Last Updated: January 16, 2026 | International tax CPA firm with Big Four experience
Key Takeaways
- Schedule K-2 reports partnership-level international tax items
- Schedule K-3 reports each partner’s share of K-2 items
- Required for partnerships with foreign activities, foreign taxes, or foreign partners
- Category 1 and 2 filers typically must complete these schedules
- If foreign partnership files Form 1065, you may substitute those K schedules
- Penalties under Section 6698 apply ($260/month/partner for 2026)
- Schedules became mandatory starting with 2021 tax years
Table of Contents
What Are Schedule K-2 and K-3?
Schedule K-2 and K-3 report international tax items that affect partners’ foreign tax credit calculations, treaty positions, and other international provisions. These schedules added significant complexity to foreign partnership reporting starting in 2021.
Direct Answer: Schedule K-2 is the partnership-level report of international tax items, serving as an extension of Schedule K. Schedule K-3 is the partner-level report showing each partner’s share of those items, serving as an extension of Schedule K-1. Both are required when a partnership has items relevant to international tax provisions.
Schedule K-2: Partnership-Level International Items
Purpose
Schedule K-2 reports items of international tax relevance from partnership operations at the partnership level. Think of it as Schedule K expanded for international purposes.
What Schedule K-2 Reports
- Foreign taxes paid or accrued
- Foreign source income by category
- Deductions related to foreign activities
- Income by country
- Treaty-based positions
- GILTI and Subpart F items
- Section 250 deduction information
- Foreign tax credit limitation categories
Structure
Schedule K-2 contains multiple parts addressing different international provisions:
- Part I: Partnership’s Other Current Year International Information
- Part II: Foreign Tax Credit Limitation
- Part III: Information for Form 1116 or 1118
- Part IV: Information for Partners’ Section 250 Deduction
- Parts V-XIII: Additional items as applicable
Schedule K-3: Partner’s Share of International Items
Purpose
Schedule K-3 allocates the partnership’s international items from K-2 to individual partners. Think of it as Schedule K-1 expanded for international purposes.
What Schedule K-3 Reports
- Partner’s share of foreign taxes
- Partner’s foreign source income allocation
- Partner’s share of items by country
- Information partners need for their Form 1116 (foreign tax credit)
- Partner-specific treaty positions
- Partner’s share of GILTI and Subpart F items
Relationship to K-2
Every item on K-3 derives from the partnership’s K-2. The K-3 simply shows each partner’s proportionate share based on the partnership agreement’s allocation provisions.
Who Must File Schedule K-2 and K-3?
General Rule
Any person required to file Form 8865 Schedule K must also file Schedule K-2 if the partnership has items relevant to international tax provisions.
Specific Filing Requirements
Category 1 Filers:
- Must complete Schedule K-2 (partnership level)
- Must complete Schedule K-3 for their direct interest
- Must complete Schedule K-3 for any partner owning 10%+ direct interest
Category 2 Filers:
- Must complete Schedule K-3 for their own interest
- May use Form 1065 K-3 if foreign partnership files Form 1065
Triggers for K-2/K-3
You likely need Schedule K-2 and K-3 if the partnership has any of these:
- Foreign taxes paid or accrued
- Income from foreign sources
- Foreign partners
- Treaty-based positions taken
- GILTI or Subpart F items
- Foreign-derived intangible income
- Assets or operations in foreign countries
International Items Covered
Foreign Tax Information
Schedule K-2 reports all foreign taxes the partnership paid or accrued. This information flows through K-3 so partners can claim foreign tax credits on their individual returns.
Items reported include:
- Country where tax paid
- Type of income taxed
- Amount of tax in foreign currency
- U.S. dollar equivalent
- Tax credit vs. deduction treatment
Foreign Source Income
Partnerships must source their income to determine foreign vs. U.S. source. Schedule K-2 reports income by:
- Source (U.S. vs. foreign)
- Category (passive, general, etc.)
- Country
- Character (ordinary, capital gain, etc.)
This detail allows partners to properly calculate foreign tax credit limitations.
GILTI and Subpart F Items
When a partnership owns interests in controlled foreign corporations (CFCs), it may have GILTI or Subpart F income that flows through to partners. Schedule K-2/K-3 reports:
- Tested income and tested loss
- QBAI (qualified business asset investment)
- Partner’s share of CFC income
- Coordination with Form 5471
Treaty-Based Positions
If the partnership takes positions based on tax treaties, these must be disclosed. Schedule K-2 reports treaty benefits claimed, and partners may need this information for their own treaty claims.
Relief: When Foreign Partnership Files Form 1065
One of the most helpful relief provisions applies when your foreign partnership also files Form 1065.
Category 2 Substitution
If the foreign partnership files Form 1065, Category 2 partners may file:
- Schedule K-1 (Form 1065) received from the partnership
- Schedule K-3 (Form 1065) received from the partnership
Instead of preparing these schedules on Form 8865.
Category 1 Substitution
Category 1 filers may attach Form 1065 versions of:
- Schedule K
- Schedule K-2
- Schedule K-1
- Schedule K-3
In lieu of preparing Form 8865 versions.
