Additional Foreign Reporting

Ownership in Foreign Businesses

If you own an interest in a foreign business, you likely have to report your interest on a U.S. tax form. This is in addition to picking up any income on your tax return.

Your foreign business can be classified as a corporation, a partnership, or an entity that is disregarded for tax purposes and has no separate existence from its owner. Even though there is a default classification for all foreign business entities, you may be eligible to elect a different treatment using Form 8832, Entity Classification Election.

If you own a foreign disregarded entity, or you own certain interests in foreign tax owners of a foreign disregarded entity, then you may have to file Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities.

If you have an ownership interest in a foreign partnership, or you control a foreign partnership, then you may have to file Form 8865, Return of U.S. Persons With Respect To Certain Foreign Partnerships.

If you own 10 percent or more of a foreign corporation at any time during the year, you may have to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. Subpart F and GILTI (global intangible low-taxed income) can come into play.

Report Your Gifts and Inheritances from Abroad

Let’s say you hit the jackpot and get a gift or inheritance from a foreign person.

As you probably know, gifts and inheritances generally aren’t taxable to the recipient. But if you receive more than $100,000 in any year from any foreign individual or estate, or more than $16,649 from a foreign partnership or corporation (for 2020), you need to report it to the IRS on Form 3520. Though no tax will be owed, reporting the information is needed.

Report Your Interests in Foreign Trusts

You may have to file Form 3520 and/or 3520-A if any of the following are true:

• You are a beneficiary of a foreign trust.
• The tax code treats you as the owner of any part of the assets of a foreign trust under IRC Sections 671 through 679 (grantor trust rules).
• You received a distribution from a foreign trust.

Passive Foreign Investment Company (PFIC)

Beware foreign mutual funds!

Under the tax code, foreign mutual funds will generally fall under the passive foreign investment corporation (PFIC) taxation rules. The PFIC rules are complex, and the taxation of PFICs can be much higher than that of the equivalent U.S. mutual fund. You also might have to file Form 8621 annually for each foreign mutual fund you own.

Haven’t Filed or Reported? Penalties, Consequences, and Potential Relief

You face penalties—sometimes quite severe—for not filing these little-known forms. For example:

• If you fail to file Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, your penalty is $10,000 at a minimum, and it can be as much as $50,000. This is the annual penalty for each year of failure!
• For Form 3520, if the reporting requirement is trust-related, the minimum penalty is $10,000, but the penalty can go up to 35 percent of the reportable amount from the trust.21 If the reporting requirement is due to a foreign gift, then the penalty begins at 5 percent of the gift amount, up to a maximum of 25 percent of the total gift.

In addition to the penalties on your foreign activity, the tax code extends the statute of limitations in some circumstances so that the IRS has more time to audit and adjust your tax return. For example, if you underreport income from foreign financial assets by more than $5,000, the statute of limitations goes to six years from the normal three years.

If you fail to attach certain information returns, such as Form 8621 or Form 3520 with respect to trusts, the statute of limitations never starts, and the IRS can audit you for that year whenever it feels the urge.

If you now realize you had a reporting requirement but did not meet it, there are several avenues for you to come forward; such as the Streamlined Filing Compliance Procedures. Also, the Delinquent International Information Return Submission Procedures allow you to file the missing information forms along with a statement of reasonable cause, and if the forms are accepted, the IRS generally will not assess any penalties.

Takeaways

Ask yourself: Did you get any money or other assets from a country outside the U.S.? Do you own any assets outside the U.S.? If you answered yes to either of these questions, you need to check on the likely possibility that you need to file some tax forms with the IRS.

As you can see, penalties can be staggering. You want to get this right and avoid as much pain as you can – contact us today and we can help!.