US Taxpayers Must File IRS Form 8865 To Report their Ownership in Foreign Partnerships

The cost of preparing Form 8865 is $395

Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships.

Form 8865 is an information return that should be filed by certain U.S. citizens and residents who have controlled over a partnership formed in a foreign country to satisfy IRS reporting requirements.

Form 8865 is used to report ownership in a foreign partnership as well as certain financial data related to the partnership. On this form you must report current year income and expenses, transactions between you and the foreign partnership, original capital contribution, partnership’s ownership, a balance sheet of the activities of the partnership during the year, a statement of the profits of the partnership, details of any capital gains, a summary of the K-1 forms for the partners, a reconciliation of the partner’s capital accounts from the beginning to the end of the year and a page providing information about transactions between the controlled foreign partnership, its partners and any related entities. In addition, you must report transfers to the partnership as well as acquisitions, dispositions, and changes in foreign partnership interest.

Although Form 8865 is used to report interest and activities on foreign partnerships, the form is required to be filed with the partner’s tax return. Form 8865 should be filed with your personal income tax return by the due date of the return: April 14 or October 15 if an extension has being approved on your personal return.

IRS Form 8865 Filing Requirements

The filing requirements for Form 8865 are categorized by categories. If a US person having an interest in a foreign partnership is described on any of these categories, Form 8865 should be filed.

A US person includes: a citizen or resident of the United States, domestic partnership, domestic corporation, and an estate or trust that is not a foreign estate or trust.

There are four categories of filers: Category 1, 2, 3 and 4.

Category 1 Filer
A U.S. person who controlled the foreign partnership at any time during the partnership’s tax year. Control of a partnership is ownership of more than a 50% interest in the partnership.

Category 2 Filer
A Category 2 filer is a U.S. person who at any time during the tax year of the foreign partnership owned a 10% or greater interest in the partnership while the partnership was controlled by U.S. persons each owning at least 10% interests.

Category 3 Filer
A Category 3 filer is a U.S. person who contributed property during the year to a foreign partnership in exchange for an interest in the partnership and:

The person owns a 10-percent interest in the foreign partnership after the transfer. Or The value of the property contributed to the partnership exceeds $100,000.

Category 4 Filer
A Category 4 filer is a U.S. person that had one of the following reportable events during the year: acquisition of 10-percent of more in a foreign partnership, disposition of partnership interest if the person owns 10-percent of more in the partnership, and after the sale the person owns less than 10-percent; and changes in proportional interest if the partnership interest has increased or decreased by a 10-percent.

Late Filing Penalties

Taxpayers who are partners in a foreign partnership must file Form 8865 if they are required to do so according to the 4 filing categories. Penalties for failure to timely file the form are $10,000 to $50,000 per form, plus possible loss of foreign tax credits and criminal penalties.

Penalties for Category 1 and 2 Filers

A $10,000 penalty is imposed for each tax year of each foreign partnership for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign partnership) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.

Any person who fails to furnish all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit. If the failure continues 90 days or more after the date the IRS mails notice of the failure, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired.

Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file or for filing false or fraudulent information.

Penalties for Category 3 Filers
Any person that fails to properly report a contribution to a foreign partnership that is required to be reported and the regulations under that section is subject to a penalty equal to 10% of the fair market value (FMV) of the property at the time of the contribution. This penalty is subject to a $100,000 limit, unless the failure is due to intentional disregard. In addition, the transferor must recognize gain on the contribution as if the contributed property had been sold for its FMV.

Penalties for Category 4 Filers
Any person who fails to properly report all the information requested is subject to a $10,000 penalty. If the failure continues for more than 90 days after the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. The additional penalty shall not exceed $50,000.