The AICPA and 52 state and area CPA societies submitted further comments and concerns to the IRS and Treasury on Friday urging a delay until next year of required reporting by partnerships and S corporations of items of international tax relevance on new Schedules K-2, Partners' Distributive Share Items — International, and K-3, Partner's Share of Income, Deductions, Credits, etc. — International.
The new schedules have provoked widespread controversy among practitioners dismayed at the scope and detail of items required to be reported for 2021, still-evolving instructions to the forms that were last updated in January, and the current inability to electronically file them. On Feb. 16, the IRS provided transition relief, describing some passthrough entities that the Service is excepting from having to file the forms for the 2021 tax year.
For those and other reasons, while acknowledging the IRS's relief and other efforts to facilitate the forms' implementation, the AICPA and state societies said the Service should delay their implementation until 2023 (for the 2022 tax year) and suspend any assessment of penalties against partnerships or S corporations for failing to file the forms or timely provide them to partners and shareholders for the 2021 tax year. The AICPA also requested a similar delay in its comment letter of September 2020.
One of the two recent letters released Friday, dated Feb. 24, is addressed to IRS Commissioner Charles Rettig and Lily Batchelder, assistant secretary (Tax Policy) at Treasury. In it, the AICPA and state societies point to the mid-course changes to the forms' scope and lingering uncertainty surrounding many requirements.
This "leaves the tax system confused and in disarray," the letter states. Furthermore, "taxpayers are unclear as to who is required to file the Schedules, nor can taxpayers properly file and the IRS process these Schedules. These threshold issues nearly preclude complete and accurate returns for the 2022 filing season on which our tax system relies and on which the Schedules are predicated in the goal to standardize international tax reporting."
The other letter, addressed to senior officials within the IRS, dated Feb. 18, is signed by AICPA Tax Executive Committee Chair Jan F. Lewis, CPA. It offers additional comments on Schedules K-2 and K-3, also highlighting a need to delay their implementation by a year.
This letter requests further guidance on several interpretational matters, such as the threshold consideration of what is an item of "international tax relevance." In that regard, the AICPA recommends that the schedules' instructions specify that the exception to filing Form 1116, Foreign Tax Credit (Individual, Estate, or Trust), refers to the requirements provided in Sec. 904(j).
Also, because of possible timing differences between when partners or shareholders certify the need for the schedules to the entity and the entity receives the data supporting that certification, the instructions should specify whether the entity is required to amend its return or file an administrative adjustment request and include Schedules K-2 and K-3 when the entity receives this certification after the entity's tax filing. Also, the instructions should address whether the entity is then subject to penalties, the AICPA recommends.
The letter also suggests other clarifications in the instructions regarding required attachments, including Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations.
The AICPA also calls attention to the schedules' implications for the government's compliance with the Paperwork Reduction Act (PRA) of 1995.
"The expanded scope of the updated instructions did not account for the additional information reporting burden on taxpayers who are now required to file Schedules K-2 and K-3," the letter states. "As a result, the initially published Federal Register public notice and comment period required by the PRA pertaining to the Form 1065 [U.S. Return of Partnership Income] and Form 1120-S [U.S. Income Tax Return for an S Corporation] is likely dramatically understated."
The AICPA continues to advocate for better IRS services; visit the webpage describing AICPA advocacy efforts to learn more.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.