IRS Proposes Redesigned Partnership Return for Tax Year 2021

(Parker Tax Publishing July 2020)

The IRS issued a draft redesigned partnership tax return form for tax year 2021 (filing season 2022) that includes new Schedules K-2 and K-3. According to the IRS, the proposed new forms are designed to provide greater clarity for partners on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits. IR-2020-155.

In mid-July, the IRS released a proposed redesigned partnership tax return that would go into effect for the 2021 partnership tax year. The redesigned form and instructions provide guidance to partnerships on how to report international tax information to their partners in a standardized format. This proposed form would apply to a partnership required to file Form 1065 only if the partnership has items of international tax relevance (generally foreign activities or foreign partners). The proposed changes would not affect domestic partnerships with no international tax items to report.

The IRS said that the early release of the forms is intended to afford time for stakeholder input and engagement. Treasury and IRS invite comments from affected stakeholders through Sept. 14, 2020. Written comments should be sent to the following email address: lbi.passthrough.international.form.changes@irs.gov with the subject line: "International Form Changes."

Currently, partners are required to report international tax information on their tax returns on several tax forms and schedules. Partners generally obtain the information required to be reported from their partnerships, usually through narrative statements attached to K-1s. Those statements are compiled in a variety of formats and may be difficult for partners to translate onto their own returns. The proposed changes are intended to ease this burden through a standard format that offers greater clarity to both partnerships and their partners.

The standard format of the new partnership schedules is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, allowing partners to more easily prepare their tax returns and the IRS to more efficiently verify taxpayer compliance. It is intended that all of 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.

The IRS is releasing the draft of 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, to allow partnerships and other stakeholders time to consider the proposed changes and to provide comments that can be taken into account in finalizing the schedules and instructions.

The proposed parts included in new Schedule K-2 (Form 1065) replace portions of existing Form 1065, Schedule K, lines 16(a) through 16(r). The proposed parts included in new Schedule K-3 (Form 1065) replace portions of Schedule K-1, Part III, Boxes 16 and 20.

According to the IRS, similar revisions are planned 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.

For a discussion of partnership tax returns, see Parker Tax ¶28,500.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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