The IRS and Treasury have released updated early drafts of new Schedule K-2 and Schedule K-3 for Form 1065, U.S. Return of Partnership Income, 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, for the 2022 filing season. These new schedules are designed to provide greater clarity for partners and shareholders on how to compute their income tax liability for items of international tax relevance, including claiming deductions and credits. The early release drafts are intended to give a preview of the changes before the final versions are released. The IRS plans to release the early draft of the instructions for the schedules this summer.
The redesigned forms and instructions will also give useful guidance to partnerships, S corporations and U.S. persons who are required to file Form 8865 with respect to controlled foreign partnerships on how to provide international tax information. The changes reflected in these schedules do not affect partnerships and S corporations with no items of international tax relevance.
The IRS and Treasury also announced that they intend to provide certain penalty relief for the 2021 tax year in future guidance, in order to promote compliance with adoption of Schedules K-2 and K-3 by affected pass-through entities and their partners and shareholders.