In previous chapters, I have walked you through specific forms you need to file if you have any financial ties to any foreign entities, whether they are business or personal. International transactions are already on the IRS’ radar, so you do not want to do anything to move closer to their bull’s eye.
This chapter is a catch-all of the other miscellaneous forms you may need to file in regard to foreign financial dealings. I know I keep repeating this, but it is worth hearing again. Failure to file any of these forms can result in stiff penalties from the IRS.
If you have any questions at all as to whether or not you need to file any of these forms, please call me. I have a wealth of experience in international tax issues and I would not want for you to be fined for non-compliance.
Form 5472 Information Return of a 25 Percent Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is required in cases of a 25+ percent foreign ownership of a U.S. corporation or when a corporation is engaged in a U.S. trade or business (deemed “Reporting Corporation[s]” on the form).
The 25 percent/plus foreign ownership criteria, for the purposes of this form, is fulfilled if one or more foreign shareholders own at least 25 percent (in total voting stock or total value) of the company’s shares.
Reporting corporations must file Form 5472 if they engage in any “reportable transactions” with foreign or domestic “related parties.” See Instructions for Form 5472.
Related parties include 25 percent direct or indirect foreign shareholders, individuals related to the corporation or to the 25 percent foreign shareholder under the definitions listed in 267(b) and 707(b)(1), and those related to the corporation under the definition of section 482.
Examples of reportable transactions include rent and royalties paid, purchases and sales of tangible and intangible assets, service payments, and loans. See Form 5472, Part IV.
A good way to discover if you are responsible is to look at your assets and business interests and determine if you may have a cause to trigger filing.
Some areas to look at would be your company’s organization charts, lists of related party transactions, foreign ownership of U.S. property, foreign trusts that own U.S. companies, and foreign corporations that file Form 1120-F. These areas will likely lead to a Form 5472 filing requirement.
For taxable years ending after 2017, Congress has increased the initial penalty under this form to $25,000 per year with a $25,000 continuation penalty per month and these continuation penalties can go back many years. See I.R.C. § 6038A(d)
Penalties can be assessed for failure to file (which includes filing “substantially incomplete” Form 5472s), late filings, and failure to maintain records. Again, the taxpayer will only be able to claim they had reasonable cause for failure to file before the 90 day period from when the IRS sent the notification expires.
Any reasonable cause defenses for the purpose of getting the IRS to reduce any penalties accrued after the 90 day period will likely not be entertained.
>See Instructions for Form 5472 for more detailed descriptions of the individuals/entities and transactions that trigger a filing requirement.
This is another form where we tell our clients that if in doubt, file it. Subject to exceptions every reporting corporation must file a Form 5472 if it had a reportable transaction with a foreign or domestic related party. This form should be filed with the corporation’s tax return by the filing deadline.
If you are a shareholder of a passive foreign investment company (PFIC) either directly or indirectly, you may have to file form 8621.
A corporation will be deemed a PFIC if the following two conditions are satisfied:
Furthermore, owners of PFIC may elect to treat the PFIC as either a Qualified Electing (if receiving a PFIC Annual Information Statement) fund or as a mark-to-market (if the stock is traded on a regulated securities exchange). The reporting requirements will vary based on the election.
Other individuals who must file this form are U.S. persons who elect to treat foreign corporation stocks as those of a qualifying insurance corporation. The definition of a qualified insurance corporation is set out in 26 U.S. Code § 1297.
See the IRS’ Instructions for Form 8621
Certain U.S. persons who are tax owners of FDEs (directly or otherwise) or who operate a foreign branch must file Form 8858 and Schedule M (Form 8858) with their tax returns by the filing deadline.
An FDE is defined by the IRS as "an entity that is not created or organized in the United States and that is disregarded as an entity separate from its owner for U.S. income tax purposes under Regulations sections 301.7701-2 and 301.7701-3
A foreign branch is defined as an “integral business operation carried on by a U.S. person outside the United States.” See 26 CFR § 1.367(a)-6T(g)
The statute delves into further detail as to what types of activities and evidence count towards defining whether a business is a branch so it is important to review the definition in its entirety. Foreign qualified business units are also included in the definition of foreign branches. Refer to 26 CFR §1.989(a)-1(b)(2)(ii)for the definition.
The penalty for failure to file is $10,000, plus a monthly continuation penalty of $10,000 (up to $50,000 in continuation penalties, total). Additionally, failure to file will result in a 10 percent reduction of foreign tax credits.
See Instructions for Form 8858 for more information about the persons and activities that trigger a filing requirement, as well as information on the filing process.
Certain U.S. persons who have control over, an interest in, or contribute property to a foreign partnership in exchange for an interest in the partnership will have to file Form 8865. See Instructions for Form 8865 (2019), “Who Must File.”
Given that the categories of people who must file this form are nuanced, it is important to review the IRS instructions and/or meet with an attorney to ascertain whether this form is applicable to you.
This form should also be filed with your tax return. The penalties for a failure to file Form 8865 is dependent upon what your relationship to the foreign partnership is and how the filing requirement was triggered. However, those who have control over a foreign partnership (Category 1 filers) or hold a 10 percent interest in a foreign partnership held by U.S. person(s) (each of whom also hold 10 percent or more of the partnership), [Category 2 filers] then the penalty is $10,000 per foreign partnership plus continuation penalties up to $50,000. See 26 U.S. Code § 6038(b).
The same penalty scheme applies to Category 4 filers, “U.S. person[s] that had a reportable event under section 6046A during that person's tax year.” See Instructions for Form 8865 (2019), “Who Must File.”
For persons who contributed property to a foreign partnership in exchange for an interest in the partnership (Category 3 filers), the penalty for failure to file is 10 percent of the fair market value of the property at the time of the exchange. See 26 U.S. Code § 6038B(c).
The Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation must be filed by U .S. citizens, corporations and estates and trusts that transfer property or cash to foreign corporations.
The IRS has special rules for transfers by partnerships, spouses, distributions of liquidating corporations, cash transfers and stock and securities transfers in which a gain recognition agreement is filed.
Additionally, there are various exceptions for filing so it is necessary to look closely into your unique individual or organizational situation to ensure that you are conforming to the filing requirement. See the IRS’ instructions for Form 926 - Filing Requirement for U. S. Transferors of Property to a Foreign Corporation.
Form 926 needs to be filed within the year the transfer took place. The penalties for failure to report are 10 percent of the value of the property transferred to reach a maximum of $100,000 per return. Penalties for intentional failure to file can exceed $100,000.
If it seems like there are tons of forms associated with foreign financial dealings, you are correct! The IRS should be commended for making compliance as onerous as possible. This seems counterintuitive if the long game is to get taxpayers into compliance, but it is what it is.
In this series of chapters about required forms, hopefully, you have a clearer picture of which ones you need to file, based on your unique situation. Just keep in mind that failure to comply can be very costly in terms of penalties. The IRS is not messing around when it comes to sniffing out lost tax opportunities.
That is why I recommend that you consult with an experienced tax professional, such as the attorneys at Brotman Law, if you have international holdings that need to be disclosed. We have years of experience helping clients navigate through international tax laws, leaving them with peace of mind that they are in compliance.
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