What is required for reporting a foreign partnership on Form 8865?
Published on November 13, 2024
by Grace Lorraine Angeles
Grace Lorraine, an IRS Enrolled Agent and CPA with 13 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working abroad.
Table of Contents
If you are a US person (a citizen or resident) with a stake in a partnership based outside the US, the IRS may require you to complete Form 8865 to ensure all related income, expenses, and transactions are reported.
Form 8865 is used by US taxpayers to report their ownership in foreign partnerships.
Completing this form means detailing the financial activity of the partnership that relates to you, like income or distributions you received.
Who needs to file Form 8865?
In general, if you’re a US person (citizen, resident, or certain business entities) with ownership or certain transactions with a foreign partnership, you may need to file Form 8865.
This requirement generally applies if you own 10% or more of the foreign partnership or meet specific transaction thresholds with the partnership.
The form has four filing categories, each with its own criteria:
- Category 1: You have control of the foreign partnership, generally if you own 50% or more. Check our Controlled Foreign Company (CFC) article here.
- Category 2: You own at least 10% in a foreign partnership that’s primarily controlled by US persons.
- Category 3: You contribute certain assets to the foreign partnership.
- Category 4: You engage in specific reportable transactions with the foreign partnership, such as buying or selling a significant interest.
Filing Form 8865 may be necessary if:
- You directly own a substantial percentage of a foreign partnership.
- You’ve gained control over a foreign partnership through investment.
- You’ve had certain types of transactions with the foreign partnership, like transferring property.
What are the penalties for not filing Form 8865?
- Penalties for Failing to File: The IRS may charge a US$10,000 penalty if Form 8865 isn’t submitted by the deadline. If you still don’t file after getting an IRS notice, additional penalties may apply—up to US$50,000 in total if the form is continuously late.
- Penalties for Missing or Incorrect Information: Submitting Form 8865 with incomplete or incorrect details can also lead to additional fines. If any asset details are inaccurate or missing, the IRS might add a penalty equal to 10% of the total asset value.
- Impact on Other Foreign Reporting Requirements: If Form 8865 isn’t filed when required, it can affect other tax areas. Missing this form can delay or prevent access to foreign tax credits, deductions, or other benefits.
Why use the IRS Streamlined Tax Amnesty Program?
It’s for American citizens that didn’t know they had to file U.S. tax returns each year, and have therefore fallen behind. Some more than 30 years! With the IRS Streamlined Procedure, say goodbye to overdue tax returns, late fees, and penalties.
Connect with over 10,000+ expats today!
Embarking on an international journey shouldn’t mean navigating the complex world of US taxation alone. If you’re living and working abroad, our friendly, supportive Expat Tax Online Help Facebook group is here to assist. We’ve designed a community that serves as a comprehensive guide and resource platform tailored for US expats.
How does Form 8865 differ from other foreign reporting forms?
Form 8865 is for reporting ownership in foreign partnerships, whereas Form 5471 covers foreign corporations, and Form 8938 reports various foreign financial assets.
Each form has its own requirements and applies to specific types of foreign investments or assets.
Sometimes, multiple foreign reporting forms may be necessary. For example, if you have shares in both a foreign corporation and a foreign partnership, you might need to file both Form 5471 and Form 8865. If you hold foreign assets above a certain threshold, Form 8938 could also be required alongside Form 8865.
Many confuse these forms, as they all relate to foreign assets and income. Each form, however, is designed for a particular type of foreign entity or investment, so it’s important to know which ones apply to your situation.
If you think you’ll be confused, it’s best to leave all of this work to a tax professional. They can ensure that the correct forms are submitted accordingly and on time.
How do I determine my ownership percentage?
The percentage is usually based on how much of the partnership you control or have contributed to financially. The IRS looks at both direct ownership, where you own part of the partnership outright, and indirect ownership, where you may control shares through another entity, like a trust or business you have a stake in.
For example, if you directly own 30% and indirectly own another 10% through a business, your total ownership would be 40%.
Is Form 8865 required every year?
Yes, you’ll need to file Form 8865 every year you meet the requirements.
The form is required each year you meet the ownership or activity thresholds in the partnership, such as holding a certain ownership percentage or having certain transactions with the partnership.
However, if your ownership level changes and no longer meets the filing requirements, you won’t have to file that year.
But if your status changes back to meeting the criteria, you’ll need to start filing again. This annual filing helps the IRS keep accurate records on U.S. taxpayers involved in foreign partnerships.
Can Form 8865 be filed electronically?
You can submit Form 8865 electronically if you’re filing your federal tax return online. Form 8865 is typically attached to your regular tax return, so when you e-file your return, Form 8865 is included with it.
What records should I keep after filing Form 8865?
After submitting Form 8865, it’s important to hold on to copies of your filled-out form, your full tax return, and any documents tied to the foreign partnership.
Useful records include partnership agreements, proof of ownership, any financial statements, and notes on contributions or distributions. These documents might be needed later if the IRS has questions or for future filings.
The IRS suggests keeping tax records for at least seven years, but for forms involving foreign investments like this one, it can be helpful to keep them longer.
Spread the word. Please share… 👉
