Changes to Schedules K-2 and K-3 for the 2021 Tax Filing Season

The IRS has added two new schedules for pass-through entity tax returns, better known as Schedules K-2 and K-3. The new forms are meant to provide consistency in reporting to partners and shareholders items of international relevance. The changes in reporting requirements should reduce the number of inquiries to the IRS that may arise from inconsistent reporting. The new schedules will impact partnerships and S corporations, which will be required to use the new forms beginning with the 2021 filing season.

Impact on the Asset Management industry - Private Equity Funds, Hedge Funds, Alternative Fund of Funds:

The new schedules provide complexities that will require additional analysis and an increase in compliance time.  Efforts will need to be made to determine the additional reporting requirements and its increase in the tax compliance burden—both in terms of tax compliance cost as well as timing of deliverables.

The IRS has created Schedules K-2 and K-3 for a few reasons:

• To provide consistency in reporting to partners and shareholders.
• Enforce partners to comply with their filing and reporting obligations
• Enables the IRS to verify that partnership and S corporation items are properly reported on partners’ and shareholders’ returns
• Reduce the burden on both taxpayers and the IRS by reducing unnecessary inquiries and examinations that may arise due to inconsistent reporting of partnership and S corporation items

The new schedules require more detail than was previously required, providing partners and shareholders with the necessary information to accurately complete their own returns. The new schedules can be submitted electronically as PDF files in a phased timeline (by form number) for the 2021 filing season, with electronic availability for all form numbers for the full 2022 filing season.

The IRS will not assess penalties for taxpayers who make a good faith effort to comply with the new schedules for the tax year 2021.

How SS&C can help

SS&C can provide relief for the Schedule K-2 filing. Funds that license SS&C’s tax solution for securities portfolio tax analysis will also receive a system-generated Schedule K-2.  These licensees also receive the following benefits:

• Integration with most accounting systems.
• Real-time portfolio tax analysis daily weekly, monthly, quarterly or annually.
• Nineteen fully automated tax adjustments including wash sales, straddles, constructive sales, QDI and others.
• System generated tax provision
• Robust Tax Allocation Module offers a dynamic allocation platform that handles. most industry approaches to aggregate allocations.
• Complete system-generated Tax Package and Tax Allocation Package.

Download our "Fully-automated US Tax Preparation and Hypothetical US Tax Solution" brochure to learn more about SS&C can offer tax filing relief or download our "Getting Up To Speed with IRS Regulations: Reporting and Transparency Requirements for Schedules K-2 and K-3" webinar.