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Schedule K-2/K-3 Domestic Filing Exception

The IRS introduced Schedule K-2 and K-3 with the 2021 tax filing year. The forms were designed to provide more information to taxpayers about reporting foreign activities and more specifically to provide the taxpayer with more detailed information to correctly calculate and report their foreign tax credits.

Schedule K-2 contains the overall information for the partnership and Schedule K-3 contains the partner’s distributive share of the information.

To provide some taxpayers with relief from filing Schedule K-2 and K-3 the IRS introduced the “Domestic Filing Exception”. Taxpayers would need to meet the following criteria in order to qualify for the exception.

  1. No or limited foreign activity – During a domestic partnership’s tax year 2022, the domestic partnership either has no foreign activity or, if it does have foreign activity it is limited.
  2. S. citizen/resident alien partners – During tax year 2022, all the direct partners in the domestic partnership are U.S. persons.
  3. Partner notification – With respect to a partnership that satisfies criteria 1 and 2, partners receive a notification from the partnership at the latest when the partnership furnishes the Schedule K-1 to the partner. The notice can be provided as an attachment to Schedule K-1. The notification must state that partners will not receive Schedule K-3 from the partnership unless the partners request the schedule.
  4. No 2022 Schedule K-3 requests by the 1-month date – The partnership does not receive a request from any partner for Schedule K-3 information on or before the 1-month date. The “1-month date” is 1 month before the date the partnership files Form 1065. For tax year 2022 calendar year partnerships, the latest 1-month date is August 15, 2023, if the partnership files an extension.

These criteria are explained in more detail by the IRS on their most recently released draft of the Schedule K-2/3 instructions dated December 2, 2022.  Given the Instructions are still in draft format the IRS may make further changes.

2022 Partnership Instructions for Schedules K-2 and K-3 (Form 1065)

Article by Zaid Butt, Director

Zaid Butt
Author: Zaid Butt
Zaid is a certified public accountant with significant tax compliance and consulting experience in diverse industries, including private equity, software, construction, manufacturing, retail, and financial services.