Forbes has published an article, “Change To Pass – Through Entity Reporting Requirements Is Causing Confusion And Pain”, which discusses new forms that are required for pass through entities that have created a trap for tax professionals and tax payers. The article begins as follows:
Tax professionals who prepare returns for pass-through entities (PTEs), Partnerships and Subchapter S Corporations (S-corps) know that for tax year 2021 two new information reporting forms (Forms K2 and K3) may be required for PTEs with foreign partners or shareholders. According to Bruce Friedland, IRS Media Relations, “The schedules K-2 and K-3 replace already required reporting that in practice – when it has been done – is part of attached statements, to returns and footnotes to Schedule K-1. While the schedules clarify information a partner or flow-through investor would need to complete their taxes accurately to take into account international items, the schedules do not ask for additional information [emphasis added]. Instead, the schedules are intended to improve reporting in a way that will be more useful for partners or flow-through investors, and over the longer term ease flow-through return preparation compliance by clarifying obligations and standardizing the format for reporting.” Friedland also noted that, “To ensure the public had the opportunity to provide input on the new schedules, the IRS took the unusual step of issuing the draft Schedule K-2 and K-3 in July 2020 and held events with external stakeholders shortly after the release to seek input and feedback. The comments received through all channels informed the revisions to the form, an early version of which was released in April 2021.” Final forms and draft instructions were then released in June 2021.
Many tax professionals after reviewing the IRS information releases and the draft forms and instructions decided, probably correctly, that the new requirements did not apply to the PTE returns they typically prepare and proceeded to focus on more immediate concerns. Indeed, according to Tom Gorczynski, Enrolled Agent, “Until recently it was believed this new, complex reporting requirement was limited to PTEs with international tax attributes.” But a recent update to the instructions for these schedules has tax professionals who prepare PTE returns in an uproar and believing (probably correctly) that the reporting requirement applies to a much larger percentage of PTE returns than perhaps the IRS intended
Posted by Mallory Wentz, Associate Editor, Wealth Strategies Journal.