Have you ever heard the horror story about Dave? He was just an average guy, working hard and occasionally indulging in some international business ventures. Little did he know his failure to file Form 8865 would turn his long-awaited vacation into a tax nightmare. But fret not because Dave’s unfortunate experience serves as a cautionary tale for all of us. In this article, we’ll explore Form 8865 – the document that could have saved Dave from tax trouble, and how you can avoid a similar fate.
What is Form 8865?
Form 8865 is a tax form primarily used to report information regarding controlled foreign partnerships, transfers to foreign partnerships, acquisitions, dispositions, and changes in foreign partnership interests. This form is known as an informational return, meaning that you only provide information to the IRS; you are not subject to any additional tax payment.
Owning at least 10% of a controlled foreign partnership may require filing Form 8865. Failure to do so may result in up to $50,000 in penalties and the possibility of facing civil and criminal consequences.
Who needs to file form 8865?
Any US person with at least 10% interest in a controlled foreign partnership. But what is a “controlled foreign partnership exactly?
A controlled foreign partnership is when more than 50% of a foreign entity is owned by one or more US persons.
For example, let’s say you are a co-owner of a business in Mexico; owning 55% or more of said business would be classified as a controlled foreign partnership.
Additionally, if four US proprietors have an equal share of 15% interest in a partnership based in Chile. The four US people combined to own 60% of the business, which would also be considered a controlled foreign partnership.
In both circumstances, they would be required to file form 8865.
How do you file form 8865?
There are several filing categories a potential filer may fall under; this category will determine which section of Form 8865 they must complete.
Everyone is required to fill out the identification information at the beginning of the form, but after that, there are a few “schedules” you may need to fill out based on what category you fall under.
So, what are the Category classifications?
- Category 1: A single US person owns more than 50% of a controlled foreign partnership.
- Category 2: A US person owns at least 10% of a controlled foreign partnership.
- Category 3: A US person contributes at least $100,000 to a controlled foreign partnership—or if they own at least 10% of the partnership after their contribution.
- Category 4: A US person with a reportable transaction under IRC Section 6046A during a calendar year.
What are the penalties for not filing?
For most people, this form would be due on April 15th each year. However, if your tax filing deadline has been extended, then the deadline of 8865 will also be extended.
Failing to file on time may result in quite serious consequences. The extent of said consequences is determined by the filing category you fall under.
Category 1, 2, and 4
The IRS may impose a $10,000 penalty for every tax year you fail to meet the filing requirements. After they mail you a notice of failure, you will have 90 days to file the required forms. After that deadline if you still have not filed after that deadline, the IRS will impose $10,000 every 30 days following the end of the 90-day window.
You may be subject to criminal penalties in case of false or fraudulent information.
Category 3
The IRS may impose a fine of up to 10% of the value of your contribution to the controlled foreign partnership, up to a maximum amount of $100,000. (Limit does not apply when failure to report is deemed as intentional disregard.)
Our tax experts at Legacy Counsel know the ins and outs of all your filing needs, no matter your business or personal financial ventures. Set up a free 15-minute phone call TODAY at LegacyFreeCall.com and stay protected from fines, fees, and penalties.
