New IRS foreign income reporting requirements for partnerships are fueling anger among tax practitioners, who say the agency is saddling them with far too much work to do and limiting their ability to do it.
Practitioners have a long list of complaints, from the vastly increased amount of detail the Internal Revenue Service is demanding to the fact that many partnerships will be forced to make the newly required disclosures even if they don’t have any foreign income—something the IRS made clear just a few weeks ago. The practitioners also note that the new disclosures can’t yet be filed electronically—that option won’t be available until at least next month.
The new rules require partnerships to classify their foreign income in a wide variety of ways, by type and source. They add up to a huge headache and burden on tax return preparers that they wish the IRS would take steps to alleviate, the practitioners said.
“It’s dumb, is the simplest way I can put it,” said Adam Markowitz, vice president of Howard L. Markowitz PA CPA, a Florida firm. “It makes absolutely, positively zero sense, but here we are.”
“It’s a disaster unfolding. It’s really sad,” said Mike Sylvester, a CPA with SBS CPA Group in Fort Wayne, Indiana.
He hopes the IRS will back down and at least delay the new requirements. “They’ve got to push this a year and they’ve got to change the rules,” Sylvester said.
Bruce I. Friedland, an IRS spokesman, said the new requirements are designed to improve the reporting of partnerships’ foreign income “in a way that will be more useful for partners and flow-through investors.” The IRS has sought stakeholder feedback since it first proposed the changes in 2020 and is continuing to do so, he said. The agency plans to issue FAQs to address questions that arise.
The IRS “knows these changes can cause short-term challenges” and indicated last year that it would provide relief from penalties if there are problems in adopting the changes, Friedland said.
The problems concern new IRS Schedules K-2 and K-3, which are intended to provide an extension of some of the information that used to be included on the existing Schedule K-1.
The new schedules are at least 14 pages long, and the amount of granular detail required by the schedules means much more work, practitioners said. It’s important information, Markowitz said, but “do we really need 20 to 30 pages of forms to tell us what used to be in one box on Schedule K-1?”
The IRS is “kind of like ostriches with their heads in the sand” when it comes to the burden that the new requirements impose on tax preparers, said Brian Streig, a CPA with Calhoun, Thomson + Matza LLP in Austin, Texas. “They don’t want to hear about compliance.”
In addition, the IRS has indicated that some entities may have to file the K-2 and K-3 regardless of whether they have any foreign income or foreign taxes. Practitioners said that is because if any of the partners claim foreign tax credits on separate investments unrelated to the partnership, they’ll need information from the partnership in order to calculate how much in credits they can take.
Partners will have to make these new disclosures but it “won’t change the tax of a single one of my clients by a dollar,” Sylvester said.
The default is for partnerships to file, Markowitz said, unless they can be certain that none of their partners have any foreign taxes of their own. “If you don’t know you have to fill these forms out, you have to fill these forms out.”
The IRS clarification came just last month in an update to the instructions for K-2 and K-3, and the timing caused an uproar among preparers already dealing with pandemic-related challenges
To compound the problem, the IRS says preparers can’t yet e-file Schedules K-2 and K-3 and will not be able to until at least March 20.
In some cases, including for S corporations, e-filing won’t be available for this filing season at all.
Until e-filing is available, the IRS says practitioners can attach the schedules to tax returns as PDFs, but preparers said that is a stopgap solution that increases the risk of errors or omissions.
The IRS said last year that it won’t impose penalties for incorrect or incomplete K-2 and K-3 filings, as long as taxpayers make a good-faith effort to comply with the requirements.
That judgment could involve factors such as the extent to which filers obtain information from partners and shareholders to get the information that needs to be reported, and the filer’s effort to make changes to its procedures to collect and process the information, according to the IRS.
But establishing that good-faith effort is still going to require an enormous amount of work. “It involves some sort of additional activity saying, ‘I did something,’” Streig said.