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In general, the Form 1065 Schedule K-3 reports a partner's distributive share of items of international tax relevance and is an extension of the Form 1065 Schedule K-1. It replaces line 16, portions of line 20, and numerous unformatted statements attached to prior versions of the Schedule K-1 Form 1065, Schedule K-1.

Exception Criteria Individuals who are U.S. citizens or resident aliens, Domestic decedent's estates, Domestic grantor trusts that have solely U.S. citizen or resident alien individual grantors and beneficiaries, Domestic non-grantor trusts that have solely U.S. citizen or resident alien individual beneficiaries,

Schedules K-2 and K-3, including any required attachments, are required for partnership (domestic or foreign) and S corporation taxpayers (those taxpayers required to file Form 1065 (U.S. Return of Partnership Income), Form 1120-S (U.S. Income Tax Return for an S Corporation) and taxpayers required to file Form 8865 ( ...

Form K-2 is titled “Partners' Distributive Share Items – International” and reports an entity's total activity with respect to these items. Form K-3 is titled “Partner's Share of Income, Deductions, Credits, etc. – International” and is filed to report each individual partner's respective share of these items.

Any flow-through entity that is required to file Form 1065, 1120-S, or 8865 and that has items that are relevant to the determination of U.S. tax or certain withholding or reporting obligations of its partners or shareholders must file the Schedules K-2 and K-3.

Chan: The relief that was provided and Notice 2021-39 said that essentially you had relief against certain penalties for failure to file K-2, K-3 and those penalties are roughly $200 to $500 and it can be multiplied by the number of partners.

Schedule K-3 reports items of international tax relevance from the operation of a partnership. Schedule K-2 is an extension of Form 1120-S, Schedule K, and is used to report items of international tax relevance from the operation of an S corporation.

The K-2 and K-3 is now mandatory for all Partnerships and S Corporations unless you can qualify for exemption under the DFE. On December 23, 2022, after several drafts, the IRS finalized the Partnership and S Corporation instructions for Schedules K-2 and K-3 for tax year 2022 with updated DFE.