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IRS Proposes Form 1065 Schedule K-2 and K-3 to Improve International Reports for Partnerships

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Freed Maxick International Tax Team

Freed Maxick helps foreign companies along with U.S. companies and CPA firms across the U.S. navigate through their international tax issues.

Freed Maxick Blog Tax

Intention: more closely align info partnerships report to partners with forms that partners use

The IRS is in the process of redesigning the U.S. tax return for partnerships in order to improve reporting of items with international tax implications. The Service recently released draft versions of two new supporting schedules and related instructions that would report information to partners about distributions, income, deductions and credits that may have international tax consequences.

Once finalized, these new forms will replace the somewhat unstructured process that partnerships use to report international tax information to partners. In the current system, partners generally get international tax information from their partnerships via narrative statements attached to each partner’s annual Form K-1 report of income, deductions and credits.

These narrative statements can vary widely in terms of their usefulness and understandability and they are often difficult for partners to translate into the accurate information they need to report on their personal returns.

Proposed Schedule K-2 and Schedule K-3 Partnerships

The proposed new reports, Schedule K-2 (Form 1065), Partners' Distributive Share Items - International and Schedule K-3 (Form 1065), Partner's – Share of Income, Deductions, Credits, etc. – International, are intended to more closely align the information that partnerships report to partners with the forms that the partners use to report the income and other information on their own returns.

The IRS has stated that all of the information included on the new schedules is already available to the partnership and in many cases is already necessary for the partnership to provide to partners. The intention is not to create additional reporting requirements, but instead to create a more standardized format for existing reporting.

New Schedule K-2 and K-3 in Time for 2021 Tax Returns?

The IRS plans to have the new schedules ready for use on tax returns for 2021. They will be accepting comments on the draft forms until September 14, 2020. Once the comment period ends, the Service will review the input, consider potential modifications to the drafts and move toward a final version. Partnerships with international partners and/or income from international activities can expect to use the new forms to report to partners during the filing season in 2022.

To learn more about our international tax services, including reporting requirements for partnerships with international activities, please contact your Freed Maxick international tax advisor.

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