In the United States, business partners or shareholders in an S-Corp report their portion of dividends, income, or losses on their personal tax return. To obtain the appropriate information to report on their tax return, they receive, generally, Schedule K-1s from the entity in which they hold an ownership percentage.
For companies that have pertinent and relevant foreign transactions, Schedule K-2 and Schedule K-3 are required supplemental forms that replace amounts formerly reported on Schedule K-1s.
It is the responsibility of the business to prepare these informational forms and send them to each member. Any entity that is required to file Form 1120-S, Form 8865, or Form 1065 are generally required to report these schedules.
When are the K-1s due to shareholders or members? What is the penalty for non-compliance?
Schedule K-1 is due to partners or shareholders by March 15th of each year.
Each instance of a failure to furnish a Schedule K-1 when due is a $260 penalty by the IRS. This means that if an entity of 10 members were to fail to furnish K-1s each year, they would be penalized $2600, as the penalty applies to each member or shareholder.
What about K-2s and K-3s?
In 2022, the K2s and K3s that are not filed when required or if the schedules are not properly completed, the penalties are $210 per month, per partner or shareholder. Schedule K-2 and Schedule K-3 are both 10-to-20-page forms that is needed, like Schedule K-1, in preparation of individual tax returns.
However, under Section 6038, companies can be penalized for non-compliance in improper or lack of reporting foreign transactions / information. As foreign transactions are part of the informational preparation of K-2s and K-3s, this means that improper filing of these forms could result in penalties of up to $10,000 for an entity in a given tax year.
At doola, as part of our Total Compliance plan, we keep your company up to date with these schedules and will confirm, as part of our tax preparation process, that they are sent appropriately to each member. We guarantee that our certified accountants are always keeping up-to-date with the most current IRS guidelines and treat our customers with care even in the face of new standards or forms.