Form K-3: Filing Requirements, Domestic Exception, and Penalties

Schedule K-3 is the IRS form that partnerships (Form 1065) and S corporations (Form 1120-S) use to report each partner’s or shareholder’s share of international tax items, including foreign-source income, foreign taxes paid, GILTI and Subpart F inclusions, and other cross-border figures the owner needs to complete their own return. It accompanies Schedule K-2, which reports the same information at the entity level. If the business has any item of international tax relevance, it generally must prepare both forms unless it qualifies for the Domestic Filing Exception.

Who Has to File

Any domestic partnership filing Form 1065 or S corporation filing Form 1120-S that has items of international tax relevance must prepare Schedules K-2 and K-3. The K-2 goes to the IRS at the entity level; the K-3 goes to the IRS and to each owner individually.¹

“International tax relevance” is a wide net. It covers earning foreign-source income, paying or accruing foreign taxes, owning interests in foreign corporations or partnerships, operating foreign branches, and having foreign partners or shareholders. Even a modest amount of foreign dividend income flowing through a brokerage statement can be enough to trigger the requirement.

The Domestic Filing Exception

A partnership can skip both schedules entirely if it meets all four of the following criteria.²

No or limited foreign activity. The partnership has no foreign activity at all, or its foreign activity is limited to passive category foreign income on which no more than $300 of creditable foreign taxes were paid or accrued, and those amounts appear on a payee statement furnished to the partnership. Foreign activity includes foreign-source income, foreign taxes, and ownership interests in any foreign entity.
All-domestic ownership. Every direct partner must be a U.S. citizen, resident alien, domestic estate with only U.S. beneficiaries, domestic grantor or non-grantor trust with only U.S. grantors and beneficiaries, S corporation, qualifying single-member LLC, or another domestic partnership whose partners all meet these same requirements.³
Timely partner notification. The partnership must notify every partner that they will not receive a Schedule K-3 unless they request one. The notice must go out no later than when the Schedule K-1 is furnished.
No K-3 requests received by the one-month date. No partner may have requested a K-3 on or before the date one month before the partnership files Form 1065. For calendar-year partnerships that file on extension, the latest one-month date for tax year 2025 is August 15, 2026.

The exception is all-or-nothing. If a single partner requests a K-3 by the one-month deadline, the partnership loses the exception and must prepare K-2 and K-3 for every partner, not just the requester. Even when the exception applies, the IRS can ask for the schedules later, so keep records that show all four criteria were satisfied.

What’s on the Form

Schedule K-3 for Form 1065 has twelve parts, each covering a different corner of international tax. Most entities complete only the parts that match their activity.⁴ The S corporation version (Form 1120-S) follows the same logic with fewer parts; GILTI and Subpart F information, for instance, sits in Part V rather than Part VI.⁵

Foreign Tax Credit Information (Parts II and III)

Part II is where most of the action is. It breaks down foreign income and the partner’s share of that income by source country and by separate category, often called baskets: passive category, general category, foreign branch category, and Section 951A (GILTI) category. The foreign tax credit limitation applies separately to each basket, so excess credits in one category cannot offset tax in another.

Part III provides the allocation and apportionment data behind the credit limitation calculation, including research and experimental expense factors, interest expense factors, and the partner’s share of creditable foreign taxes paid or accrued. Together, Parts II and III feed into Form 1116 for individual partners or Form 1118 for corporate partners.⁶

FDII Deduction (Part IV)

Part IV reports information needed to compute the Section 250 deduction for Foreign-Derived Intangible Income. It matters mainly for corporate partners earning income from foreign markets, who use it to complete Form 8993.

GILTI and Subpart F (Part VI)

Part VI reports each partner’s share of income inclusions from controlled foreign corporations: GILTI under Section 951A and Subpart F income under Section 951(a)(1). U.S. shareholder partners use these figures on Form 8992.⁷ Part VI also carries the partner’s share of qualified business asset investment (QBAI) and tested interest expense, both of which feed the GILTI calculation and any available Section 250 deduction.

BEAT (Part IX)

Part IX covers the Base Erosion and Anti-Abuse Tax. It matters when corporate partners meet the BEAT gross receipts threshold (generally $500 million averaged over three years). The K-3 passes through each such partner’s share of base erosion payments and base erosion tax benefits for use on Form 8991.⁸

The Specialized Parts

The remaining parts handle narrower situations: distributions attributable to previously taxed earnings and profits of foreign corporations (Part V); PFIC information for Form 8621 (Part VII); deemed-paid foreign taxes on CFC inclusions (Part VIII); effectively connected income data for foreign partners (Part X); and Section 871(m) and qualified derivatives dealer items (Parts XI and XII).

