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US Tax Guide for Expats (2019): Form 8865

Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships

Filing Requirements

If you are a United States person for any part of the year, and own an interest in a foreign partnership, you are required to file Form 8865. Here are the Instructions. A separate form is required for each foreign partnership. There are four categories of filers, which classify you according to your ownership and activities in the partnership.

Category 1

A Category 1 filer is a United States person who owned, directly or constructively, more than 50% interest in the partnership at any time during the partnership's year. Nearly all of the form must be completed by a Category 1 filer, which is equivalent to preparing a US partnership return.

Category 2

A Category 2 filer is a United States person who at any time during the year of the partnership owned at least a 10% interest, directly or constructively, while the partnership was controlled by US persons each owning at least 10%. However, if the foreign partnership had a Category 1 filer at any time during the tax year, no person will be considered a Category 2 filer.

Category 3

A Category 3 filer is a United States person who contributed property during that person's tax year in exchange for and interest in the foreign partnership, if that person 1) owned at least 10% of the foreign partnership immediately after the contribution, or 2) the value of all property contributed by such person during the 12 month period ending on the date of the transfer exceeds $100,000.

Category 4

A Category 4 filer is a United States person that had a reportable event during that person's tax year, which includes acquisitions, dispositions, and changes in proportional interests.

A partnership includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that is not, within the meaning of the regulations, a corporation, trust, estate, or sole proprietorship. A foreign partnership is a partnership that is not created or organized in the United States under the law of the United States or any state or the District of Columbia.

What Happens If You Don't File?

For Category 1 and 2 filers, a $10,000 penalty applies for each tax year the required information is not filed with the IRS. The penalty is increased to a maximum of $50,000 if information is not submitted after the IRS has mailed notices of the failure. For continued failures, the foreign tax credit could be reduced. See Code Section 6038(b).

For Category 3 filers, failure to properly report a contribution to a foreign partnership is subject to a penalty equal to 10% of the fair market value of the property at the time of the contribution. This penalty is generally subject to a $100,000 limit. In addition, the transferor must recognize gain on the contributed property as if it had been sold for its fair market value. See Code Section 6038B.

For Category 4 filers, a $10,000 penalty is imposed for failure to properly report all the information requested. If the failure continues for more than 90 days after the IRS mails a notice of the failure, an additional $10,000 penalty will apply for each 30 day period (or fraction thereof) during which the failure continues after the 90 day period has expired. The additional penalty cannot exceed $50,000. See Code Section 6679(a).

All penalties are subject to the reasonable cause exception.

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