Beyond FBARs: What other reporting requirements are there for interests in foreign entities?
BY: AMY L. HOLBROOK, ESQ.
We have written a lot in the past about the FBAR – Report of Foreign Bank Accounts, the form on which you annually report any foreign bank or financial accounts if you had more than $10,000 during that year. There is a lot of focus on the FBAR, but in fact, that is not the only foreign filing form that is the basis for substantial penalties.
We are starting to see a lot more interest in other, similar forms that are used for reporting other types of interests that are located overseas. All of these are part of the IRS’s coordinated effort to collect information about U.S. persons’ overseas financial accounts, and investigate potential tax evasion using overseas financial information. These include interests in corporations, partnerships, trusts, and certain transfers of property.
Here’s our breakdown of the different form numbers and their application:
- Form 5471 –Used to report that you are a 10% or more shareholder in a foreign corporation.
- Form 5472 –Used to report that a US corporation had a 25%+ foreign shareholder or engaged in reportable transactions
- Form 8886 –Used to report any reportable transaction you participated in.
- Form 8865 –Used to report that you are a 10%+ partner in a foreign partnership.
- Form 926 –Used to report transfers of property to a foreign corporation, including undistributed earnings.
- Form 3520 –Used to report a foreign trust with a US owner.
- Form 8621 –Used to report a shareholder interest in a Passive Foreign Investment Company (PFIC, most foreign mutual funds) or a Qualified Electing Fund.
These forms are all information returns, meaning they do not calculate any tax but are a document that is simply for the IRS’s information. These are in addition to any tax forms an individual, business, or other entity may have to file to report income and pay tax.
These forms are among the most complex the IRS has to offer, and require meticulous record-keeping and data entry. Knowing whether a person or entity is required to file can be a difficult determination. Furthermore, the penalties for failure to file are extremely steep:
- Failure to file Form 5471 penalties: $10,000 failure to file penalty per year per person required to file (may be multiple in a single corporation)
- Failure to file Form 5472 penalties: $10,000 failure to file per year per person required to file (may be multiple in a single corporation)
- Failure to file Form 8886 penalties: minimum of $5,000 in the case of an individual, $10,000 in the case of any other entity, maximum of $10,000 for an individual and $50,000 for other entities. This rises to a maximum of $100,000 per individual and $200,000 per entities for certain listed transactions for which the form is not filed.
- Failure to file Form 8865 penalties: $10,000 failure to file penalty per year per person required to file (may be multiple in a single partnership)
- Failure to file Form 926 penalties: 10% of the property transfer, up to $100,000–although not limited if the failure to file was due to “intentional disregard.”
- Failure to file Form 3520 penalties: The greater of $10,000 or 35% of the gross value of the property transferred to a foreign trust or 35% of the gross value of distributions received from a foreign trust.
- Failure to file Form 8621:
$10,000 failure to file penalty per person for year(H/T to our astute reader, “M.”) There are no direct penalties for failing to report a shareholder interest in a PFIC or Qualified Electing Fund.
If these failures to file have occurred due to reasonable cause, we have been able to help several taxpayers file previous information returns and receive penalty abatements for failure to file. This is in the case of failure to file information returns only–if you have failed to file information returns and have a tax liability due to previously unreported foreign transactions or income, you may need to participate in the Offshore Voluntary Disclosure Program in order to protect yourself from steep penalties or other consequences.
Many taxpayers have used foreign entities as a shield to help them hide assets and income from the IRS. Yet because of FATCA, and the due diligence requirements it imposes on foreign banks, such techniques may not be terribly strong.
The good news is just like who failed to file FBARs and have unreported income, those who have failed to file any of the above returns and have unreported income may also enter int to the IRS Voluntary Disclosure Initiative which is currently operates under the 2012 rules.