Schedule K-3 questions and answers to recently released instructions (2024)

ARTICLE | December 05, 2022

Authored by RSM US LLP

Schedule K-3 took the pass-through world by storm this past filing season. Together with Schedule K-2, the changes to Forms 1065, 1120-S and 8865 represented a significant expansion in the amount of U.S. international tax information required to be reported on partnership and S corporation tax returns. All pass-through entities with items of international tax relevance were required to file a Schedule K-3. While K-3 instructions have been provided, many professionals are still seeking clarity.

Brian Moreira, a senior manager at RSM who focuses on the financial services industry, discussed the Schedule K-3 requirement, the challenges that resulted and how technology could minimize them.

Q: What is the new Schedule K-3 requirement and why was it created?

A: The IRS introduced the Schedule K-3 to help partners and shareholders by clarifying calculations of U.S. income tax liability, as well as income and deductions related to international activity.

Before tax year 2021, foreign informational disclosures were reported to the investors on their Schedule K-1 Line 16 and footnote sections. In tax year 2021, all that information needed to be reported on the new Schedule K-3. In fact, all pass-through entities with items of international tax relevance were required to file a Schedule K-3.

In the IRS’ answers tofrequently asked questions, it acknowledged that partnerships and S corporations would initially have transition costs, but the agency asserted those entities would benefit from increased transparency of information and reduced uncertainty about what to report and how to report it.

Q: Why was it so challenging to follow the Schedule K-3 instructions?

A: The new schedules required more detailed and more complete reporting than many partnerships and S corporations provided previously to partners and shareholders. This created a major compliance hurdle for various entities, including private equity and real estate funds.

Schedule K-2 and K-3 require a significant amount of information to be reported. The Schedule K-3 is about 20 pages long and does not take into consideration any overflow statements or supplemental disclosures. Schedule K-3 requires country-by-country reporting, which, as you can imagine, could be voluminous.

Q: How would you describe your experience with filing Schedule K-3?

A: It was a challenge, to say the least. The IRS released the Schedule K-3 instructions and theSchedule K-2 and K-3 FAQsin February 2022 but continued to update them through September, which left tax advisors with only a brief period to understand the reporting requirements across their various clients. We worked closely with our international tax team to understand the requirements. This helped us scope the requirements from clients to ensure we received the information that needed to be reported on the forms, such as the country of incorporation.

Q: How did those issues measure up to expectations for K-3?

A: We knew it would be a challenge, especially in the fund-of-funds space, where you may receive underlying Schedule K-3s from various tax preparers. We had to aggregate all the Schedule K-3 data in a concise manner in order to enable clients to report to their investors. This meant reconciling items between the various sections of the form and Schedule K-1 and Schedule K-3. There were occasions where we had to go back to clients to ask them questions with regards to the Schedule K-3 and in some cases request the Schedule K-3 because it was not provided.

Q: What changes next year could improve the process?

A: Like most tax compliance processes, we look for ways to improve each year. On the client side, the data-gathering process has been vetted, which will allow the team to provide more value-added services. On the advisory side, we will look for ways to streamline the data with tax applications likePartnerSight®.

Q: How can digital solutions help the K-3 compliance effort?

A: The Schedule K-3 contains over 700 data points. An application like PartnerSight can aggregate and tier the Schedule K-3 data in a structured format and generate the forms. This is a game changer because it is more efficient and minimizes the risk of human error.

Q: What insights can an organization glean from K-3 data?

A: As the tax regulatory footprint continues to evolve, our clients should be aware of these changes so that we can work closely with the administrators to ensure we have the data points we need.

Clients are being more proactive in reaching out to us to understand their requirements if they make a new investment in a foreign jurisdiction and are initiating information requests from underlying portfolio companies much earlier than usual. We saw delays in receiving underlying K-1s, ranging from two to four weeks in comparison to the prior year. It also facilitates collaboration with our international tax specialists, which deepens the insights for the investment funds we serve.

This article was written by Brian Moreira and originally appeared on Dec 05, 2022.
2022 RSM US LLP. All rights reserved.
https://rsmus.com/insights/services/business-tax/schedule-k-3-instructions.html

The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.

RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.

Schedule K-3 questions and answers to recently released instructions (2024)

FAQs

How to fill out a K3? ›

Entering a K-3 in the individual return:
  1. Open the Schedule K-1 Worksheet.
  2. Scroll down to the Foreign Transactions line: For partners, this is line 16. ...
  3. Check the Schedule K-3 is attached if checked box.
  4. Enter the Name of Country or U.S. Possession.
  5. Complete lines B through AI based on the K-3 received.

