Dear [CLIENT NAME]:
Starting this year the IRS is requiring most partnerships and S corporations to prepare the following two new schedules:
- Schedule K-2, Partners’ Distributive Share Items—International, and
- K-3 Partner’s Share of Income, Deductions, Credits, etc.—International.
Significant penalties may be imposed for failure to file these returns if they are required. Unfortunately, preparing these forms will result in an increase in our fees.
This new mandate applies even though the partnership or S corporation that you have an ownership interest in has no foreign owners, foreign activities, or foreign income if any direct or indirect partner/shareholder will need information supplied on the K-2 or K-3 to complete their returns. (An indirect partner/shareholder is an owner of a partnership or S corporation that is a partner/shareholder of this partnership/S corporation.)
This will most likely come up if any partner/shareholder is eligible to claim a Foreign Tax Credit for foreign taxes on investment, including income from a mutual funds or brokerage accounts that contain international investments.
For 2021 we can avoid filing these K-2 and K-3s if we can document that all the direct and indirect partners/shareholders either do not have ANY foreign income (including dividend or interest income from foreign investments) on which foreign taxes were paid or, even if you do, you qualify to claim the foreign tax credit directly on the Form 1040 rather than by filing the Form 1116, Foreign Tax Credit (Individual, Estate, or Trust).
You may only elect to claim the Foreign Tax Credit directly on the Form 1040 if:
- You are an individual (estates and trusts do not qualify);
- All your foreign income is passive income (e.g., dividends, interest, royalties that are reported to the individual on a payee statement such as a 1099-DIV, 1099-INT, or K-1); and
- You have received less than $300 ($600 if filing married filing jointly) in creditable foreign taxes.
We are asking all partners/shareholders to complete the attached form and send it back to us no later than _______________ so we may determine whether we will need to complete the Schedules K-2 and K-3. Unless we receive these forms back from all partners/shareholders by _________________ we will complete the K-2s and K-3s, which will result in an additional tax return preparation fee of at least ________________.
Feel free to call our office if you have any questions,
Sincerely,
Your tax professional
Schedule K-2/K-3 statement from partners/shareholders
Partnership/Shareholder Name _______________________________________________
Partnership/Shareholder Social Security number/EIN: _____________________________
Partnership/S corporation Name: _____________________________________________
Partnership/S corporation EIN: _______________________________________________
I, ____________________________________, a partner/shareholder of the _______________________________________ partnership/S corporation affirm that (check the boxes below):
____Am a U.S. C corporation with no foreign income, foreign assets, or other foreign activities, including investments in other entities with any foreign owners, foreign income, foreign assets or other foreign activities, and will not be claiming the Foreign Tax Credit
___ Am a U.S. resident individual and
____ Have no foreign income, assets, or other activity (other than described immediately below);
____ Have only foreign creditable income from an investment in a mutual fund that invests in international investments and that the income is below $300 ($600 and I’m filing a married filing joint return) and I have received a 1099-DIV or 1099-INT payee statement from the brokerage
Signed: __________________________________________ Dated:______________________
