Do you live abroad and have a foreign business? The IRS wants to know about it! Here’s the U.S. tax return info you need to know.
The U.S. government wants to know if you have a foreign business outside the U.S. You might not have to pay taxes on the profit unless they are part of your personal income.
The reporting obligations for the different types of foreign entities are as follows:
- Controlled Foreign Corporations (CFC)
- 5471 or 5472 requires that even if a foreign corporation does not have establishment in the U.S. and does not have sourced income in the country, the I.R.S. has taxing authority over these foreign corporations because of the involvement by U.S. persons. If the foreign corporation has U.S. officers, directors, or shareholders who meet certain filing requirements, the U.S. officers, directors or shareholders are subject to U.S. income tax and must file Form 5471 or form 5472.
- Passive Foreign Investment Company or Qualified Electing Fund (PFIC)
- 8261 requires that U.S. citizens and residents that are direct or indirect shareholders of a Passive Foreign Investment Company (PFIC). Absent any exception, each stock that is held during the year is required to be reported on a separate Form 8621 under the following circumstances: receives certain direct or indirect distributions from a PFIC, recognizes gain on a direct or indirect disposition of PFIC stocks, is reporting information with respect to a QEF or section 1296 mark-to-market elections, is making an election reportable in Part II of the form, is required to file an annual report. A foreign corporation is a PFIC if it meets either the income or asset test
- Foreign Partnerships
- 8865 will need to be filed if a U.S. person owns an interest in a foreign entity that is classified as a foreign partnership for U.S. federal tax purposes. If you qualify under more than one category for a particular foreign partnership, you must submit all the items required for each category under which you qualify. In general, a U.S. person who is a partner in a foreign partnership is required to file Form 8865 to report the income and financial position of the partnership and to report certain transactions between the partner and the partnership. The form is required to be filed with the partner’s tax return.
- Foreign Trusts
- 3520 requires that any US Person who meets at least one of the following requirements must file IRS Form 3520. There four different sections that would require for you to fill out form 3520. Transferor to a Foreign Trust: If you created a foreign trust and/or transferred money or other property to your foreign trust; Responsible Party: If you are the executor of the estate of a US decedent and the decedent made a transfer to a foreign trust by reason of death or was treated as the owner of any portion of the foreign trust immediately prior to death; Owner of Trust: If you own a foreign trust or even a portion of a foreign trust;
Trust Distribution Recipient: If you received (directly or indirectly) a distribution from a foreign trust; Foreign Trust Obligation Holder: If you held an obligation from a foreign trust (evidence of indebtedness);Gift Recipient from a Foreign Person or Estate: If you received a gift from a foreign person or estate of at least $100,000; Gift Recipient from a Foreign Corporation or Trust: If you received a gift of at least $14,723 from a foreign corporation or a foreign partnership.
What if I Have Failed to File?
- While no tax is directly due with the filing of these returns, the failure to timely file or substantially complete these international information returns can result in significant penalties, as well as indefinitely extend the statute of limitation on assessment for the taxpayer’s entire return. For example, Congress has imposed steep penalties for the failure to timely file or substantially complete certain international information returns, such as Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, or Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.
- The failure to timely file or substantially complete one of these international information returns may result in a flat $10,000 penalty, per form, per month, per year—even when no income tax was owed with the taxpayer’s return.
- As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
- All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
- Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
Situation | Best approach |
Failed to file tax return | So long as failure is not willful, use Streamlined Procedures: • File last completed year plus three prior year 1040s • What if no tax due? Still need to file streamlined procedures? Yes, since no information return was filed, you would need to file under Streamlined Procedures. |
Filed but failed to report all income (such as foreign sourced income) | So long as failure is not willful, use Streamlined Procedures: · File last completed year plus three prior year 1040s · What if no tax due? Still need to file streamlined procedures? Yes, since no information return was filed, you would need to file under Streamlined Procedures. |
Failed to file FBARs | No amnesty program. File last 6 years of FBARs and hope for non-enforcement |
Failed to file foreign entity international informational return | Controlled Foreign Corporation (CFC): • Tax NOT due: File 5471 but no need to re-file tax return? • Tax due: Must use streamlined procedures, file 5471 with the tax returns and include income calculated in 5471 in 1040 PFIC: • Tax NOT due: File 8261 but no need to re-file tax return? Yes, since no information return was filed, you would need to file under Streamlined Procedures. • Tax due: Must use streamlined procedures, file 8261 with the tax returns and include income calculated in 5471 in 1040 Partnership: • Tax NOT due: File 8865 but no need to re-file tax return? Yes, since no information return was filed, you would need to file under Streamlined Procedures. • Tax due: Must use streamlined procedures, file 8865 with the tax returns and include income calculated in 8866 in 1040 Trust: • Tax NOT due: File 3520 but no need to re-file tax return? No, just file the year’s form. • Tax due: Must use streamlined procedures, file 3520 with the tax returns and include income calculated in the 3520 in 1040 |
I hope you found this helpful. For more information on this and other topics:
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