Do You Own an Interest in a Foreign Business?The IRS Wants to Know
Forms 5471 and 8865 can carry substantial penalties when overlooked.
Most people know they must report income earned outside the United States. What many do not realize is that simply owning an interest in a foreign business can create an IRS filing requirement, even if the business made little or no money.
Two of the most commonly overlooked international information returns are Form 5471 and Form 8865. These forms do not usually create additional tax by themselves, but failing to file them can result in substantial penalties.
Form 5471: Foreign Corporations
- Started a corporation outside the United States
- Own a significant percentage of a foreign corporation
- Became an officer or director under certain circumstances
- Have ownership in a controlled foreign corporation (CFC)
The form can require detailed ownership and financial information.
Form 8865: Foreign Partnerships
- Own an interest in a foreign partnership
- Control a foreign partnership
- Contribute significant property
- Meet ownership thresholds
Like Form 5471, Form 8865 requires detailed financial and ownership information.
The Penalties Can Be Severe
Failure to file can generally result in an initial $10,000 penalty per required form, with additional penalties possible if the failure continues.
International Reporting Is More Than Just FBARs
Foreign business ownership is a separate reporting requirement from FBAR and Form 8938.
Do Not Assume Someone Else Is Filing
These are U.S. information returns that are generally the responsibility of the U.S. taxpayer.
The Bottom Line
If you own, inherit, or invest in a foreign corporation or partnership, determine whether Forms 5471 or 8865 apply before filing your return.
The article is meant for informational purposes only. Please contact me directly to discuss how this applies to your individual tax situation.