Year 2021 Schedule K-1 and K-3 Question

[raybeyond]

I bought company XYZ stock in year 2021 and sold all on the same year.  I received my Schedule K-1 from the mail.  There is an instruction enclosed with the mail saying that Schedule K-3 be available for me in August 2022.  It also says that Schedule K-3 is not required to be attached to my U.S. federal and state tax returns.  My question is do I need to file Schedule K-3 for my year 2021 tax return?

[Cynthiad66]

It depends....If a taxpayer has items of international relevance, they are required to report on Schedules K-2 and K-3 if they file: Form 1065, U.S. Return of Partnership Income. Form 1120-S, U.S. Income Tax Return for an S Corporation. Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

The IRS  provided further details on additional transition relief for certain domestic partnerships and S corporations preparing the new schedules K-2 and K-3 to further ease the change to these new schedules. Those eligible for the relief will not have to file the new schedules for tax year 2021.

Notice 2021-39 PDF provides penalty relief for good-faith efforts to adopt the new schedules. Today's transition relief, appearing in new frequently asked questions (FAQs) on Schedules K-2 and K-3, allows an additional exception for tax year 2021 filing requirements by certain domestic partnerships and S corporations.

The IRS is providing an additional exception for tax year 2021 to filing the Schedules K-2 and K-3 for certain domestic partnerships and S corporations. To qualify for this exception, the following must be met:

• • In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates or foreign trusts. 
  • In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated or may reasonably expected to generate foreign source income (see section 1.861-9(g)(3)).
  • In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders nor did the partners or shareholders request the information regarding (on the form or attachments thereto):
    • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
    • Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).
  • The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

Use this IRS link for lmore information:  IRS Guidance on Relief for Forms K-2 and K-3

[raybeyond]

Thanks for your respond @Cynthiad66. On my K1 form that I received from the mail, the  “Domestic Partner” is checked and “Foreign Partner” is unchecked.  Also, there is no value on “foreign taxes paid or accrued“ on my K1 form.  Does that mean I am qualified for the exception?  Hence, I do not need to file K3 for year 2021? Please advise.  Thanks in advance.

[DaveF1006]

Yes, if you qualified for each of the exceptions that Cynthiad66 outlined in her previous post, you qualify for the exception. Be sure to review the specific lines that are referenced in your K1, such as;

• Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
• Line 20c, Form 1065, Schedules K and K-1 (Controlled Foreign Corporations, Passive Foreign Investment Companies, 1120-F, section 250, section 864(c)(8), section 721(c) partnerships, and section 7874) (line 17d for Form 1120-S).

Also make sure that there is no reference of international relevance in the supplemental statement that came with the K1. This will ensure that you know that your domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

@raybeyond

[raybeyond]

Thanks  @DaveF1006 .  Line 16 is checked indicated K3 is attached on my K1 form.  However, the mail said Schedule K3 will be available in August 2022.  Line 20 on my K1 form has these values: A 9 and AG 37.  Do I need to file K3 for year 2021?  I already e-file my tax.  Do I need to amend it?  Thanks!

[DaveF1006]

To assure your piece of mind, contact the issuer of the K1 form and ask why Box 16 was checked. The entries in Line 20 on your K1 does not suggest that this is from foreign income sources. 

Based on the exceptions listed, it sounds like you qualify for an exception but still inquire about a specific reason why the box was checked. This is because in the mail, you said "It also says that Schedule K-3 is not required to be attached to my U.S. federal and state tax returns". Yet the box was checked that you have a K3 attached to the return.

There is a conflict of information here that needs to be clarified by the partnership that issued the K1.

@raybeyond

[raybeyond]

@DaveF1006 I called the issuer.  They said the checkbox on line 16 is checked for all the K1 they issued.  They told me go ahead to file my tax without K3.  They will have K3 available around 8/31/22.  Then check IRS requirements for filing for K3 by then.  Thanks @DaveF1006