Why This Matters
If the foreign partnership has already prepared these schedules for Form 1065, you avoid duplicate preparation. You’re essentially using the partnership’s work rather than recreating it.
Related: Form 8865 vs Form 1065 Comparison
Penalties for K-2/K-3 Failures
Schedule K-2 and K-3 failures carry penalties under both the Form 8865 penalty structure and Section 6698.
Form 8865 Penalties
Incomplete Form 8865 filing (missing required K-2/K-3) triggers the standard penalty structure:
- $10,000 initial penalty
- Additional $10,000 per 30-day period after 90-day notice
- Maximum $50,000 continuation penalty
Section 6698 Penalties
Failure to furnish complete Schedule K-1 (including K-3) to partners triggers:
- $260 per month per partner (2026 inflation-adjusted amount)
- Maximum 12 months
- Calculated per partnership, not per schedule
Combined Impact
If you fail to file K-2/K-3 as part of Form 8865, you may face both penalty regimes. The IRS hasn’t provided clear guidance on how these interact for Form 8865 specifically.
Related: Form 8865 Penalties and Relief Guide
Completing Schedule K-2 and K-3
Step 1: Identify International Items
Review the partnership’s activities for any international tax relevance:
- Did the partnership pay foreign taxes?
- Does the partnership have foreign source income?
- Are there foreign partners?
- Does the partnership own interests in foreign entities?
Step 2: Gather Information
Collect detailed information about:
- Foreign taxes by country and category
- Income sourcing (U.S. vs. foreign)
- Any CFC ownership and related GILTI/Subpart F
- Treaty positions taken
Step 3: Complete K-2 at Partnership Level
Work through each applicable part of Schedule K-2. Most filers won’t need every part. Focus on parts relevant to your specific international items.
Step 4: Allocate to K-3
Using the partnership agreement’s allocation provisions, allocate K-2 items to partners on Schedule K-3. Each partner receiving a K-1 should also receive a K-3 if the partnership has international items.
Step 5: Coordinate with Other Forms
K-2/K-3 information may need to coordinate with:
- Form 1116 (Foreign Tax Credit)
- Form 5471 (if partnership owns CFCs)
- Form 8992 (GILTI)
- Form 8993 (Foreign-Derived Intangible Income)
Frequently Asked Questions
Do I need K-2/K-3 if the partnership has no foreign income?
Possibly. K-2/K-3 is required for any items relevant to international provisions. This includes foreign taxes paid (even if income is U.S. source), foreign partners, and treaty positions. Having no foreign source income doesn’t automatically mean you can skip these schedules.
What’s the difference between Form 8865 K-3 and Form 1065 K-3?
The content is substantially similar, but Form 8865 K-3 is attached to a U.S. person’s individual return while Form 1065 K-3 is prepared by the partnership entity. When a foreign partnership files Form 1065, you may be able to use the Form 1065 version instead of preparing a Form 8865 version.
Can I request K-3 from a foreign partnership that doesn’t provide it?
You can request it, but foreign partnerships aren’t required to prepare K-3 unless they file Form 1065. For non-Form 1065 foreign partnerships, the U.S. person filing Form 8865 is responsible for preparing K-2 and K-3 themselves.
How does K-3 affect my Form 1116?
Schedule K-3 provides the information you need to complete Form 1116 (Foreign Tax Credit). It shows your share of foreign taxes paid and foreign source income by category. This flows directly into your foreign tax credit calculation.
What if I’m a Category 2 filer and the partnership files Form 1065?
You may use the Schedule K-1 and K-3 (Form 1065) that you receive from the partnership instead of preparing Form 8865 versions. This simplifies your filing significantly.
Are there exceptions from K-2/K-3 filing?
Limited exceptions exist for domestic partnerships with no international items and partners who certify they don’t need the information. These exceptions don’t typically apply to Form 8865 filers since foreign partnership interests inherently have international relevance.
Next Steps
Schedule K-2 and K-3 add complexity to Form 8865 but provide essential information for international tax calculations. Understanding when these schedules are required and what they report helps ensure complete compliance.
Need Help With K-2/K-3 Requirements?
International partnership taxation involves multiple overlapping provisions. Review your K-2/K-3 obligations with a CPA experienced in foreign partnership reporting.
Related Form 8865 Resources
- Complete Form 8865 Guide for Foreign Partnerships
- Form 8865 Categories of Filers Guide
- Form 8865 Penalties and Relief Options
- Form 8865 vs Form 1065 Comparison
- Schedule O: Property Transfer Reporting
- Constructive Ownership Rules Explained
- Section 721(c) Partnership Requirements
Sources
- IRS Instructions for Schedules K-2 and K-3 (Form 8865) 2025
- IRS Form 8865 Instructions (2025)
- IRS About Form 8865
- 26 U.S.C. § 6698 – Failure to file partnership return
Disclaimer: This article is for general informational purposes only and does not constitute tax, legal, or financial advice. Each taxpayer’s situation is unique and requires individual analysis. Consult with a qualified CPA for advice specific to your circumstances.