6/30/2021
Notice 2021-39: Transition Period Penalty Relief for New Schedules K-2 and K-3 for Forms 1065, 1120-S and 8865 provides transition relief with respect to new Schedules K-2 and K-3 required for Forms 1065, U.S. Return of Partnership Income, 1120-S, U.S. Income Tax Return for an S Corporation, and 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships for tax years that begin in 2021 .
During the transition period, a partnership required to file Form 1065, an S corporation required to file Form 1120-S, or a U.S. partner required to file Form 8865 will not be subject to penalties for incorrect or incomplete reporting on the Schedules K-2 and K-3 if the filer establishes that it made a good faith effort to comply with the filing requirements.
IRB 2021-27, July 6, 2021
Notice 2021-39: Transition Period Penalty Relief for New Schedules K-2 and K-3 for Forms 1065, 1120- S and 8865 provides transition relief for certain international reporting for taxable years that begin in 2021 with respect to new Schedules K-2 and K-3 required for Forms 1065, U.S. Return of Partnership Income, 1120-S, U.S. Income Tax Return for an S Corporation, and 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
Schedules K-2, Partners’ Distributive Share Items—International, and K-3, Partner’s Share of Income, Deductions, Credits, etc.—International for partnerships (draft schedules and instructions for Form 1065 and draft schedules and instructions for Form 8865) and Schedules K-2, Shareholders’ Pro Rata Share Items—International, and K-3, Shareholder’s Share of Income, Deductions, Credits, etc.—International for S-corporations (draft schedules and instructions for Form 1120-S) are new for taxable years beginning in 2021.
The notice provides penalty relief for taxable years that begin in 2021 for any incorrect or incomplete reporting on Schedules K-2 and K-3 if the filer can demonstrate that it made a good faith effort to comply with the filing requirements. A filer that does not establish a good-faith effort to comply will not be eligible for penalty relief as provided for in the notice.
The Treasury and the IRS released early draft instructions for the Schedules K-2 and K-3 for Forms 1065, 1120-S, and 8865 for tax year 2021 (filing season 2022). The early release drafts of the instructions provide a preview of the instructions before final versions are released. The new Schedules K-2 and K-3 were released on June 3 and 4, 2021.
The redesigned forms and instructions give useful guidance to partnerships, S corporations and U.S persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information. The updated forms apply to any persons required to file Form 1065, 1120-S or 8865, but only if the entity for which the form is being filed has items of international tax relevance (generally foreign activities or foreign partners).
The changes do not affect partnerships and S corporations with no items of international tax relevance.
The Treasury Department and the IRS released prior drafts and instructions of Schedules K-2 and K-3 for the Form 1065 in July 2020 and engaged with stakeholders to solicit input on the changes. The final instructions respond to comments received with respect to the draft July 2020 instructions. For example, the final instructions:
Clarify when each part of the schedule is applicable;
Clarify that the preparer must only complete applicable parts of the Schedules K-2 and K-3
Provide instructions for requested new separate schedules regarding determination of the section 250 deduction and the allocation and apportionment of expenses
Recognizing the transitional challenges with the adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders, the Treasury Department and the IRS issued Notice 2021-39 on June 30, 2021 providing certain penalty relief for the 2021 tax year.