How Partners Use the K-3

The K-3 is the source document that each owner needs to finish the international portions of their own return. Mismatches between what the entity reports and what the partner reports are a reliable trigger for IRS attention on international items.

For the foreign tax credit, the partner takes Part II and Part III data into Form 1116 (individuals) or Form 1118 (corporations). The country and basket breakdown drives the limitation calculation; without it, the credit cannot be computed accurately.⁶

GILTI treatment splits by partner type. Corporate partners report their inclusion on Form 8992 and take the Section 250 deduction directly. Individual partners face a higher effective rate on GILTI unless they make a Section 962 election to be taxed on CFC inclusions at corporate rates. That election opens the door to the Section 250 deduction and an indirect foreign tax credit, with additional reporting on Form 8992 and potentially Form 8993.⁷ Without the election, an individual’s GILTI inclusion lands on Schedule 1 of Form 1040 at ordinary rates.

When It’s Due and How It’s Filed

The deadline to furnish the K-3 to each owner matches the deadline for Schedule K-1: generally March 15 after the close of the tax year for both partnerships and S corporations, or September 15 on extension. An extension of the entity’s return does not automatically extend the time to furnish K-1s and K-3s; a separate extension is needed if more time is required.

The completed K-2 and K-3 are attached to the entity’s main income tax return. If the entity is required to e-file its Form 1065 or Form 1120-S, the K-2 and K-3 must be filed electronically as well. Paper filing requires an IRS-approved waiver. For 2025 returns filed in 2026, partnerships filing 10 or more returns of any type during the calendar year are generally required to e-file.

Penalties

The IRS treats the K-3 as both an information return (filed with the IRS) and a payee statement (furnished to the owner). That means a single missed or incorrect K-3 can draw two penalties at once.⁹

For returns due in 2026 (tax year 2025), the amounts per return or statement are:¹⁰

$60 if corrected within 30 days of the due date.
$130 if corrected after 30 days but before August 1.
$340 if filed after August 1 or not filed at all.
At least $680 for intentional disregard, with no maximum cap.

Because the filing and furnishing penalties apply separately, one K-3 that is never filed or provided can produce a combined $680 bill ($340 for each failure). For partnerships with many owners, the exposure multiplies fast. The same amounts apply to timely forms that contain incorrect or incomplete information.

Reasonable Cause Relief

Section 6724 allows the IRS to waive these penalties where the failure is due to reasonable cause and not willful neglect.¹¹ To qualify, the entity generally has to show it acted responsibly before and after the failure (requesting extensions when possible, taking preventive steps, correcting the problem promptly) and that significant mitigating factors applied, such as first-time filer status, a strong compliance history, or circumstances beyond its control.¹²

Relief can be requested by phone using the number on the penalty notice, or in writing on Form 843. The IRS has shown some flexibility with early K-3 filers making good-faith efforts; that leniency is not guaranteed to continue as the form matures.

1
Internal Revenue Service. IRS Form 1065, Schedules K-2 and K-3 Filing Requirements
2
Internal Revenue Service. Partnership Instructions for Schedules K-2 and K-3 (Form 1065) – Section: Domestic Filing Exception
3
Internal Revenue Service. IRS Form 1065, Schedules K-2 and K-3 Filing Requirements – Section: U.S. Citizen/Resident Alien Partners
4
Internal Revenue Service. Partner’s Instructions for Schedule K-3 (Form 1065)
5
Internal Revenue Service. 2025 Shareholder’s Instructions for Schedule K-3 (Form 1120-S)
6
Internal Revenue Service. Instructions for Form 1116 – Section: Explanation of Certain Line Items on Schedule K-3
7
Internal Revenue Service. Instructions for Form 8992
8
Internal Revenue Service. Form 8991 – Tax on Base Erosion Payments of Taxpayers With Substantial Gross Receipts
9
Internal Revenue Service. Information Return Penalties
10
Internal Revenue Service. General Instructions for Certain Information Returns (2025) – Section: Penalty Amounts
11
Office of the Law Revision Counsel. 26 USC 6724 – Waiver; Definitions and Special Rules
12
Internal Revenue Service. Penalty Relief for Reasonable Cause