It happened quietly, but before Christmas on December 23, the IRS finalized the partnership instructions for Schedules K-2 and K-3 for 2022.
Schedules K-2 and K-3 for federal Form 1065, U.S. Return of Partnership Income, were first required to be filed for the 2021 tax year. The 2021 instructions initially provided a limited Domestic Filing Exception (DFE), with additional exceptions and guidance released on February 16, 2022 in FAQ 15. The new 2022 Instructions just released are more specific and arduous to meet.
The DFE for 2022 requires the following:
- No or limited foreign activity;
- The partners of the partnership are limited to U.S. citizens, individual resident aliens, domestic decedent estate, domestic grantor trust, domestic non-grantor trust, S-corp with sole owner, and SMLLC with sole owner;
- Written notice has been provided to the partners that they will not receive Schedule K-3 unless the partner requests the schedule; and
- The partnership did not receive a request for Schedule K-3 from any partner one month prior to filing the Form 1065.
In addition to the DFE, a Form 1116 exemption exception applies to the new schedules. If all of the partners do not qualify for this exception, the partnership is required to file the Schedules K-2 and K-3, but only as relates to the partners that do not qualify.
For 2022, penalty relief for taxpayers who exercise good faith is no longer applicable. The relief had been provided in FAQ 10 and notice 2021-39 to ease the original transition period. Now that relief has been rescinded, taxpayers should expect penalties to be assessed if the schedules are not completed in their entirety when required or if the schedules are not completed and furnished to the respective partners timely.
The IRS’ narrower exceptions to filing the schedules and the removal of penalty relief means partnerships should anticipate that Schedules K-2 and K-3 will more than likely be required to be prepared for tax year 2022.
For additional information on preparing 2022 Schedules K-2 and K-3, contact your CBIZ tax professional.
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