IRS previews changes in partnership forms for next year

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The Internal Revenue Service and the Treasury Department released proposed drafts of redesigned partnership form schedules for tax year 2021 (filing season 2022) that aim to provide more clarity for partners on how to figure their U.S. income tax liability in terms of international tax reporting, including claiming the appropriate tax deductions and credits.

The redesigned form and instructions for Form 1065, Schedules K-2 and K-3, offer guidance to partnerships on how they should report international tax information to their partners in a standardized format. The proposed form would apply to a partnership that’s required to file Form 1065 only if the partnership has items of international tax relevance (such as foreign activities or foreign partners). The proposed changes wouldn’t affect domestic partnerships with no international tax items to report, the IRS noted

The IRS and the Treasury are releasing the draft new Schedule K-2 (Form 1065), "Partners’ Distributive Share Items - International" and Schedule K-3 (Form 1065), "Partner’s – Share of Income, Deductions, Credits, etc. – International," both for tax year 2021 (filing season 2022), and the draft instructions, early so there’s more time for input and feedback from partnerships and other stakeholders to consider the proposed changes, and their comments can be taken into account before the schedules and instructions are finalized.

They are asking for comments from affected stakeholders through Sept. 14, 2020. Any comments should be emailed to lbi.passthrough.international.form.changes@irs.gov with the subject line: “International Form Changes.”

Partners are currently required to report international tax information on their tax returns on several different tax forms and schedules. Partners generally receive the information that needs to be reported from their partnerships, usually through narrative statements attached to K-1s. Those statements are then compiled in different formats and can be hard for partners to translate onto their own returns. The proposed changes are supposed to ease this burden through a standard format that provides more clarity to both partnerships and their partners.

The standard format of the new partnership schedules is designed to align the information that partnerships provide on the schedules with the tax forms used by partners, so partners can prepare their tax returns more easily and the IRS can verify taxpayer compliance more efficiently. All the information to be reported on the new schedules is already necessary for the partnership to provide to partners, or is available to the partnership.

Under the IRS's new partnership audit regime, which was approved in a 2015 law, the service is now able to audit the tax returns for an entire partnership without having to audit the tax return for each individual partner.

The proposed parts included in new Schedule K-2 replace parts of the existing Schedule K, Lines 16(a) through 16(r). The proposed schedule allows international tax information to be reported in a standardized manner generally corresponding to the tax forms listed above.

The proposed parts included in new Schedule K-3 replace parts of Schedule K-1, Part III, Boxes 16 and 20, and offer information to the partner generally in the format of the following forms that may be completed by the partner:

  • Form 1040 (U.S. Individual Income Tax Return)
  • Form 1040-NR (U.S. Nonresident Alien Income Tax Return),
  • Form 1116 (Foreign Tax Credit (Individual, Estate, or Trust)),
  • Form 1118 (Foreign Tax Credit – Corporations),
  • Form 1120 (U.S. Corporation Income Tax Return)
  • Form 1120-F (U.S. Income Tax Return of a Foreign Corporation),
  • Form 4797 (Sales of Business Property)
  • Form 8949 (Sales and Other Dispositions of Capital Assets)
  • Form 8991 (Tax on Base Erosion Payments of Taxpayers with Substantial Gross Receipts),
  • Form 8992 (U.S. Shareholder Calculation of Global Intangible Low-Taxed Income), and
  • Form 8993 (Section 250 Deduction for Foreign Derived Intangible Income and GILTI).

The Treasury and the IRS plan to make some similar revisions, where appropriate, to Form 1120-S, "U.S. Income Tax Return for an S Corporation," and Form 8865, "Return of U.S. Persons with Respect to Certain Foreign Partnerships." They are asking for comments on those as well.

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