprised when you receive a packet of more than 20 pages attached to your 2021 Schedule K-1. Beginning with the 2021 tax year, the IRS has announced several new pass-through entity reporting requirements. The new requirements serve to provide greater detail to partners and shareholders regarding international items so that they can more accurately calculate their U.S. income tax liability. Most notable of these requirements are the Schedules K-2, K-3 and Section 1061 Worksheet A. Many items were previously reported as footnotes to the Schedule K and K-1, however Schedules K-2 and K-3 will formalize the reporting. BACKGROUND On June 3 and 4, 2021, the IRS released final versions of two new international-related schedules that are being added to passthrough entity returns: Schedule K-2, Partners’ Distributive Share Items — International; and Schedule K-3, Partner’s Share of Income, Deductions, Credits, etc. — International. The new schedules are intended to provide more transparency and clarity for the owners of pass-through vehicles regarding how to calculate their US income tax liability from relevant international items. The IRS designed these specific schedules to replace the current reporting for these items (which often occurs on Line 16 and footnotes to K-1s) Although your pass-through entity might not have any direct foreign partners or foreign source income, reporting could still be necessary due to other direct and indirect partners. The IRS highlighted this in its update to the instructions released on January 18, 2022: “A partnership with no foreign source income, no assets generating foreign source income, and no foreign taxes paid or accrued may still need to report information on Schedules K-2 and K-3. However, the IRS announced on Tuesday, February 15, 2022, that most K2/K3 reporting for 2021 can be delayed until the 2022 tax return filing. This new guidance indicates you don’t need to determine that information from those partners or shareholders mentioned in the January update. You only need to determine if you have foreign activity or owners. FIRST-YEAR PENALTY RELIEF Recognizing that the adoption of new Schedules K-2 and K-3 will create challenges, the IRS has provided transition relief. For tax years that begin in 2021, certain penalties will not be imposed for incorrect or incomplete reporting on Schedule K-2 or K-3 if the filer establishes to the satisfaction of the IRS that it made a good-faith effort to comply with the new reporting requirements (Notice 2021-39). WHAT DOES THIS MEAN FOR ME? Since the IRS is still releasing guidance and changes for Schedules K-2 and K-3, it is important to be mindful and stay up to date. The un-extended deadline for pass-through entities returns is March 15, 2022. Talk with your advisor to make sure you understand the requirements and the guidance that has been issued thus far. You may consider filing extensions so that you and your preparers have time to consider any exceptions or relief that the IRS may announce in the coming months. If you have questions about how these new requirements will impact your filings and payments please contact your KatzAbosch representative or contact us. About KatzAbosch: Founded in 1969, KatzAbosch is one of the largest CPA and business consulting services in the Mid-Atlantic region. As an accounting firm, our mission is to provide the highest quality accounting, tax, financial and management consulting services to our regional clients. We understand the needs and challenges of our clients and we have made it our obligation to create, grow and protect asset value. KatzAbosch is consistently named a Best Accounting Firm to Work For in Accounting Today and has been named a Top 200 Accounting Firms in the Nation by Inside Public Accounting. Our firm is also ranked among the Top 15 Largest Accounting Firms in the Baltimore Area by the Baltimore Business Journal and a Top Workplace four times by The Baltimore Sun.