How to Complete and File Schedules K-2 and K-3 (Form 1065)

To complete and file Schedules K-2 and K-3 with Form 1065, a partnership reports its international tax items at the entity level on Schedule K-2, allocates each partner’s share of those items on a separate Schedule K-3, and files both with the partnership return by the Form 1065 due date. Before doing any of that, check the two filing exceptions: many domestic partnerships with little or no foreign activity don’t have to file the schedules at all.

First, Check Whether You Have to File

Every partnership required to file Form 1065 under Internal Revenue Code Section 6031 must attach Schedules K-2 and K-3 if it has items of international tax relevance.¹ That phrase is broader than it sounds. It covers foreign source income of any kind, foreign taxes paid or accrued, assets producing foreign income, foreign partners, and transactions with controlled foreign corporations. A partnership that owns shares in a foreign mutual fund, receives a dividend sourced abroad, or has a partner who intends to claim a foreign tax credit on their personal return can be swept in.

Two exceptions can spare partnerships with minimal exposure. If either fits, you don’t file the schedules with the IRS.

The Domestic Filing Exception

To use this exception, the partnership must meet all four of the following criteria from the IRS instructions:²

No foreign activity, or only foreign taxes of $300 or less that would qualify for a credit.
Every partner is a U.S. citizen, resident alien, domestic estate, or domestic trust. A foreign corporation, nonresident alien, or partnership as a partner disqualifies the entity.
The partnership notifies each partner, no later than when it furnishes the Schedule K-1, that Schedule K-3 will not be provided unless requested.
No partner requests Schedule K-3 on or before the date one month before the partnership files Form 1065. For a calendar-year partnership on extension, the latest one-month date for tax year 2025 is August 17, 2026.

Beginning with tax year 2024, a single partner’s request no longer sinks the exception for the whole partnership. You provide Schedule K-3 to the partner who asked and still avoid filing Schedules K-2 and K-3 with the IRS.³

The Small Partnership Filing Exception

Also starting in tax year 2024, a partnership that answers “Yes” to question 4 on Schedule B of Form 1065 is not required to file Schedules K-2 and K-3.³ The same partner-notification rule applies: tell partners they won’t receive Schedule K-3 unless they ask.

If neither exception fits, you file. The rest of this guide assumes you do.

Gather the Records Before You Open the Forms

Schedules K-2 and K-3 draw on financial detail that most general ledgers don’t produce automatically. Pull the following together first:

Every item of foreign source income, categorized by type (interest, dividends, royalties, rents, capital gains, business profits) and by country of origin.
Foreign taxes paid or accrued, with receipts, foreign returns, or withholding statements. Record both the foreign currency amount and the U.S. dollar equivalent.
The correct foreign tax credit limitation category for each item: passive, general, Section 951A (GILTI), foreign branch, or treaty-resourced, most often.
The average adjusted basis of assets that generate foreign source income, which partners use to apportion interest expense.
Controlled foreign corporation data if applicable: Form 5471 information, subpart F income, tested income for GILTI, and previously taxed earnings and profits balances.

Converting Foreign Currency

The IRS does not publish an official exchange rate. The general rule is to use the spot rate on the date the item was received, paid, or accrued.⁴ Any posted exchange rate is acceptable if used consistently. Partnerships with many small transactions often use the IRS yearly average rates published on irs.gov. Document whichever rate you use; unexplained gaps between the foreign currency and dollar figures draw follow-up questions.

Use the Current Year’s Form

Download Schedules K-2 and K-3 from irs.gov each year. Line numbers, categories, and required statements change between tax years, and using the prior year’s form is one of the more common preventable errors.

Completing Schedule K-2

Schedule K-2 is the partnership-level report. Finish it before starting any partner’s K-3, because K-3 pulls directly from K-2 totals. Complete only the parts that apply.²

Part I: Other Current Year International Information

Part I is a checklist of international items not captured elsewhere on the schedule, including gain on personal property sales, foreign oil and gas taxes, splitter arrangements, high-taxed income, Section 267A disallowed deductions, Form 5471 information, partner loan transactions, and dual consolidated losses. Check every box that applies and attach the statement the instructions require for each. If the partnership has an item that no box addresses, check box 13 and attach a custom statement describing it.

Part II: Foreign Tax Credit Limitation

This is the core section for most partnerships. For each income type (interest, dividends, royalties, rents, and so on), enter the total from all foreign sources, then break the total down by country using the IRS two-letter country codes. Assign each amount to the correct income category. Directly allocable deductions go in the deduction rows with matching country codes and categories. The output is a full picture of the partnership’s foreign source net income by country and category, which drives each partner’s foreign tax credit limitation on Form 1116 or Form 1118.

Part III: Other Information for Form 1116 or 1118

Part III reports the foreign taxes actually paid or accrued, each entered alongside its country code and income category. This section also collects the allocation and apportionment data partners need for research and experimental expenses and interest expense, plus Section 743(b) adjustments from a partner’s purchase of an interest, reported by source and category.

