Domestic filing exception revised for Schedules K-2 and K-3

October draft instructions

The October draft instructions required the notification to be made two months prior to the unextended due date of the return, or Jan. 15, for calendar-year filers. If a request for a Schedule K-3 was received from a partner or shareholder by the date that is one month before the unextended due date of the return (the one-month date), or Feb. 15, for calendar-year filers, a Schedule K-2 and Schedule K-3 were required to be filed with the return with respect to the requesting partner or shareholder and a copy of the Schedule K-3 was required to be furnished to the requesting partner or shareholder. If a request for a Schedule K-3 was received after the one-month date, the domestic filing exception continued to apply, and a Schedule K-3 with the requested information was required to be provided to the requesting partner or shareholder by the later of the date the partnership or S corporation files its return or one month from the date of the request.

Crowe observation

Because the dates in the original rules were tied to the unextended due date of the returns, partnerships and S corporations filing returns on extension might not have enough time after the close of the year to determine if they would be eligible for the exception and to provide the notification. This timing could result in many taxpayers not getting the benefit of the exception, even when they might be eligible for it.

December draft instructions

Under the revised draft instructions, the notification must be provided at the latest when the taxpayer furnishes the Schedule K-1 to the partner or shareholder. The notification can be attached to the Schedule K-1. The revised instructions also change the one-month date. The domestic filing exception now applies if the partnership or S corporation does not receive a request from any partner or shareholder one month before the date that the Form 1065 or Form 1120-S is filed. For tax year 2022 calendar-year filers, the latest one-month date is Aug. 15, 2023, if the taxpayer files an extension. If a request for a Schedule K-3 is received by the one-month date, a Schedule K-2 and Schedule K-3 are required to be filed with the return with the information requested by the partner or shareholder, and a copy of the Schedule K-3 is required to be furnished to the requesting partner or shareholder. If a request for a Schedule K-3 is received after the one-month date, the domestic filing exception continues to apply and a Schedule K-3 with the requested information is required to be provided to the requesting partner or shareholder by the later of the date the partnership or S corporation files its return or one month from the date of the request.

Looking ahead

The changes in the December revised draft instructions will make it easier for more partnerships and S corporations to take advantage of the domestic filing exception. However, taxpayers that qualify for the domestic filing exception should make sure that they are able to prepare the Schedule K-2 and Schedule K-3 if they receive a request before the one-month date.