What is a Schedule K-3 notification? ›

Schedule K-3 (Form 1065) reports items of international tax relevance from the operation of a partnership. You must include this information on your tax or information returns, if applicable. See separate parts for specific instructions. You only need to use the schedules that are applicable to you.

Can I file taxes without K-3? ›

The calculations on this form can result in deduction limitations. But unless this is a foreign investment with significant foreign activity, whatever information is missing by not having Schedule K-3 should not greatly influence the taxes due on your return.

What is the difference between IRS K-3 and K-1? ›

In general, the Form 1065 Schedule K-3 reports a partner's distributive share of items of international tax relevance and is an extension of the Form 1065 Schedule K-1. It replaces line 16, portions of line 20, and numerous unformatted statements attached to prior versions of the Schedule K-1 Form 1065, Schedule K-1.

How long does it take to approve K3? ›

In theory, the k3 visa processing time is between three to thirteen months on average. This time frame is the same as if you're applying for a marriage green card, which is why people avoid it. While you can go ahead and apply for it, it is better to apply for a K1 visa instead.

How to avoid filing schedule K-3? ›

A partnership or S corporation that meets the domestic filing exception does not need to: (a) complete and file the Schedules K-2 and K-3 with the IRS, or (b) furnish the Schedule K-3 to its partners or shareholders (except when requested by a partner or shareholder after the One Month Date).

Who is exempt from filing K-2 and K-3? ›

However, the draft instructions also say that if a partnership is filing Form 1065 solely because it is a qualified derivatives dealer, it does not need to file Schedules K-2 and K-3.

What is the difference between k-2 and k-3? ›

Schedule K-2 is an extension of Form 1120-S, Schedule K, and is used to report items of international tax relevance from the operation of an S corporation. Schedule K-3 is an extension of Schedule K-1 (Form 1120-S) and is generally used to report to shareholders their share of the items reported on Schedule K-2.

Do I have to fill out Schedule K? ›

Who needs to fill out a K-1? Certain entities and partnerships file Schedule K-1 forms with the IRS and issue them forms to partners and shareholders. While individual taxpayers typically don't file K-1 forms, you can use the information you receive from a K-1 on your personal income tax return.

Can I skip a year without filing taxes? ›

Taxpayers are required by law to file an income tax return for any year in which a filing requirement exists. There are numerous practical reasons to file tax returns. Important programs like federal aid to higher education require applicants to submit copies of tax returns to qualify for loans.

Does Schedule 3 need to be filed with 1040? ›

Not everyone needs to file Schedule 3 with their federal income tax return. You only need to file Schedule 3 if you're claiming any of the tax credits or made any of the tax payments mentioned above.

What is the penalty for not filing k2 k3? ›

For the 2021 tax year, failure to include these Schedules subjected taxpayers to late filing penalties of $210 per month per partner or shareholder. As you can imagine, taxpayers with many owners could be subject to significant penalties.

What is the purpose of Schedule K-3? ›

For example, the new Schedule K-3 provides the information that corporate and individual partners need to calculate their foreign tax credit on Form 1118, Foreign Tax Credit — Corporations, and Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), respectively.

Do I need to file a K1 if I have no income? ›

If your business is operating at a loss and there is no taxable income for any partner or shareholder to report, the partnership is still responsible for issuing Schedule K-1s.

Does a loss on a K1 reduce taxable income? ›

This is a non-cash expense that the Internal Revenue Service (IRS) allows you to deduct from your taxable income, effectively creating a "paper loss." The paper loss shows up on the K-1 tax form you receive from the property and can often be used to offset your W-2 income.

What are documents needed for K3? ›

Required Documentation
  • Birth certificate.
  • Marriage certificate for the marriage to the U.S. citizen spouse.
  • Divorce or death certificate(s) of any previous spouse(s)
  • Police certificates from your present country of residence and all countries where you have lived for 6 months or more since age 16.

What is K3 filing? ›

With a non-immigrant K3 Spouse Visa, also known as K3 Visa, your foreign spouse may be allowed to enter the U.S. under a temporary legal status for two years. During this time, applicants can apply for a permanent residence card while living in the United States with their families.

Is K1 or K3 better? ›

There are two different types of marriage visa available to those wanting to come to the US and which one is appropriate depends on your current marital status. If you are engaged and plan to wed in the US then the K1 visa could be the correct option, if you are already married then the K3 visa is the ideal route.

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