Parts IV Through XIII

Complete the remaining parts only if the specific activity applies: Part IV for FDII, Part V for distributions from foreign corporations, Part VI for subpart F and GILTI, Part VII for PFICs, and Parts VIII through XIII for foreign partner withholding, treaty positions, and Global Anti-Base Erosion (Pillar Two) reporting. A partnership with straightforward foreign income and foreign taxes usually only touches Parts I, II, and III.

Preparing and Distributing Each Partner’s Schedule K-3

Schedule K-3 mirrors K-2 part-for-part but shows a single partner’s distributive share instead of partnership totals. Prepare a separate K-3 for every partner and allocate amounts under the partnership agreement.

Partners then use their K-3 to complete their own returns. Individual, estate, and trust partners use Form 1116 to claim the foreign tax credit; corporate partners use Form 1118.⁵ Partners also use K-3 data for Form 8992 (GILTI), Form 8993 (FDII deduction), and Form 8621 (PFIC), where those parts apply.

The K-3 distribution deadline is the same as the K-1 deadline: the 15th day of the third month after the partnership’s tax year ends. For a calendar-year partnership, that is March 15. An extension of Form 1065 on Form 7004 extends the K-3 deadline as well, but partners generally need their K-3 in time to prepare their own April 15 returns, so getting the schedules out earlier is worthwhile.⁶

Filing the Schedules With the IRS

Schedules K-2 and K-3 are filed as part of the Form 1065 package, not separately. Most partnerships file electronically through the IRS Modernized e-File (MeF) system, which returns an acknowledgment code confirming receipt. The IRS has been lowering e-filing thresholds, and partnerships filing 10 or more returns in aggregate are generally required to e-file. Paper filing is still available for exempt entities but processes more slowly and provides no electronic confirmation.

A partnership that needs more time files Form 7004 for an automatic six-month extension.⁶ For calendar-year filers, that moves the deadline from March 15 to September 15 and covers the full return, schedules included. Note that extending the return also extends the window during which a partner may request Schedule K-3 under the Domestic Filing Exception rules.

Keep workpapers that tie every K-2 and K-3 entry back to source documents. If the IRS spots inconsistencies between the partnership’s reporting and what individual partners report, it may issue a notice; well-organized workpapers make the response quick.

When a Partner Disagrees With Their K-3

Partners are generally required to report consistently with how the partnership reported on Schedule K-3. A partner who believes the schedule is wrong and wants to take a different position on their own return must file Form 8082 (Notice of Inconsistent Treatment or Administrative Adjustment Request) to flag the inconsistency.⁷ Without Form 8082, the IRS may simply adjust the partner’s return to match the partnership’s reporting and assess additional tax.

Penalties for Late or Incomplete Filing

A partnership that fails to file a complete and timely Form 1065, including required Schedules K-2 and K-3, is subject to a penalty under Internal Revenue Code Section 6698. The penalty runs per partner, per month or partial month the return is late or incomplete, for up to 12 months.⁸ The statutory base of $195 is adjusted annually for inflation. For returns required to be filed in calendar year 2027 (covering tax year 2026), the inflation-adjusted amount is $260 per partner per month.⁹

The numbers compound quickly. A partnership with 10 partners filing six months late owes $15,600 ($260 × 10 × 6). At the 12-month maximum, the same partnership owes $31,200. The penalty falls on the partnership, but it reduces funds that would otherwise flow to partners. A timely Form 7004 extension is the simplest protection.

If You File Form 1120-S or Form 8865 Instead

Schedules K-2 and K-3 also attach to Form 1120-S for S-corporations with international items, following largely the same structure and a parallel Domestic Filing Exception; the S-corporation instructions govern the specifics.¹⁰ U.S. persons who file Form 8865 for interests in foreign partnerships attach a separate set of Schedules K-2 and K-3 with the same purpose: to give partners the data they need for Forms 1116, 1118, 8992, and related returns.¹¹ Whether a Form 8865 filing is required depends on the filer’s category (1 through 4), which is defined in the Form 8865 instructions.¹²

1
Office of the Law Revision Counsel. 26 Code 6031 – Return of Partnership Income
2
Internal Revenue Service. Partnership Instructions for Schedules K-2 and K-3 (Form 1065)
3
Internal Revenue Service. Expanded and New Filing Exceptions for Schedules K-2 and K-3 Form 1065 Beginning Tax Year 2024
4
Internal Revenue Service. Yearly Average Currency Exchange Rates
5
Internal Revenue Service. Instructions for Form 1116
6
Internal Revenue Service. Publication 509 (2026), Tax Calendars
7
Internal Revenue Service. Instructions for Form 8082
8
Office of the Law Revision Counsel. 26 USC 6698 – Failure to File Partnership Return
9
Internal Revenue Service. Rev. Proc. 2025-32
10
Internal Revenue Service. S Corporation Instructions for Schedules K-2 and K-3 (Form 1120-S)
11
Internal Revenue Service. Instructions for Schedules K-2 and K-3 (Form 8865)
12
Internal Revenue Service. Instructions for Form 8865 (2025)