Annual Action Required for Schedules K-2 and K-3

The IRS released two new schedules in recent years, Schedules K-2 and K-3. These new schedules are an expanded reporting requirement intended to provide more clarity and transparency for partners and shareholders of pass-through entities on how to properly calculate their U.S. income tax liability from relevant international items.

Every partnership and S corporation is required to complete and file Schedules K-2 and K-3 unless the domestic filing exception is met.

What are your action steps?

Send a notification annually to each partner/shareholder of your company either electronically or by mail. For the 2023 tax year, this notification should be sent as soon as possible. Going forward, you should establish a plan for sending the notification annually in December. A sample notification is below.

If a partner responds yes, then you need to contact your client relationship manager at Kirsch CPA Group immediately so that Schedules K-2 and K-3 can be prepared. Please note that there will be additional fees if Schedules K-2 and K-3 are required.

Do you meet an exception?

Your company may meet an exception to the requirement to file Schedules K-2 and K-3. In order to meet this exception, the pass-through entity must meet all four of the following requirements:

• Have no or limited foreign activity
• Have no foreign owners
• Have provided the K-3 notification to shareholders/partners (example below) and
• Have received no K-3 requests within one month prior to filing the federal tax return (Form 1065 or 1120S).

Please note that your pass-through entity is not eligible for the exception if it is owned:

• by an S Corporation with more than one shareholder
• or by a multi-member LLC.

What happens if you don’t act?

If you do not notify your partner/shareholders and thereby don’t communicate the need to file Schedules K-2 and K-3 to your client relationship manager at Kirsch CPA Group, then it may result in the assessment of failure to file penalties by the IRS.

What are Kirsch’s responsibilities?

You have been notified this is an annual requirement. We will only prepare Schedules K-2 and K-3 at your request. If Kirsch has prepared Schedules K-2 and K-3 for you in the past, we will continue to do so.

SAMPLE NOTIFICATION

Dear Partner/Shareholder,

The IRS released two new schedules in recent years, Schedules K-2 and K-3. These new schedules are intended to provide more clarity and transparency for partners and shareholders of pass-through entities on how to properly calculate their US income tax liability from relevant international items. In an effort to qualify for the domestic filing exception and thereby eliminate the requirement of filing Schedules K-2 and K-3, we are required to send you this official notification. You will not receive Schedule K-3 from the partnership unless you request it. If you are not requesting to receive Schedule K-3, no action is required on your part.

Please consult your tax advisor if you are unsure as to whether you should request Schedule K-3.

Sincerely,
Partnership/Corporation ABC

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