Foreign Entity Reporting by U.S. Persons

Form 5471 (U.S. Persons Reporting Interest in Foreign Corporations)

• A U.S. person must file Form 5471 if they fall into one of the categories of filers as outlined in the Form 5471 instructions, which includes officers & directors of the foreign corporation, and U.S. persons that have substantial control or a certain percentage ownership in the foreign corporation.
• The penalty for failing to timely file Form 5471 is a $10,000 penalty per form per year, plus an additional $10,000 penalty per 30 days beginning 90 days after the IRS notice about failure to file, up to a maximum of $50,000 of additional penalties.
• The IRS may also impose a 10% reduction on any foreign tax credits available if noncompliance continues.

Form 926 (U.S. Persons Reporting Transfer of Property to a Foreign Corporation)

• A U.S. person must generally file Form 926 to report the transfer of property to a foreign corporation during the tax year.
• The transfer of property may include cash, inventory, stock or securities, tangible assets, or intangible assetsoration.
• The penalty for failing to timely file Form 5471 is a $10,000 penalty per form per year, plus an additional $10,000 penalty per 30 days beginning 90 days after the IRS notice about failure to file.
• The IRS may also impose a 10% reduction on any foreign tax credits available if noncompliance continues.

Form 8865 (U.S. Persons with Interests in Foreign Partnerships)

• Form 8865 is filed by a U.S. person that owns a certain percentage interest in a foreign entity treated as a partership for U.S. federal tax purposes.
• This includes foreign corporations that have filed an election to treat the foreign corporation as a flow-through partnership for federal tax purposes.
• The Form 8865 is required to be completed by the U.S. person, even in cases where the partnership entity itself files a complete Form 1065 partnership return.
• The penalty for failing to file is $10,000 per form per year, plus an additional $10,000 penalty per 30 days after receiving notice from the IRS about failing to file, up to a maximum of $50,000 in additional penalties.

Form 8858 (U.S. Persons with Interests in Foreign Disregarded Entities & Branches)

• Form 8858 is generally filed by a U.S. person that owns 100% of a foreign disregarded entity or a foreign branch in a non-U.S. jurisdiction. The filing is also required for certain controlled foreign corporations (CFC) or controlled partnerships.
• The penalty for failing to file is $10,000 per form per year, plus an additional $10,000 penalty per 30 days after receiving notice from the IRS about failing to file, up to a maximum of $50,000 in additional penalties.

Foreign Asset Reporting by U.S. Persons

Form 8938 (Statement of Specified Foreign Financial Assets)

• A U.S. person must file Form 8938 to disclose their beneficial interest in foreign financial accounts, which include foreign bank accounts, custodial brokerage accounts, equity ownership in certain foreign corporations, partnerships, and trusts, and other foreign financial assets.
• The penalty for failing to timely file Form 8938 is a $10,000 penalty, plus an additional $10,000 penalty per 30 days beginning 90 days after the IRS notice about failure to file, up to a maximum of $50,000 of additional penalties.
• The IRS may also impose a 10% reduction on any foreign tax credits available if noncompliance continues.

Form 8621 (U.S. Shareholder of PFIC Investments)

• A U.S. person must generally file Form 8621 when that U.S. shareholder is an investor in a foreign corporation that qualifies as a passive foreign investment company (PFIC) for federal tax purposes.
• A timely filed Form 8621 allows the U.S. shareholder to make favorable elections, such as the Qualified Electing Fund (QEF), or the Mark-to-Mark (MTM) election.
• There is no direct penalty for a U.S. persons failure to file Form 8621 and disclose their PFIC holdings. However, failing to file the Form 8621 leaves the statute of limitations open for the entire tax return until an amended return is filed to include the Form 8621. In addition, failure to timely file Form 8621 means the taxpayer misses the opportunity to make a QEF or MTM election, which results in the taxpayer stuck with the default excess tax regime under IRC Section 1291.

FinCEN Form 114 (Foreign Bank and FInancial Accounts)

• The FinCEN Form 114 is filed by U.S. persons to disclose their ownership interest in foreign bank accounts, financial accounts, certain retirement accounts, and other foreign financial assets.
• This disclosure is required if the aggregate value of foreign financial accounts exceeds $10,000 USD during the year.
• The penalty for failing to file is $10,000 per report, rather than a per account basis, as decided in the Bittner v. United States case for nonwillful violations of the Bank Secrecy Act (BSA).

Form 3520 (Transactions with Foreign Trusts and Receipt of Foreign Gifts)

• The IRS Form 3520 is generally filed by a U.S. person when that person transfers money to a foreign trust, receives a distribution or allocation of money from a foreign trust, or receives a large foreign gift or bequest from a foreign person
• The penalty for failing to file is initially $10,000 per form, or up to 35% of the gross reportable amount for transfers and distributions, or 5% o the trust assets.
• For foreign gift tax reporting, the penalty can be 5% of the gift amount per month, capped at 25% of the reportable gift.