Translating Foreign Activities Reporting
Every day there seems to be another newspaper article reporting IRS’ epic battles over the disclosure of foreign bank accounts and the ensuing diplomatic disputes.
This media attention has greatly increased awareness of the requirement to report foreign bank and financial accounts on Form TD F 90-22.1. As a consequence, the number of these reports filed in 2009 has sky-rocketed.
However, in addition to the reporting requirements for foreign bank accounts, there are many other important information reporting obligations for U.S. persons with foreign activities that are frequently overlooked. Often even experienced tax advisors are unfamiliar with all of these filing requirements. Although these reporting obligations have not been splashed across the headlines, failure to file such reports completely and accurately can result in very harsh penalties similar to those for the failure to report foreign bank accounts. Given the heightened scrutiny by the IRS of foreign activities, it is important to briefly review some of the more frequently encountered information and reporting forms.
Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships, is generally required by any U.S. person who: (1) controlled a foreign partnership at any time during the year; (2) owned a 10 percent or greater interest in the foreign partnership while the partnership was controlled by other U.S. persons; (3) contributed property during the year to a foreign partnership in exchange for certain interests in the partnership or (4) had a reportable event during the year, such as certain acquisitions, dispositions or changes of proportional interest of 10 percent or greater.
Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, is generally required to be filed by any U.S. person that transferred over $100,000 to a foreign corporation during the span of 1 year, or if a U.S. person holds at least 10 percent of the total voting power or share value of the foreign corporation immediately after a transfer, regardless of the amount.
Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, is required for U.S. persons who are officers, directors, or shareholders in certain foreign corporations if they fall within one of four categories of filers. In general, the categories include: (1) U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person has acquired 10 percent or more of the stock; (2) U.S. person becomes a 10 percent shareholder in a foreign corporation or disposes of stock to reduce ownership below 10 percent; (3) U.S. person who had control of a foreign corporation for at least 30 days; or (4) U.S. shareholder who owned, directly or indirectly, at least 10 percent of a controlled foreign corporation for an uninterrupted period of at least 30 days, and who owned the stock on the last day of that year.
Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, is used to report certain information regarding dealings with passive foreign investment companies (PFICs). A PFIC is a foreign corporation that generates at least 75 percent of its income from passive sources or with respect to which at least 50 percent of its assets produce passive income. Generally, foreign mutual funds and offshore hedge funds are considered PFICs. Form 8621 is required to be filed by a U.S. person that received a distribution from a PFIC or recognized gain on the sale of PFIC stock. In addition, there are important elections that may be tax advantageous to the PFIC shareholder, such as the Qualified Electing Fund election, which may be made on the form. Failure to make an appropriate, timely election can significantly reduce the shareholder’s after-tax investment returns.
Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is generally required to be filed by any U.S. person who: (1) received gifts in excess of $100,000 from a foreign person; (2) received a gift of $13,561 or more from a foreign corporation or partnership; (3) received distributions from a foreign trust; or (4) created and/or transferred property to a foreign trust;
Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner, is generally required to be filed by the trustee of a foreign grantor trust with a U.S. owner.
The reporting obligations for U.S. persons with foreign activities are extremely complex and this is just a general overview of some of the most frequently required returns. To complicate matters there are attribution and constructive ownership rules that expand the class of individuals, trusts, and entities that are required to file many of these forms.
Given the severe potential penalties for noncompliance and the increased attention by the IRS with regard to foreign activities, it is important to completely and accurately file these returns. WTAS has an on-call team to assist you in such reporting obligations, as well as with other international tax planning opportunities.