Form 8865, U.S. Persons and Foreign Partnerships

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Jason B. Freeman

Jason B. Freeman

Managing Member

214.984.3410
jason@freemanlaw.com

Mr. Freeman is the founding member of Freeman Law, PLLC. He is a dual-credentialed attorney-CPA, author, law professor, and trial attorney.

Mr. Freeman has been named by Chambers & Partners as among the leading tax and litigation attorneys in the United States and to U.S. News and World Report’s Best Lawyers in America list. He is a former recipient of the American Bar Association’s “On the Rise – Top 40 Young Lawyers” in America award. Mr. Freeman was named the “Leading Tax Controversy Litigation Attorney of the Year” for the State of Texas for 2019 and 2020 by AI.

Mr. Freeman has been recognized multiple times by D Magazine , a D Magazine Partner service, as one of the Best Lawyers in Dallas, and as a Super Lawyer by Super Lawyers, a Thomson Reuters service. He has previously been recognized by Super Lawyers as a Top 100 Up-And-Coming Attorney in Texas.

Mr. Freeman currently serves as the chairman of the Texas Society of CPAs (TXCPA). He is a former chairman of the Dallas Society of CPAs (TXCPA-Dallas). Mr. Freeman also served multiple terms as the President of the North Texas chapter of the American Academy of Attorney-CPAs. He has been previously recognized as the Young CPA of the Year in the State of Texas (an award given to only one CPA in the state of Texas under 40).

What is Form 8865?

Form 8865 is used by U.S. persons to report information regarding controlled foreign partnerships (IRC section 6038), transfers to foreign partnerships (IRC section 6038B), and acquisitions, dispositions, and changes in foreign partnership interests (IRC section 6046A).

There are four categories of U.S. persons required to file. U.S. persons who would fall into one of these categories at any point during their tax year must file Form 8865 unless an exception applies. The form must be filed with the appropriate information, statements, and schedules (such as balance sheets, reports of profits and capital gains, and reconciliations of capital accounts) applicable to the category that the filer falls under.

If a filer falls under multiple categories with respect to a single foreign partnership, that filer can file a single Form 8865, but they must provide all additional items for each category. The filer must complete a separate form 8865 for each foreign partnership. The form must be filed annually with the filer’s income tax return—or, if an income tax return is not filed, at the time an income tax return would normally be filed.

Form 8865 Filing Requirements

Penalties for deficient fillings vary depending on which category the filer falls under. Deficient Category 1 and 2 filings result in criminal penalties, partial loss of foreign tax credits, and $10,000 fines per foreign partnership for each tax year, with a maximum additional penalty of $50,000 for continued failure to rectify the filing after notice from the IRS.

Category 3 filers that fail to properly and timely file must pay a penalty of 10% of the fair market value of the contribution, not to exceed $100,000 unless the deficiency is a result of intentional disregard.

Category 4 filers that fail to properly and timely file are subject to criminal penalties and a fine of $10,000, with the possibility of additional penalties of up to $50,000 for continued failure to rectify the deficiency after notice from the IRS. Category 4 penalties will not apply if there is reasonable cause for the deficiency.

In addition to these category-specific penalties, failure to comply with a requirement of the gain deferral method in Form 8865 schedules, and underpayment attributable to undisclosed foreign financial asset understatements, will result in penalties. To rectify a deficient filing, a filer can submit a corrected Form 8865 with her amended tax return.

Categories of Filers:

Category 1 – Controllers:

U.S. persons who control a foreign partnership. Control is established by ownership of more than a 50% interest in the partnership. Multiple Category 1 filers in a partnership can file a single joint Form 8865.

Although each partner need not file an individual form, each partner must still provide separate schedules and other information normally required of Category 1 filers. This includes a Controlled Foreign Partnership statement that must be filed with a non-filing Category 1 filer’s income tax return. A Category 1 filer who is relying on another partner to file the form is still subject to penalties for a deficient filing.

Category 2 – Shareholders of U.S.-controlled foreign partnerships:

U.S. persons who hold at least a 10% interest in a foreign partnership while the partnership is under the control of U.S. persons also holding at least a 10% interest each in the partnership. The exception is that no one shall be considered a Category 2 filer if the foreign partnership has a Category 1 filer.

Category 3 – Contributors:

U.S. persons who contributed property to a foreign partnership in exchange for an interest in the partnership. Such persons are only required to file if (1) the person owned at least a 10% interest in the partnership immediately after the contribution, or (2) the value of the property contributed exceeded $100,000.

Domestic partnerships that transfer property to foreign partnerships need only file one Form 8865 for the entire partnership; each domestic partner does not need to file a separate Form 8865. Persons who qualify as filers under both Category 3 and 4 need only file under Category 3.

Category 4 – Acquisitions, Dispositions, and Changes in Proportional Interest:

U.S. persons that engage in a reportable event (i.e., acquisitions, dispositions, and changes in proportional interest).

Exceptions to Filing:

Conclusion

Establishing foreign partnerships in a legal and efficient way is not as complicated as it may seem. Form 8865 exists to help those entering a foreign partnership to report vital information regarding their relationships, such as transfer, acquisition, and more.

This file must be filed by a U.S. citizen if they fall under one of the four categories. If they do not, they will be subject to penalty. You must file this form if you fall into one of these categories in the tax year. However, it can be complicated if you are not used to this world, which is why employing the help of a trusted tax attorney like those at Freeman Law sets you up for success.

 

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Related Articles:

Everything That You Need To Know About International Tax Penalties

IRS Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations

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IRS Form 3520 Reporting Transactions with Foreign Trusts and the Receipt of Foreign Gifts

Form 3520-A, Information Return of Foreign Trusts With a U.S. Owner

The FBAR (Report of Foreign Bank and Financial Accounts): Everything You Need to Know

Why (Nearly) Every Partnership Agreement Should be Amended

 

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