When a U.S. taxpayer has foreign accounts, assets, investments, trusts, or other entities, they must report this information to the U.S. government on various international information reporting forms . Some of the more common reportable assets include bank accounts, investment accounts, pensions, and life insurance policies. Another type of asset a Taxpayer may have to report is a foreign disregarded entity. Taxpayers who own a foreign disregarded entity (or foreign branch) are required to file an annual form 8858, which is the Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs). While Form 8858 can be intrusive, it is typically less complicated than its counterpart Form 5471 — which is used to report foreign corporations. Let’s review some key about reporting disregarded entities on form 8858. The form is used to report foreign disregarded entities and branches, but for this summary, we will focus on foreign disregarded entities.
Just as it is common for a U.S. person who operates an LLC to operate as a disregarded entity, many foreign countries offer disregarded entity opportunities as well. A foreign disregarded entity is an entity that was created outside of the United States and for U.S. tax purposes it is disregarded as well — whether the default status is that it is disregarded or whether the taxpayer had to make an election under 8832 and the applicable regulations.
For reporting form 8858, the IRS makes a distinction between who is the tax owner and who is the direct owner of the foreign disregarded entity – noting, it can be the same person. In general, the tax owner is the person who has ownership of the assets and liabilities whereas the direct owner is the legal owner of the disregarded entity. Sometimes, a person may be a legal owner of a disregarded entity but not be considered the actual owner of the assets and liabilities.
Similar to Form 5471 dormant filing rules, there is a filing procedure that taxpayers can use if they have a dormant foreign disregarded entity as well which eliminates much of the reporting required when lodging Form 8858. Not all dormant corporations will qualify for dormant status under announcement 2004-4 so the taxpayers should review the requirements.
When it comes to Form 8858, there are six categories of filers who may be required to file the form. The threshold requirements, exclusions, exceptions, and limitations vary depending on what category filer the taxpayer qualifies us. In general, most taxpayers will qualify as a Category 1 filer. A category 1 filer is the tax owner of the foreign disregarded entity at any time during the tax year or accounting.
The Form 8858 is due to be filed at the same time that a person is required to file their tax return. If the Taxpayer files an extension for their tax return then the Form 8858 goes on extension as well.
As part of the Form 8858 filing requirements, the taxpayers are required to include a balance sheet and income statement in functional currency and in accordance with U.S. GAAP. Sometimes this can be difficult when the foreign disregarded entity does not operate using Generally Accepted Accounting Principles under U.S. tax law. In addition, Taxpayers must also exchange the functional currency into U.S. dollars. Generally, taxpayers will use the average exchange rate as outlined in section 989(b).
When taxpayers do not file the form 8858 timely, they may become subject to certain fines and penalties although the IRS has developed various amnesty programs to assist taxpayers with getting into compliance with the reduced penalties — or penalty waivers.
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA ) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties .
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting , it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer .
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
