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FAQ Guidance & Additional Relief Issued By IRS

The IRS said in a statement late yesterday that it had heard the tax industry’s worries regarding new reporting standards for pass-through company (PTE) reports and that it would be giving more information soon. Today, that guidance arrived in the shape of a new FAQ.

The FAQ (Question 13) addresses the January 18, 2022 modification to the Schedule K2/K3 instructions, which caused widespread confusion in the tax community, bordering on panic at times.

According to the FAQ, the late changes “gave clarification & exceptions to fulfilling the Schedules K-2 & K-3,” and public feedback prompted them. “The updates help in reduction to attach certain forms to Schedule K-3” and “the changes generally clearly articulate those domestic partnerships with solely domestic activities and less than 10% limited U.S. citizen & U.S. resident individual associates exempted from filing specific parts of Schedules K-2 and K-3.”

Requirements To Become Qualified

Furthermore, to the provisional penalty relief given by Notice 2021-39, Question 15 explores a new available remedy. Four requirements must be completed to be qualified for this exception, including the following:

For the tax year 2021, there can be no direct foreign partners; the PTE has no international acts (which include foreign income, possession of overseas assets that did or could generate income, or foreign taxes paid). The domestic partnership or S corporation seems to have no insight that the shareholders or partners are asking for such information.

Those organizing PTE returns are still frustrated by that last item. It may be doable (with some more study) to assess if a shareholder will seek the K2/K3 information for the smallest PTEs or not. However, determining whether a partner or an individual shareholder requires the information is not practical for larger PTEs. The guideline suggests that, in the lack of information that a shareholder or partner will seek the information, the PTE return preparer can leave Schedules K2 and K3 off the PTE return if the organization meets the other standards (at least for this year).

New Formats

Regardless of the organization, the preparer must be prepared to offer K2/K3 information if a shareholder or partner requests it.

The FAQ also states that relief isn’t really available if the presenter has prior knowledge (that is, before PTE return is submitted) that a shareholder or partner will require the information on Schedules K2 and K3. Also, the new formats must be filed with the PTE return.

The IRS is not fully repealing the K2/K3 disclosure requirements for any subgroup of PTEs (e.g., small enterprises or businesses with a small no. of partners or shareholders), at least not at this time, according to the FAQ, reports Claconnect.com.


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