Impacts of Foreign Tax Reporting in Recent Years

Having navigated three filing seasons with Schedules K-2 and K-3, clear patterns and pain points have emerged. Originally introduced to improve the reporting of international tax information, these schedules have had far-reaching impacts, even for real estate and private equity partnerships with little or no foreign activity.

Key observations on Schedules K-2 and K-3

Wider application than expected

There was an assumption that these forms would not apply to many real estate and private equity partnerships. However, the IRS’s broad interpretation of the requirement caught non-foreign-focused partnerships by surprise, particularly those with investors who have other sources of foreign-sourced income and/or file international informational forms, such as Form 1116 for foreign tax credit claims.

The primary takeaway should be not to assume an exemption based on domestic activity alone. A careful analysis of your investor base and filing obligations is essential.

Compliance complexity has grown

Schedules K-2 and K-3 require a significant volume of disclosures, often needing coordination across tax advisory teams, investor relations, and fund administration. Even for entities not directly engaging in foreign transactions, producing these forms can be resource intensive.

We have seen success when clients adopt a centralized data collection approach early in the tax year so last-minute fire drills can be mitigated.

Investor expectations are rising

Many investors, particularly institutions and high-net-worth individuals with cross-border tax considerations, expect timely and completed Schedule K-3s. Delays or incomplete reporting creates friction and could pose reputational risk.

Communicate proactively with investors to establish whether they will be requesting K-3s — and automate recurring data pulls, where possible.

IRS relief windows are narrowing (or are now closed)

Initial IRS transition relief has mostly expired. The 2023 and 2024 filing seasons demonstrated a reduced tolerance for incomplete or omitted Schedules K-2 and K-3. Penalties for noncompliance are substantial and can add up quickly, especially where there are a significant number of partners.

Staying ahead of these requirements is not just about avoiding penalties; it’s about demonstrating operational excellence and transparency.

How CLA can help with international tax matters

Schedules K-2 and K-3 are here to stay. Navigating these schedules requires a practical understanding of both compliance obligations and investor needs. Our real estate, private equity, and international tax teams have experience in preparing, reviewing, and advising on Schedules K-2 and K-3. Whether you are filing for the first time or looking to streamline your approach, we can help.