Avoiding Hefty Tax Penalties on Foreign Returns
Tax time is especially complex when you operate or earn revenue in more than one country. And getting it right is critical, because mistakes could be quite costly.
Fail to turn in a complete and accurate foreign information return on time and you’ll be facing severe penalties from the IRS. Missing Form 5471, for example? That’ll be $10,000 plus a 10% reduction on any applicable foreign tax credits. Another $10,000 will be added on if you don’t get the form filed within 90 days of getting notice about the first fine. Those numbers jump to $25,000 if you miss or get Form 5472 wrong.
Avoiding these fees can be tricky given the intricacies and sheer volume of requirements (and forms) involved.
Barnes Dennig’s international practice team stays on top of all the requirements, filing deadlines, and form details. Including the international reporting changes in the wake of the Tax Cuts and Jobs Act (TCJA) which has caused issues for owners – and for the IRS.
Here’s a quick breakdown of some of the forms you or your organization may be required to submit. You can read our blog for an in-depth look at potential penalties that could be assessed if the forms or information in them are missed, and set up a free consultation with one of our top international tax pros if you need help.
Before we get started…what’s a “certain U.S. person?”
A U.S. person is a citizen or resident of the United States, a domestic partnership, a domestic corporation, and any estate or trust that isn’t foreign. See section 7701(a)(30).
Form 5471 – Information Return of U.S. Persons with Respect To Certain Foreign Corporations
Certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations must file Form 5471. The form isn’t for filing tax information, per se. Instead, it’s a record of which certain U.S persons have ownership in foreign corporations.
Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
The 5472 form is used by foreign companies to report an interest in or ownership over a U.S. company or subsidiary. It applies to 25% foreign-owned U.S. corporations or foreign corporations engaged in a trade or business with U.S. businesses or consumers.
Form 8858 – Information Return of U.S. Persons with Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)
Form 8858 is a disclosure form for certain U.S. persons who have formed a business outside of the U.S. that can be treated as a disregarded entity for U.S. income tax purposes (i.e., not seen as a separate entity from its owner).
Form 8865 – Return of U.S. Persons with Respect to Certain Foreign Partnerships
Form 8865 is a very comprehensive international tax form that’s required for any U.S. citizen and resident who has a foreign partnership – even if that partnership isn’t making a profit. There are four categories of form 8865 categories for filers each with its own particular schedule detailing more information about the foreign partnership.
Schedule K-2 and K-3 for International Tax Filing
Updated with the TCJA, schedule K-2 and K-3 apply to anyone who must file a Form 8865 if the business has items relevant to international tax (e.g., foreign partners or international activities). The revised schedules provide more transparency and clarity for the owners of pass-through entities about how to calculate their U.S. income tax liability.
There’s also a whole other set of forms for foreign trust holders, foreign gifts, and foreign bank accounts. These too are subject to hefty penalties if they aren’t filed correctly and on time.
Questions? Let’s Talk
There’s a lot of paperwork for foreign reporting. And mishaps on reporting or no reporting at all can be very costly. Learn more by talking with a top Barnes Dennig international tax pro to get the answers to questions you have regarding your specific tax situation. We’re here to help.
Ready to talk taxes? Contact us today.