IRS issues a frequently asked question for pass-through entities to report negative amounts to the IRS on Part II of Schedules K-2 and K-3


FS-2023-20, September 2023

This fact sheet is about a frequently asked question that addresses how pass-through entities electronically file and report negative amounts to the IRS on Part II of Schedules K-2 and K-3.

This frequently asked question (FAQ) is being issued to provide general information to taxpayers and tax professionals as expeditiously as possible. Accordingly, this FAQ may not address any particular taxpayer's specific facts and circumstances, and it may be updated or modified upon further review. Because this FAQ has not been published in the Internal Revenue Bulletin, it will not be relied on or used by the IRS to resolve a case. Similarly, if an FAQ turns out to be an inaccurate statement of the law as applied to a particular taxpayer's case, the law will control the taxpayer's tax liability. Nonetheless, a taxpayer who reasonably and in good faith relies on this FAQ will not be subject to a penalty that provides a reasonable cause standard for relief, including a negligence penalty or other accuracy-related penalty, to the extent that reliance results in an underpayment of tax. Any later updates or modifications to this FAQ will be dated to enable taxpayers to confirm the date on which any changes to the FAQ were made. Additionally, prior versions of this FAQ will be maintained on to ensure that taxpayers, who may have relied on a prior version, can locate that version if they later need to do so.

More information about reliance is available. This FAQ was announced in IR 2023-162.

Frequently asked question for pass-through entities to report negative amounts to the IRS on Part II of Schedules K-2 and K-3

Q. For the 2022 tax year, a pass-through entity receives information (for example, a Schedule K-3 from a lower-tier pass-through entity) that certain gross income amounts to be reported on the Schedules K-2 and K-3 are negative. However, the current schema for electronic filing of the Schedules K-2 and K-3 does not permit negative values for certain line items in Part II, Section 1 of Schedules K-2 and K-3. How should these negative amounts be reported on Schedules K-2 and K-3 to the IRS and to the partners or members? (added September 5, 2023)

A. A pass-through entity electronically filing the Schedules K-2 and K-3 for the 2022 tax year should enter zero on the line items in Schedules K-2 and K-3, Part II, Section 1 for which the schema does not permit negative values. A pass-through entity must attach a General Dependency (XML) schema to the Schedule K-2 identifying the line items and the negative values for which the pass-through entity reported zero on Part II, Section 1. Additionally, a pass-through entity should attach a list of the impacted line items and the negative numbers, partner by partner. A pass-through entity should report to its partners or members any changes to the amounts reported on the original Schedules K-3 issued to the partners or members. The IRS has not opined on whether it is legally appropriate to use negative values.