Form 8865 Instructions
If you have ownership in a foreign partnership from purchasing or even inheriting shares from a foreign relative, you may need to report it to the IRS through filing Form 8865.
Who uses Form 8865?
People who have an interest in a foreign partnership use Form 8865. A partnership is considered a foreign partnership when it wasn’t created or organized in the United States or under the law of the United States.
The U.S. partners of a U.S. controlled foreign partnership are required to file an annual report with the IRS on Form 8865. Like the controlled foreign corporation, the form is required when the foreign partnership is controlled by U.S. persons who each own 10% or more of the partnership and who collectively own more than 50% of the partnership interests.
A controlled foreign corporation (with multiple owners) that elects to be taxed as a disregarded entity, should file Form 8865 and should file a Form K-1 for each U.S. partner.
What information do you need for Form 8865?
The form requires:
- A statement of the net taxable profits of the partnership
- Details of any capital gains (long or short term)
- A summary of the K-1 forms for the partners
- A balance sheet at the beginning and end of the year
- A reconciliation of the partner’s capital accounts from the beginning to the end of the year
- A page providing information about transactions between the controlled foreign partnerships, its partners and any related entities
- The name, address and taxpayer ID of the partners
- Information about any transfers of property to the partnership and any changes in the ownership interest of any partner
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Where do you file Form 8865?
File Form 8865 with the IRS Center that you file your tax return to.
When is Form 8865 due?
The form needs to be filed with the income tax return of each partner, including any extensions of time to file.
Exceptions to filing Form 8865
If during the year of the foreign partnership, more than one U.S. person qualifies as a Category 1 filer, only one of these Category 1 partners is required to file Form 8865.
If you qualify for the exception to the Category 1 filing requirement, you will still need to file a separate Form 8865 if you’re also subject to Category 3 or 4 filing requirements.
Form 8865 Filer Categories
Whether or not a filer of Form 8865 is required to complete a specific schedule depends on the category of that filer. It’s also possible to be in multiple categories simultaneously.
There are 4 general filer categories:
Category 1: a Category 1 filer has controlled the foreign partnership at any time during the partnership’s tax year. Control of a partnership is ownership of more than a 50% interest in the partnership.
Category 2: a Category 2 filer has owned a 10% or more interest in the partnership at any time during the tax year, while the partnership was controlled by US persons each owning at least 10% interest. However, if the foreign partnership had a Category 1 filer at any time during that tax year, no person will be considered a Category 2 filer.
Category 3: a Category 3 filer contributes property during the tax year to a foreign partnership in exchange for an interest in the partnership. You’d fall in this category if you contribute at least $100,000 to the partnership or you own at least 10% of the partnership after your contribution.
Category 4: a Category 4 filer has had a reportable event under Section 6046A, meaning acquiring a direct 10% or more interest or experiencing a 10% or more proportional change in direct interest in a foreign partnership, through an acquisition, disposition and/or change in proportional interests.
Once you know what category you fall into, you’ll be able to determine your schedules and filing requirements.
Constructed Owner of a Foreign Partnership
You might be considered a constructive owner of a foreign partnership, meaning you’re closely related enough to the owner to be treated as an owner. For example, if your spouse owns 100% of the stock of a company, you’d constructively also have that ownership and be treated like an owner.
Form 8865 Filing Requirements
|Filing Requirements||Category 1||Category 2||Category 3||Category 4|
|Identifying information—(page 1 of Form 8865)||Included||Included||Included||Included|
|Schedule A—Constructive Ownership of Partnership Interest||Included||Included||Included||Included|
|Schedule A-1—Certain Partners of Foreign Partnership||Included||Not Included||Included||Not Included|
|Schedule A-3—Affiliation Schedule||Included||Included||Included||Included|
|Schedule B—Income Statement—Trade or Business Income||Included||Not Included||Not Included||Not Included|
|Schedule G—Statement of Application of the Gain Deferral Method Under Section 721||Included||Not Included||Included||Included|
|Schedule H—Acceleration Events and Exceptions Reporting Relating to Gain Deferral Method Under Section 721©||Included||Not Included||Included||Included|
|Schedule K—Partners’ Distributive Share Items||Included||Not Included||Not Included||Not Included|
|Schedule L—Balance Sheets per Books||Included||Not Included||Not Included||Not Included|
|Schedule M—Balance Sheets for Interest Allocation||Included||Not Included||Not Included||Not Included|
|Schedule M-1—Reconciliation of Income (Loss) per Books With Income (Loss) per Return||Included||Not Included||Not Included||Not Included|
|Schedule M-2—Analysis of Partners’ Capital Accounts||Included||Not Included||Not Included||Not Included|
|Schedule N—Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities||Included||Included||Not Included||Not Included|
|Schedule D—Schedule D (Form 1065), Capital Gains and Losses||Included||Not Included||Not Included||Not Included|
|Schedule K-1—Partner’s Share of Income, Deductions, Credits, etc. (direct partners only)||Included||Included||Not Included||Not Included|
|Schedule O—Transfer of Property to a Foreign Partnership||Not Included||Not Included||Included||Not Included|
|Schedule P—Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership||Not Included||Not Included||Not Included||Included|
Penalties for failing to file Form 8865
You may be subject to a $10,000 penalty for each year for each partnership return that has not been filed, with an additional $10,000 penalty accruing (ninety days after notification of failure by the IRS) every thirty days following a $50,000 maximum. There may also be an additional 5 percent reduction of foreign tax credits made for each 3-month period or a fraction for 90 days.
There are also reporting requirements for U.S. persons who transfer property to a foreign partnership. These reporting requirements apply if the U.S. person owns, directly or indirectly, at least 10% interest in the partnership. A 10% partner who makes a contribution of property to a foreign partnership and does not disclose the transfer is subject to a penalty of 10% of the fair market value of the property at the time of the contribution, up to a limit of $100,000.
In summary, the IRS Form 8865 is a very complicated return that an international tax specialist should review to ensure accurate preparation of your Form 8865.
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