IRS Requires Further Reporting Transparency: Schedules K-2 and K-3


Wednesday, May 4, 2022 | By David Helprin, Managing Director, Tax Services, and Spyridon Kalogerakis, Sr Director, Tax Optimizer Regulatory & Analytics Solutions

IRS Requires Further Reporting Transparency: Schedules K-2 and K-3

The IRS has now added two new schedules for pass-through entity tax returns, better known as Schedules K-2 and K3. The reason for these new forms is to accommodate the complex 2017 Tax Cuts and Jobs Act (TCJA) and provide consistency in reporting to partners and shareholders. The new schedules impact most partnerships and S corporations, beginning with the 2021 filing season.

Schedules K-2 and K-3 will enforce partners to comply with filing and reporting obligations and enables the IRS to verify that partnership and S corporation items are properly reported internationally relevant items on partners’ and shareholders’ returns. This reduces the burden on both taxpayers and the IRS by reducing unnecessary inquiries and examinations that may arise due to inconsistent reporting.

Many have questions about the new schedules:

  • Are there any penalties?
  • What is new about Schedules K-2 and K-3?
  • What are the additional details required for reporting?
  • What are the challenges faced with K-2 and K-3?
  • How does the filing process work for K-2 and K-3?

First things first, the IRS is providing transition relief (per Notice 2021-39) for tax years that begin in 2021 for Schedules K-2 and K-3, in instances where the filer establishes to the IRS’s satisfaction a good-faith effort to comply with the new requirements. This will be determined by the IRS’s evaluation of the extent to which the filer changed systems, processes and procedures for collecting and processing the relevant information..  

On February 17, 2022, the IRS updated the Schedules K2 and K3 Frequently Asked Questions.  #15 provides some additional relief on the requirement to file K-2/K-3.  The IRS is providing an additional exception for tax year 2021 to filing the Schedules K-2 and K3 for certain domestic partnerships and S corporations. To qualify for this exception, the following must be met:

  • In tax year 2021, the direct partners in the domestic partnership are not foreign persons.
  • In tax year 2021, the domestic partnership or S corporation has no foreign activity.
  • The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

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

In our "Changes to Schedules K-2 and K-3 for the 2021 Tax Filing Season" blog we reviewed details about the specific changes and filing process.

How SS&C can help

SS&C can provide relief for the schedule K-2 filing. Funds that license SS&C’s Tax Solution for securities portfolio tax analysis will also receive a system-generated Schedule K-2.  These licensees also receive the following benefits:

  • Integration with most accounting systems.
  • Real-time portfolio tax analysis daily weekly, monthly, quarterly or annually.
  • Nineteen fully automated tax adjustments including wash sales, straddles, constructive sales, QDI and others.
  • System-generated tax provision.
  • Robust Tax Allocation Module offers a dynamic allocation platform that handles most industry approaches to aggregate allocations.
  • Complete system-generated Tax Package and Tax Allocation Package.

Download our "Fully-automated US Tax Preparation and Hypothetical US Tax Solution" brochure to learn more about SS&C can offer tax filing relief or register for our "Getting up to speed with IRS regulations: reporting and transparency requirements for schedules K-2 and K-3" webinar.



Alternative Investments, Fund Administration, Regulation


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