Starting with the 2021 tax year, the IRS required Schedules K-2 and K-3 be completed for passthrough entities (Partnerships and S-Corporations) to include items of international tax relevance from the operations of a pass-through entity.  As these forms are very involved and complex, tax pros have argued that companies should not have to file Forms K-2 and K-3 for businesses with no foreign activity and no foreign owners. 

The IRS responded to these calls for expanded relief.  In late 2022, the IRS issued draft sets of instructions for passthrough entities 2022 Schedule K-2s and K-3s where they included a new “Domestic filing exception” for partnerships and S-Corporations.

Under the exception, a domestic passthrough entity need not complete and file Schedules K-2 and K-3, nor furnish Schedule K-3 to a partner or shareholder (except as specified), if the passthrough entity meets four criteria for the tax year:


1. No or limited foreign activity. The domestic passthrough entity must have either no “foreign activity” during the tax year or its foreign activity must meet certain specified limitations (i.e., be passive income, upon which no more than $300 of foreign income taxes allowable as a credit under Internal Revenue Code Section 901 treated as paid or accrued by the passthrough entity, and the foreign income and taxes are shown on a payee statement (generally Form 1099) that is furnished to the passthrough entity). For this purpose, “foreign activity” includes foreign income taxes paid or accrued, foreign-source income or loss, and ownership interests in foreign partnerships, corporations, branches, or disregarded entities.


2. U.S. citizen/resident alien partners.  During the 2022 tax year, all direct partners must be one of the following: 

    • U.S. citizens
    • Resident aliens
    • Domestic decedent’s estate 
    • Domestic grantor trust 
    • Domestic non-grantor trust
    • S Corporations with a sole shareholder
    • Single-member LLCs, where the LLC’s sole member is one of the persons above, and the LLC is disregarded as an entity separate from its owner 

3. Partner notification. Passthrough entities satisfying the first two criteria must further notify their partners or shareholders that they will not receive Schedule K-3 unless requested. The notification must be made electronically or by mail no later than when the passthrough entity furnishes the Schedule K-1 to the partner or shareholder (the notice can be provided as an attachment to Schedule K-1).  The notification must state that partners or shareholders will not receive Schedule K-3 from the passthrough entity unless the partners or shareholders request the schedule.


4. No 2022 Schedule K-3 requests by the 1-month date. The passthrough entity must not receive a request from any partner or shareholder for Schedule K-3 information on or before the date that is one month before the due date (with extension) of the passthrough entity’s Form 1065 (partnership) or Form 1120-S (S-Corporation).  For tax year 2022 calendar year passthrough entities, the latest 1-month date is August 15, 2023, if the passthrough entity files an extension. The passthrough entity must still provide a requested Schedule K-3 to partners or shareholders making such requests after the one-month date, but such requests will not cause the passthrough entity to fail to meet the domestic filing exception.

If a passthrough entity fails to meet the domestic filing exception solely due to the fourth criterion (i.e., a partner or shareholder making a Schedule K-3 information request before the one-month date), the passthrough entity must complete and file Schedules K-2 and K-3 but only with respect to the parts and sections relevant to the requesting partner or shareholder.


Be mindful of

These instructions are draft in nature and they are subject to change.


Dana R. Borys, an Accountancy Corporation is a boutique tax consulting, compliance, and representation firm working with affluent individuals and owners/officers/founders of start-up/emerging growth companies. Building connections beyond the code.