n-21-39.pdf

Preserve advance releases and the authoritative Internal Revenue Bulletin rendition; directory timestamps are file-publication metadata, not legal effective dates. HTML bulletins begin June 2003; earlier available issues require full PDF parsing.

This collection currently includes the publisher’s available advance-release directory. Historical bulletin renditions are discovered separately; an advance-release record alone does not certify the collection archive complete.

Part III - Administrative, Procedural, and Miscellaneous

Transition Period Penalty Relief for New Schedules K-2 and K-3 for Forms 1065, 1120-
S and 8865

Notice 2021-39

SECTION 1. PURPOSE
This notice announces transition relief for taxable years that begin in 2021 with
respect to new Schedules K-2 and K-3 required for Forms 1065, U.S. Return of
Partnership Income, 1120-S, U.S. Income Tax Return for an S Corporation, and 8865,
Return of U.S. Persons With Respect to Certain Foreign Partnerships. Section 2
provides background on these new schedules and the penalties that may apply for
failure to furnish complete and correct information with respect to such schedules.
Section 3 provides transition relief from these penalties for any incorrect or incomplete
reporting on the Schedules K-2 and K-3 if the filer establishes to the satisfaction of the
Commissioner that it made a good faith effort to comply with the new reporting
requirements.
SECTION 2. BACKGROUND
.01 Longstanding Filing and Reporting Requirements
Section 6031 of the Internal Revenue Code (“Code”) and §§ 1.6031(a)-1 and
1.6031(b)-1T of the Income Tax Regulations generally require a partnership to do the
following:

2

• make a return for each taxable year stating the items of its gross income and
deductions allowable by subtitle A of the Code and any other information as
prescribed by forms and instructions for the purpose of carrying out the
provisions of subtitle A of the Code, and
• furnish to its partners statements containing each partner’s distributive share of
the partnership’s items of income, gain, loss, deduction, or credit required to be
shown on the partnership return and any additional information required to apply
particular provisions of subtitle A of the Code to the partner with respect to items
related to the partnership as prescribed by form or accompanying instructions.
Section 6037(a) and (b) provide similar requirements with respect to an S
corporation.
Section 6038(a)(1) and (a)(5) and §1.6038-3 of the Income Tax Regulations
generally require a United States person that controls a foreign partnership or holds at
least a 10-percent interest in a foreign partnership that is controlled by United States
persons holding at least 10-percent interests (a U.S. partner) to furnish information
relating to the partnership (a controlled foreign partnership or CFP), including
information relating to the U.S. partner's ownership interests in the partnership and
allocations to the partner of partnership items. A U.S. partner that controls a CFP may
also need to provide information relating to another U.S. partner's ownership interest in
the partnership and allocations to that partner of partnership items.
Pursuant to sections 6031, 6037, and 6038 and the accompanying Income Tax
Regulations, the Internal Revenue Service (IRS) has, in forms and instructions, long

3

required that any partnership, S corporation, or U.S. partner in a CFP report information
of international tax relevance.
.02 New Schedules K-2 and K-3
Form 1065, Schedules K-2, Partners’ Distributive Share Items—International,
and K-3, Partner’s Share of Income, Deductions, Credits, etc.—International, are new
for taxable years beginning in 2021. These schedules replace, supplement, and clarify
the reporting of certain amounts formerly reported on Form 1065, Schedule K, Partners'
Distributive Share Items, line 16, Foreign Transactions, and Schedule K-1 (Form 1065),
Partner’s Share of Income, Deductions, Credits, etc., Part III, Partner's Share of Current
Year Income, Deductions, Credits, and Other Items, line 16, Foreign Transactions.
Schedules K-2 and K-3 also replace, supplement, and clarify reporting of certain
amounts formerly reported on Form 1065, Schedule K, line 20c, Other items and
amounts, and Schedule K-1 (Form 1065), Part III, line 20, Other information.
The new
standardized format assists partnerships in providing partners with the information
necessary to complete their returns with respect to the international tax aspects of the
Code and allows the IRS to more efficiently verify tax compliance.
For the same reasons, for taxable years beginning in 2021, Form 1120-S
includes new Schedules K-2, Shareholders’ Pro Rata Share Items—International, and
K-3, Shareholder’s Share of Income, Deductions, Credits, etc.—International. These
schedules replace, supplement, and clarify the reporting of certain amounts formerly
reported on line 14, Foreign Transactions, of both Form 1120-S, Schedule K,
Shareholders’ Pro Rata Share Items, and Schedule K-1 (Form 1120-S), Shareholder’s
Share of Income, Deductions, Credits, etc. Part III, Shareholder's Share of Current Year

