Uncle Sam Wants (more info from) You

If you own a business entity, there's a pretty good chance that Uncle Sam is going require more info from you over the next year.?There are two new information requirements and it's likely that one or both of them will impact you!?In this article, I'll discuss one that will require some additional effort for most businesses that file their income tax returns as a partnership or S corporation.?I'll discuss the other requirement in a later article.

Last summer, the IRS introduced new schedules K-2 & K-3 with an explanation the new forms weren't required if the tax return didn't have any items of international tax relevance.?The tax community generally understood that to mean if the business didn't have any foreign activities or partners, the forms were not required.

THEN THE IRS DROPPED A BOMBSHELL IN JANUARY 2022!?Changes to the final instructions required the filing of the forms if any partners/shareholders claimed a foreign tax credit on their individual tax returns!?Since claiming small amounts of foreign tax credits is pretty common (anyone with an Edward Jones or similar account probably had some foreign tax withheld) it seemed that unless the business could determine that ALL partners/shareholders wouldn't claim any foreign tax credits, it would be necessary to file the additional forms.

Naturally, the tax community went nuts and the IRS finally provided limited transition relief for the 2021 tax returns that allowed most partnerships and S corps a pass on the required filing....but only for the 2021 tax returns.?For 2022 tax returns, the original filing requirements are back in place.

Partnerships and S corporations will have a couple options to deal with this new requirement:

1.?Prepare and file the new forms.?This will undoubtedly increase tax preparation costs but may be the simplest option unless the business has a handful of partners/shareholders.

2.?Get signed written acknowledgement from EVERY partner/shareholder that owns more than 10% of the business that they will NOT be claiming a foreign tax credit on their individual income tax return.?If the acknowledgements are not returned or if any partner/shareholder will claim a foreign tax credit, then the new forms will be required.

Don't think this is something you can just ignore!?Not including the forms if required, could result in:

1.?Failure to file tax return penalties

2.?Failure to file timely, correct and complete information return penalties

3.?You may have to later supply the info to a partner who needs it for foreign tax credit calculations.

4.?May face Form 8082 (Notice of Inconsistent Position) filed by a partner/shareholder on their return.

5.?Statute of limitations for the Form 1065 or 112-S may not begin since a complete tax return was not filed.

The IRS isn't the only part of Uncle Sam that wants more information from you.?In my next article, I'll discuss new reporting that will impact millions of entities and every new LLC, partnership or corporation that is formed!