IRS Issues Retroactive Changes to Schedule K-2 and K-3 Reporting Rules

The IRS has posted updated Filing Requirement Exceptions for Schedule K-2 and K-3 as of June 4, 2025. Although these changes were posted in 2025, they are retroactive to the 2024 tax year.

These exceptions are an expansion of Criterion 2 of the existing domestic filing exception for partnerships. True to the name, the domestic filing exception is a narrow exception to the otherwise mandatory filing of Schedule K-2 and K-3 for domestic partnerships. For those unfamiliar, the criterion for the domestic filing exception is as follows:

1. 1. No or limited foreign activity
   2. All partners are U.S. persons or Resident Aliens (to be expanded upon)

If the above are both met, the following additional conditions apply:

1. 1. The partners have received a notification that unless they elect to receive a K-3, it will not be provided to them. At the very latest, this must be completed at the time the partnership furnishes schedule K-1 to the partners.
      • A. Partners have the option to inform the partnership that they will automatically elect to receive this schedule every year, in which case the partnership will be required to file these schedules until such election is revoked by the partner.
      • B. If a partner elects to receive a Schedule K-3 and the partnership meets criteria 1, 2 and 3, the partnership will only be required to file Schedules K-2 and K-3 for the sections relevant to the requesting partners.
   2. The partners have not requested a Schedule K-3 within 1 month of this notification being delivered.

Before the June 4 update, Criterion 2 qualifying direct partners included:

1. 1. U.S. Citizens
   2. Resident Aliens
   3. Domestic Decedents Estates with beneficiaries that qualify as persons (A) or (B)
   4. Domestic Grantor Trusts not considered Foreign Trusts
   5. Domestic Non-Grantor trusts with solely beneficiaries that qualify as persons (A) or (B)
   6. S-Corporations
   7. Single Member LLCs, where the sole member is one of the persons in (A) through (F)

A significant change to the domestic filing exception announced by the IRS is the inclusion of domestic partnerships among Criterion 2’s Qualifying Direct Partners. This applies if the direct partners also meet Criterion 2 and all other qualifying criteria. It’s vital to note that this “Look-Through” provision is expected to apply only one tier above the partnership, likely resulting in limited effects on larger pass-through structures.

If you’re unsure how these updated exceptions apply to your partnership or need help navigating complex tiered structures, our Global Business Services team is here to help. Contact us today to discuss your specific filing obligations and ensure full compliance with the latest IRS guidance.