4

Income, Deductions, Credits, etc. Schedules K-2 and K-3 also replace, supplement, and
clarify the reporting of certain amounts formerly reported on Form 1120-S, Schedule K,
line 17d, Other items and amounts, and Schedule K-1 (Form 1120-S), Part III, line 17,
Other Information.
Finally, for the same reasons, for taxable years beginning in 2021, Form 8865
includes new Schedules K-2, Partners’ Distributive Share Items—International, and K-3,
Partner’s Share of Income, Deductions, Credits, etc.—International. These schedules
replace, supplement, and clarify the reporting of certain amounts formerly reported on
line 16, Foreign Transactions, of both Form 8865, Return of U.S. Persons With Respect
to Certain Foreign Partnerships, Schedule K, Partners’ Distributive Share Items, and
Schedule K-1 (Form 8865), Partner’s Share of Income, Deductions, Credits, etc., Part
III, Partner’s Share of Current Year Income, Deductions, Credits, and Other Items.
Schedules K-2 and K-3 also replace, supplement, and clarify the reporting of certain
amounts formerly reported on Form 8865, Schedule K, line 20c, Other items and
amounts, and Schedule K-1 (Form 8865), Part III, line 20, Other information.
The IRS released on July 14, 2020, for public comment drafts of the Form 1065,
Schedules K-2 and K-3 and the associated instructions. At that time, the IRS also
requested comments on the Forms 1120-S and 8865 with respect to which the IRS
planned to issue similar Schedules K-2 and K-3. After considering the comments
received, on June 3 and 4, 2021, the IRS released the final versions of new Schedules
K-2 and K-3 for the Forms 1065, 1120-S and 8865 applicable for taxable years
beginning in 2021.
.03 Penalties

5

(a) Failure to File or Show Information on Partnership Return
Section 6698 imposes a penalty for failing to file a return at the time prescribed
therefor, or for filing a return that fails to show the information required under section
6031. A return required under section 6031 includes Form 1065 and Schedule K-1
(Form 1065). For partnership taxable years beginning in 2021, it will also include
Schedules K-2 and K-3. A failure to file a timely partnership return that shows
information required under section 6031 would generally subject a partnership to the
section 6698 penalty. A section 6698 penalty will not be imposed if it is shown that the
failure is due to reasonable cause.
(b) Failure to File or Show Information on an S Corporation Return
Section 6699 imposes a penalty for failing to file a return required under section
6037 at the time prescribed therefor, or for filing a return that fails to show the
information required under that section. A return required under section 6037 includes
Form 1120-S and Schedule K-1 (Form 1120-S). For S corporation taxable years
beginning in 2021, it will also include Schedules K-2 and K-3. A failure to file a timely S
corporation return that shows information required under section 6037 would generally
subject an S corporation to the section 6699 penalty. A section 6699 penalty will not be
imposed if it is shown that the failure is due to reasonable cause.
(c) Failure to File Correct Information Returns
Section 6721 imposes a penalty for any failure to file an information return on or
before the required filing date, and for any failure to include all of the information
required to be shown on the return or the inclusion of incorrect information. When
regulations under section 6011 require a partnership to file a partnership return

