Schedules K-2 and K-3 for Partnerships: International Reporting and the Domestic Filing Exception

Schedule K-2 extends Schedule K of Form 1065 and reports a partnership's international tax items. Schedule K-3 extends each partner's Schedule K-1 and gives the partner that partner's share, which the partner uses on its own return. Most domestic partnerships with only U.S. individual partners and no foreign activity do not have to file either schedule if they follow the exceptions in the IRS instructions. This article uses the 2025 Partnership Instructions for Schedules K-2 and K-3, the most recent revision, to show who must file, how to apply each exception, and what to document.

Who must file Schedules K-2 and K-3?

A partnership completes the parts that apply when it has items that affect its partners' U.S. tax or certain withholding or reporting obligations under the international provisions. It does not have to collect information from partners just to decide whether a part applies, unless another law requires it.

Some parts can apply even when the partnership has no foreign activity:

• Part IV (Section 250 deduction and foreign-derived intangible income) if it has domestic corporate partners.
• Part IX (base erosion and anti-abuse tax information).
• Part XI for certain publicly traded partnerships.
• Part XII for qualified derivatives dealer (QDD) partnerships with foreign partners. A QDD partnership must file Form 1065 even if it would otherwise not need to.

The schedules are organized by part: Part I (other international information), Part II (foreign tax credit limitation), Part III (other information for Form 1116 or 1118), Part IV (Section 250 deduction), Part V (distributions from foreign corporations), Part VI (section 951(a)(1) and 951A inclusions), Part VII (PFICs), Part VIII (foreign corporation income groups for deemed paid taxes), Part IX (BEAT), Part X (ECI and FDAP information for foreign partners), Part XI (section 871(m) information for certain publicly traded partnerships), Part XII (QDD activities), and Part XIII on Schedule K-3 only (foreign partner's share of deemed sale items on transfer of a partnership interest).

What is the domestic filing exception?

A domestic partnership that is not a QDD partnership does not have to complete and file Schedules K-2 and K-3, or furnish Schedule K-3 to partners (except on a partner's request after the 1-month date), if all four criteria are met.

1. No or limited foreign activity. Foreign activity is limited to passive category foreign income, no more than $300 of creditable foreign income taxes paid or accrued, and income and taxes shown on a payee statement furnished to the partnership. Foreign activity includes foreign taxes, foreign-source income or loss, and interests in foreign partnerships, corporations, branches or disregarded entities.
2. Eligible direct partners. All direct partners must be in listed categories, which include U.S. citizens, resident aliens, certain domestic estates and trusts, S corporations, certain single-member LLCs and certain domestic partnerships. The 2025 revision broadened this criterion.
3. Notice to partners. The partnership notifies partners no later than when it furnishes Schedule K-1. The notice can be attached to the K-1 and must state that partners will not receive Schedule K-3 unless they request it.
4. No request by the 1-month date. The partnership receives no request for Schedule K-3 information from any partner on or before the 1-month date. The 2025 revision no longer requires providing Schedule K-3 in later years unless the partner asks, although a partner must renew the request for later years specifically or annually.

What is the 1-month date?

The instructions define it as one month before the date the partnership files Form 1065. For a calendar-year partnership that filed an extended 2025 return, the latest 1-month date was August 17, 2026. A request received after that date does not defeat the exception. The partnership still has to give the requesting partner a completed Schedule K-3 no later than one month after it receives the request, but it does not have to file Schedules K-2 and K-3 with the IRS.

If criteria 1 through 3 are met and a request arrives on or before the 1-month date, the partnership files Schedules K-2 and K-3 only for the parts relevant to the requesting partner, gives that partner a copy on the filing date, and keeps records of the request.

Is there a separate small partnership exception?

Yes, new in the 2025 instructions. A partnership is excepted if it meets all four conditions tied to Schedule B, question 4 of Form 1065:

1. Total receipts for the year are under $250,000.
2. Total assets at year-end are under $1 million.
3. Schedules K-1 are filed with the return and furnished to partners by the due date, including extensions.
4. The partnership is not filing and is not required to file Schedule M-3.

Partner notice and the 1-month date rules apply to this exception as they do to the domestic filing exception.

Worked example: applying the four criteria

A calendar-year partnership has five direct partners, all U.S. citizens. It receives a payee statement showing passive foreign dividends and foreign tax withheld of $250.

• Criterion 1: the foreign income is passive and shown on a payee statement, and creditable foreign tax of $250 is below the $300 limit. Met.
• Criterion 2: all partners are U.S. citizens. Met.
• Criterion 3: the partnership attaches a notice to each K-1 saying no K-3 will be furnished unless requested. Met.
• Criterion 4: no request arrived by the 1-month date. Met.

The partnership does not file Schedules K-2 and K-3. Change one fact: the payee statement shows $450 of foreign tax. That is $150 over the $300 limit, so criterion 1 fails and the partnership must complete the relevant parts, starting with Parts II and III unless a separate exemption in the instructions applies. A nonresident alien direct partner would fail criterion 2 on its own.

If a late request comes from a partner after the 1-month date, the criteria still hold, and the partnership delivers a completed Schedule K-3 within one month of the request.

What are the penalties and 2025 changes?

Penalties may apply for filing Form 1065 without all required information, and for furnishing a Schedule K-3 without all required information. The Form 1065 penalty applies to Schedule K-2, and the Schedule K-1 penalty applies to Schedule K-3. Under section 6698, the penalty is a dollar amount multiplied by the number of partners for each month or fraction of a month the failure continues, up to 12 months, and it can apply to a return that fails to show required information. Rev. Proc. 2025-32 sets the dollar amount at $260 for returns required to be filed in 2027, which are 2026 tax year returns. A 2025 return filed in 2026 uses the amount for that filing year. As an illustration at $260, a 10-partner return that is 3 months late in meeting a requirement is $260 x 10 x 3 = $7,800.

Other 2025 changes include a checkbox on Schedule K-2 for an electronically filed administrative adjustment request or amended return, and, under Public Law 119-21, exclusion from Part IV deduction eligible income of income and gain from certain intangible property and depreciable, amortizable or depletable property for sales after June 16, 2025.

What should the file show?

Keep the payee statements supporting criterion 1, a partner schedule showing each direct partner's category, the notice sent with the K-1, and a log of every K-3 request with its date. For related partnership and S corporation work, see state PTET elections, Form 7203 and S corporation basis and the tax season workflow. The Schedule M-3 standards page covers the reconciliation referenced in the small partnership exception.

CORAA prepares ready-to-review audit files for US CPA firms; see /us.

Sources

• IRS, Partnership Instructions for Schedules K-2 and K-3 (Form 1065) (2025): https://www.irs.gov/instructions/i1065s23
• Cornell Legal Information Institute, 26 U.S.C. 6698, Failure to file partnership return: https://www.law.cornell.edu/uscode/text/26/6698
• IRS, Rev. Proc. 2025-32, section 4.55: https://www.irs.gov/pub/irs-drop/rp-25-32.pdf

AU-C references are to AICPA Professional Standards, paraphrased here; read the standard itself before relying on a requirement. This page is guidance, not professional advice. Report an error