In 2021, the IRS instituted new foreign reporting rules for S-Corporation and Partnership business tax returns. Schedules K2 and K3 are now required as supplemental information for all business tax returns to report any potential foreign activity. Thankfully, the IRS has created a “domestic filing exception” that should apply to you and would allow you to file your return without these complicated new schedules:
Domestic filing exception (exception to filing Schedules K-2 and K-3). A domestic partnership (as defined under section 7701(a)(2) and (4)) does not need to (a) complete and file with the IRS the Schedules K-2 and K-3, or (b) furnish to a partner the Schedule K-3 (except where requested by a partner after the 1-month date (defined in criteria number 4, below)) if each of the following four criteria are met with respect to the partnership’s tax year
1. No or limited foreign activity
2. US Citizen/Resident Alien partners
3. Partner Notification
4. No Schedule K3 Requests by the 1-Month Date
As you can see from the above, the filing exception is based on a 4 part test. Criteria 1 & 2 are factual hurdles with regards to the company’s lack of foreign activity. Criteria 3 & 4 dictate that the company must make a disclosure to its owners (by January 15th) that the business did not engage in any foreign activity and that no K2/K3 form is being prepared with the return. The disclosure must also state that upon request by any owner, a K2/K3 form will be furnished to them by the business within 30 days of the notice. If this disclosure has been made, the company is allowed to file their return without Form K2/K3.
A need to file these forms can drastically increase the complexity of your tax return, and therefore also drastically increase your fee (or lead to our firm no longer being able to service your account). Please assist us in making the necessary disclosure to any other partners/shareholders involved in your business so that you can move forward without having to make this filing!
This serves as our disclosure to you of the requirements and our notification to you as your tax preparer that if your company had no/limited foreign activity and all owners are US Citizens/Resident Aliens, we will not be preparing Forms K2/K3 as part of your tax return.
It is your responsibility to communicate this to any other partners or shareholders by January 15th. If you are the only owner of your business, then you do not need to take any action.