6

electronically, each schedule required to be included with the return with respect to
each partner (that is, Schedules K-1 and K-3) is treated as a separate information return
subject to the section 6721 penalty. See section 6724(e). Failure to electronically file a
correct Schedule K-1 or K-3 when required would generally subject a partnership to a
section 6721 penalty.
(d) Failure to Furnish Correct Payee Statements
Section 6722 imposes a penalty for failure to furnish a payee statement on or
before the date prescribed therefor to the person to whom such statement is required to
be furnished, and for any failure to include all of the information required to be shown on
a payee statement or the inclusion of incorrect information. Section 6724(d)(2) provides
a definition for "payee statement" that applies to section 6722. Under section
6724(d)(2)(A), a payee statement includes a statement required to be furnished to each
partner under section 6031(b) or (c) and to each S corporation shareholder under
section 6037(b). A failure to furnish a correct Schedule K-1 or K-3 as required under
section 6031 would generally subject a partnership to the section 6722 penalty. A
failure to furnish a correct Schedule K-1 or K-3 as required under section 6037 would
generally subject an S corporation to the section 6722 penalty.
Section 6724 provides an exception to a penalty for any failure under sections
6721 and 6722 if it is shown that the failure is due to reasonable cause and not to willful
neglect. Under § 301.6724-1 of the Procedure and Administration Regulations, a
penalty is waived for reasonable cause only if the filer establishes that either there are
significant mitigating factors with respect to the failure or the failure arose from events

7

beyond the filer’s control. In addition, the filer must establish that the filer acted in a
responsible manner both before and after the failure occurred.
(e) Failure to furnish information required by section 6038
Section 6038(b) and (c) impose penalties for failing to furnish the information
required under that section by its due date. The reporting required under section 6038
includes Form 8865 and each Schedule K-1 (Form 8865). For partnership taxable
years beginning in 2021, it will also include Schedules K-2 and K-3. A U.S. partner is
generally subject to penalties under section 6038 for failure to file a Form 8865 that
shows information required under section 6038. No penalties are applicable under
section 6038 for a partner that shows that the failure to file Form 8865 is due to
reasonable cause.
SECTION 3. PENALTY RELIEF
This section provides transition relief for taxable years that begin in 2021
(processing year 2022) with respect to Schedules K-2 and K-3 to Forms 1065, 1120-S,
and 8865. During this transition period, a partnership required to file Form 1065, an S
corporation required to file Form 1120-S, or a U.S. partner required to file Form 8865 (a
“Schedule K-2/K-3 filer”) will not be subject to the relevant penalties described in section
2 for any incorrect or incomplete reporting on the Schedules K-2 and K-3 if the filer
establishes to the satisfaction of the Commissioner that it made a good faith effort to
comply with the Schedules K-2 and K-3 filing requirements (and the Schedule K-3
furnishing requirements) per the instructions. A Schedule K-2/K-3 filer that does not
establish that it made a good faith effort to comply with the new requirements will not be
eligible for penalty relief under this notice.

8

For purposes of determining whether a Schedule K-2/K-3 filer makes a good faith
effort to complete Schedules K-2 and K-3, the IRS will take into account the extent to
which a Schedule K-2/K-3 filer has made changes to its systems, processes, and
procedures for collecting and processing information relevant to filing the Schedules K-2
and K-3 and the extent to which a Schedule K-2/K-3 filer has obtained information from
partners, shareholders, or the CFP, or applied reasonable assumptions when
information is not obtained. The IRS will also take into account the steps taken by the
Schedule K-2/K-3 filer to modify the partnership or S corporation agreement or
governing instrument
to facilitate the sharing of information with partners and
shareholders that is relevant to determining whether and how to file Schedules K-2 and
K-3.
In several instances, certain information about partners, shareholders, or the
CFP is relevant for determining the applicability of a part of Schedules K-2 and K-3. For
example, if a partnership has a direct or indirect partner that is a nonresident alien
individual or a foreign corporation, the partnership must complete Form 1065, Part X of
Schedules K-2 and K-3. Information about the partners, shareholders, or the CFP is
also relevant for determining how to report some amounts. For example, for taxable
years beginning in 2021, the instructions for Form 1065, Part IX of Schedule K-2 and K-
3 state that a partnership is expected to collaborate with its partners to identify the
foreign related parties of each partner.
The Treasury Department and the IRS are aware that a Schedule K-2/K-3 filer
may not currently have systems or procedures in place to obtain information about its
partners, shareholders, or the CFP to determine whether it must file a part of Schedules

