The reporting requirements for IRS Form 5471 are complex, including 'category of filer' and required…
Foreign Proprietorship: Form 8858 Filing Requirement
US taxpayers with an ownership interest in unincorporated foreign businesses (such as foreign sole proprietorships, partnerships, and single-member entities that are not separately taxed as corporations) must file a Form 8858 with their regular 1040 income tax return. IRS Form 8858 is an “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)”.
WHAT IS A FOREIGN DISREGARDED ENTITY?
The first question is “What is a Foreign Disregarded Entity (FDE), and what is a Foreign Branch? (FB).” The IRS defines an FDE as “an entity that is not created or organized in the United States and that is disregarded as an entity separate from its owner for US income tax purposes.” In other words, the entity does not file its own tax return. Its income or loss is included in its owner’s personal income tax return. Partnerships, single-member LLCs (which have NOT elected to be taxed as a corporation), and sole proprietorships are examples of entities that do not file separate returns.
Form 8858 Categories
A U.S. person that owns 100% of a foreign disregarded entity is required to file Form 8858 as a Category 1 filer. A U.S. person must file Form 8858 as a Category 2 filer if the U.S. person is required to file Form 5471 with respect to a controlled foreign corporation (CFC) and the CFC is the tax owner of a foreign disregarded entity. A U.S. person must file Form 8858 as a Category 3 filer if the U.S. person is required to file Form 8865 with respect to a controlled foreign partnership that is a tax owner of a foreign disregarded entity.
The income statement of the foreign disregarded entity is required to be reported on Form 8858 in functional foreign currency and in U.S. dollars. The balance sheet of the foreign disregarded entity is required to be reported on Form 8858 in U.S. dollars translated from functional foreign currency in accordance with U.S. GAAP.
Certain transactions between the U.S. person filing Form 8858 (or certain related parties) and the foreign disregarded entity are required to be reported on Schedule M of Form 8858.
When an FDE is dormant, Form 8858 is necessary for any individual who meets the filing requirements. However, you may be able to use a simpler procedure known as a “summary filing” for dormant FDEs. If you choose to use the summary procedure, you will only need to complete certain information on the form.
Specifically, you must make sure the top margin of the return states, “Filed Pursuant to IRS Announcement 2004-4 for Dormant FDE.” You must also include your tax year, address, and name, as well as the dormant FDE’s annual accounting period. Finally, you must complete items 1a through 1e, item 1g, items 3a through 3d, and items 4a through 4c. Some of these items may not be applicable, depending on the specifics of your situation.
Form 8858 Penalties
A $10,000 penalty applies for the failure to timely file Form 8858 or if the Form 8858 is incomplete or inaccurate when filed. Form 8858 is filed with the U.S. filer’s U.S. federal income tax return. The $10,000 penalty will apply automatically if the U.S. filer’s U.S. federal income tax return is filed late and the return includes Form 8858.
If the IRS sends you a notice informing you of your failure to file this form, you will have 90 days to comply before additional penalties begin to accumulate.
If you do not file the form within this 90-day period, you will owe an additional penalty of $10,000 for every 30 days or part of 30 days that passes after this deadline expires. In addition to these penalties, you will also incur a 10 percent reduction in the amount of foreign taxes you can use to calculate certain credits. In some cases, criminal penalties may also apply to taxpayers who do not file a required Form 8858.
Submitting Delinquent Forms
In some cases, you may not realize you need to submit Form 8858 until it is already delinquent. In such cases, you may still be able to avoid penalties if you meet certain requirements.
Sometimes the best option available for submitting delinquent returns is to submit them under the IRS Delinquent International Information Return Submission Procedures (DIIRSP). You cannot use this procedure if the IRS has been in contact with you about the missing forms. If you are under a criminal or civil investigation from the IRS, you are disqualified from using this procedure.
We have used the DIIRSP for hundreds of clients to solve their tax problems. Contact our office to learn more about the DIIRSP procedure.
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