Basics of Filing Form 8858 for Foreign Entities
What is Form 8858?
Form 8858 is a disclosure form for United States taxpayers who have formed a business entity outside of the U.S. that can be treated as a disregarded entity for U.S. income tax purposes. A disregarded entity is an organization that is not seen as a separate entity from its owner. All the income and expenses of the foreign company are considered the income and expenses of the individual in the eyes of the IRS – similar to a U.S. single-member Limited Liability Corporation (LLC).
Form 8858 Filing Requirements
If you are the owner of a foreign entity that is considered a disregarded entity of U.S. income tax purposes, you will need to file Form 8858. In order to have your business qualify as a disregarded entity, you should complete Form 8832 (Entity Classification Election) and file this with the IRS. You will then need to call the IRS to obtain an Employer Identification Number (EIN) for your foreign entity.
How Does This Relate to Other Tax Forms?
Form 8865 is similar to form 5471, except that tax form 8865 is to be used to report foreign partnership interest. Form 5471 is instead used to report ownership of foreign corporation(s). The reporting requirements for a partnership can be stringent, so it’s crucial to understand those requirements when submitting a form 8865.
What is the Late Filing Penalty for Tax Form 8858?
The penalties for failing to file Form 8865 are based on the category of filer you fall under. Penalties are dollar amounts that can also be combined with a percentage reduction of tax benefits, as follows:
- Category 1 Filers: $10,000 penalty is imposed for each tax year the form was not filed. If 90 days elapse after notice of the failure to file is given by the IRS, an additional $10,000 penalty is imposed with an additional $10,000 added every 30 days. The total penalty is capped at $50,000. Category 1 filers can also lose 10% of their foreign taxes available for credit with an additional 5% reduction for each three month period until compliance. Additionally, category 1 filers may be subject to criminal penalties for failing to file or providing false information.
- Category 3 Filers: If failure to report a contribution to a foreign partnership, filer may be subject to a 10% penalty, which is computed based on the Fair Market Value (FMV) of the property contributed. $100,000 is the upper limit of this penalty.
- Category 4 Filers: Form 8865 must be filed for any “reportable event” which occurred during the tax year, including dispositions, acquisitions, and/or changes in proportional interest. A $10,000 penalty is imposed for failure to report such events, and an additional $10,000 is added for every 30 day period after notice. The maximum fine is $50,000.
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