The domestic partnership must have either no “foreign activity” during the tax year or its foreign activity must meet certain specified limitations (e.g., be passive income, with no more than $300 of foreign income taxes allowable as a credit under Section 901 treated as paid or accrued by the partnership, and the foreign income and taxes are shown on a payee statement that is furnished to the partnership).
The draft instructions for the 2022 tax year add a “domestic filing exception.” Under the exception, a domestic partnership need not complete and file Schedules K-2 and K-3, nor furnish Schedule K-3 to a partner (except as specified), if the partnership meets four criteria for the tax year (the revisions made on the December 2, 2022, draft instructions are in bold): The new schedules are used to report and to furnish to partners certain information in connection with reporting requirements relating to international tax provisions. Introduced beginning with the 2021 tax year, Schedule K-2 (Partners’ Distributive Share Items- International) and Schedule K-3 (Partner’s Share of Income, Deductions, Credits, etc.-International) replaced and supplemented reporting previously completed on Schedules K and K-1. In the revised instructions released this month, as noted in more detail below, the notification to partners can now be made as late as when the partnership furnishes Schedule K-1 to its partners and can be provided as an attachment to the Schedule K-1. Under the October 2022 draft instructions, this notice would have had to have been provided to partners on or before January 15, 2023, for calendar year 2022 partnerships. Partnerships would notify their partners that they would not receive Schedule K-3 unless requested.
In the October 2022 draft instructions, the IRS introduced the concept of waiving some Schedule K-2/K-3 reporting with the caveat that partners be given the opportunity to request the information on a timely-filed request by the partner to the partnership. In response to criticism from the tax practitioner community, the IRS is attempting to balance its need for foreign reporting information with the cost/benefit to pass-through entities and their stakeholders. The new exception was originally included in an earlier draft of the 2022 instructions released in October. The IRS on December 2 released updated draft 2022 partnership instructions for Form 1065 Schedules K- 2 and K-3 that, among other changes, revise a new exception to filing and furnishing to partners Schedules K-2 and K.
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