IRS adds Schedules K-2, K-3 to help report international tax transactions for partnerships

IR 2020-155

“The Treasury Department and the IRS recently released a proposed redesigned partnership form for tax year 2021 (filing season 2022). The proposed form is designed to provide greater clarity for partners on how to compute their U.S. income tax liability with respect to items of international tax relevance, including claiming deductions and credits.

The redesigned form and instructions provide guidance to partnerships on how to report international tax information to their partners in a standardized format. This proposed form would apply to a partnership required to file Form 1065 only if the partnership has items of international tax relevance (generally foreign activities or foreign partners). The proposed changes would not affect domestic partnerships with no international tax items to report.”

IRS further states:

“Currently, partners are required to report international tax information on their tax returns on several tax forms and schedules. Partners generally obtain the information required to be reported from their partnerships, usually through narrative statements attached to K-1s. Those statements are compiled in a variety of formats and may be difficult for partners to translate onto their own returns. The proposed changes intend to ease this burden through a standard format that offers greater clarity to both partnerships and their partners.

The standard format of the new partnership schedules is designed to better align the information that partnerships provide on the schedules with the tax forms used by partners, allowing partners to more easily prepare their tax returns and the IRS to more efficiently verify taxpayer compliance. It is intended that all the information to be reported on the new schedules is already necessary for the partnership to provide to partners or is available to the partnership.”

IRS and Treasury is currently inviting comments on the Forms. In the mean time let us hope that these Forms will help the taxpayers and professionals and ease the reporting of international tax transactions.

Sweden – Court Decision on IRA rollovers

Expatriates are often intrigued by the complexity in taxation of cross border pension income and/or contributions. There is general understanding that tax treaty prevents double taxation of the same pension income. It is however, not always the case as they later find out that the right to tax vests with the country of residence in many cases despite the tax treaty provisions.

Recent Court decision in Sweden can be an eye opener for many U.S. expatriates who live in Sweden. The facts of the case in nutshell are as follows:

A 67 year Swedish tax resident had retirement funds in 401(k) account. Pursuant to his needs, he rolled over 401(k) in to IRA. As readers are aware, such rollovers have no tax consequences in U.S. However, Swedish Court decided that such rollovers are subject to tax in Sweden. Pensions article in U.S. – Sweden tax treaty does not make such rollovers tax exempt in Sweden. Court ruled that the tax treatment and tax triggering events in U.S. are not relevant for Swedish tax purposes since such treatments must be analyzed based on Swedish tax rules.

Court therefore ruled that the entire rollover amount was subject to tax in Sweden as pension income. The treaty, Court clarified, does not limit Sweden’s right to tax over the pension income of a person who is a Swedish tax treaty resident on the date of such rollover.

Pre-immigration planning is the quintessence for any expatriate and such rulings must be considered prior to embarking on a global employment opportunity. Consulting a cross border professional will certainly help prevent any undesirable consequences and falling in to the tax traps for the unwary.