9

K-2 and K-3 or how to complete a part that must be filed. In general, in the taxable year
2021 instructions, unless the Schedule K-2/K-3 filer has knowledge to the contrary, it
must file or complete certain parts assuming that the information would be relevant to
the partner or shareholder. Under this notice, during the transition period, a Schedule
K-2/K-3 filer will not be subject to the relevant penalties described in section 2 for any
incorrect or incomplete reporting on Schedules K-2 or K-3 if it establishes to the
satisfaction of the Commissioner that it made a good faith effort to determine whether it
must file a part and how to complete a part that it files.
With respect to information about partners, shareholders, or the CFP that is
relevant to determine whether to file and how to complete a part, the IRS will assess the
effort the Schedule K-2/K-3 filer made to obtain this information and the reasonableness
of any assumptions, taking into account the relationship between the Schedule K-2/K-3
filer and its partners, shareholders or the CFP. For example, the appropriate level of
diligence and/or the reasonableness of an assumption may differ with respect to a
partner that manages or controls the partnership, or a partnership with a partner with a
significant interest in the partnership, such as a partner with a 10-percent interest, as
compared to partners holding small interests for which there may not be the same ease
of access to information. Nevertheless, a Schedule K-2/K-3 filer may have made a
good faith effort despite being unsuccessful in obtaining information from its partners,
shareholders, or the CFP.
SECTION 4. REQUEST FOR COMMENTS
The IRS solicits comments on the draft instructions to Schedules K-2 and K-3 for
taxable years beginning in 2021 being released the same date as this Notice,

10

particularly any instances where the instructions do not provide sufficient guidance on
how to complete the returns or where additional clarity is needed. The IRS is
specifically interested in suggestions for addressing structures and situations that make
it difficult to determine certain information (for example, tiered partnership structures or
publicly-traded partnerships).
As discussed in section 3, in general, the instructions for taxable years beginning
in 2021 for certain parts of the Schedules K-2 and K-3 require the partnership and the S
corporation to report information unless the partnership and S corporation know that the
information is not relevant to partners, shareholders, or indirect partners. The IRS
solicits comments concerning reasonable assumptions Schedule K-2/K-3 filers could
make in determining whether and how to complete Schedules K-2 and K-3 for years
after the transition period and whether these assumptions may differ between various
parts of the Schedules K-2 and K-3.
Comments should be submitted in writing and should include a reference to
Notice 2021-39. Comments may be submitted in one of two ways:
(1) Electronically via the Federal eRulemaking Portal at www.regulations.gov
(type IRS-2021-0006 in the search field on the regulations.gov homepage to find this
notice and submit comments).
(2) Alternatively, by mail to: Internal Revenue Service, Attn: CC:PA:LPD:PR
(Notice 2021-39), Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C.
20044.
All commenters are strongly encouraged to submit public comments
electronically. The IRS expects to have limited personnel available to process public

11

comments that are submitted on paper through the mail and these comments,
submitted through the mail, may not be processed with enough time before revisions to
the instructions need to be prepared. Until further notice, any comments submitted on
paper will be considered to the extent practicable. The Treasury Department and the
IRS will publish for public availability any comment submitted electronically, and to the
extent practicable on paper, to its public docket.
SECTION 5. CONTACT INFORMATION
The principal author of this notice is Ronald M. Gootzeit of the Office of Associate
Chief Counsel (International). For further information regarding the issues described in
this notice, contact Mr. Gootzeit at (202) 317-6937 (not a toll-free number).