What is the IRS Form 926?
Published on February 23, 2024
by Jefferson Clemente, EA
Jefferson Clemente, a CPA tax professional with 11 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
Do I need to report property transfers to foreign corporations to the IRS?
Yes, if you are a US citizen and transfer property to a foreign corporation, you generally need to report this transaction to the IRS using Form 926. This requirement applies if the value of the transferred property exceeds $100,000 during the tax year or if you own at least 10% of the foreign corporation after the transfer.
What is Form 926?
Form 926 is filed by US citizens or green card holders who transfer property to a foreign corporation, as part of the IRS’s efforts to track and tax such transfers appropriately. This form is used to report the transfer of property and to calculate any taxes owed as a result of the transfer.
Who is required to file Form 926?
Any US person or entity that transfers property to a foreign corporation must file Form 926 if the transfer meets certain criteria set by the IRS.
- This includes individuals, trusts, estates, partnerships, and corporations based in the US The requirement to file is triggered if:
- The US person owns at least 10% of the foreign corporation immediately after the transfer, or
The value of the property transferred exceeds $100,000 at any time during the tax year.
What information do I need to include on Form 926?
When filing Form 926, you’ll need to provide detailed information about both the transferor and the transferee, as well as the transferred property, including:
- The name, address, and EIN (if applicable) of the US transferor.
- Detailed information about the foreign corporation receiving the property, including its name, address, and country of incorporation.
- A complete description of the transferred property, including its fair market value and the method used to determine this value.
- The date of the transfer and the percentage of stock or securities of the foreign corporation owned by the US person after the transfer.
Additionally, you may need to disclose any monetary or non-monetary exchange involved in the transfer, such as cash payments or the assumption of liabilities by the foreign corporation.
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What are the filing requirements for Form 926?
Transfers of Cash
When a US person transfers cash to a foreign corporation, the need to file Form 926 is determined by the amount transferred and the ownership stake in the foreign corporation post-transfer.
If the transfer exceeds $100,000 during the tax year or if the transfer results in the US person owning 10% or more of the foreign corporation, Form 926 must be filed. This requirement ensures that substantial transfers are reported to the IRS, allowing for proper oversight and taxation.
Transfers of Stock or Securities
Similar rules apply to the transfer of stock or securities to a foreign corporation. The factors triggering the filing requirement include the value of the transferred stock or securities and the resulting ownership percentage.
If these transfers meet or exceed the thresholds mentioned earlier, the US person must report the transaction using Form 926. This includes detailing the type and value of the securities transferred, the date of transfer, and the ownership stake in the foreign corporation after the transfer.
Distributions by Domestic Liquidating Corporations
Distributions by domestic liquidating corporations to foreign corporations also fall under the purview of Form 926. When a domestic corporation in the process of liquidation distributes its assets to a foreign corporation, this transaction must be reported if the US person has significant ownership or if the value of the distributed assets meets the reporting criteria.
When is Form 926 Filed?
Form 926 must be filed by a US person or entity that transfers property to a foreign corporation during the tax year if the transfer meets certain criteria. The form is due at the same time as the transferor’s income tax return, including tax extensions, for the year in which the transfer occurred.
This means if you’re transferring property in 2023, and your tax return is due in April 2024, Form 926 should be filed alongside your 2023 tax return by April 2024, or by the extended due date if an extension is filed.
Who doesn’t have to file Form 926?
Not all transfers to foreign corporations require the filing of Form 926. There are exceptions based on the nature of the property transferred and the relationship between the transferor and the transferee.
For instance, transfers of property that are considered normal business transactions, where the total value does not exceed $100,000 during the tax year, may not necessitate filing Form 926.
Additionally, if the US person does not directly or indirectly own at least 10% of the foreign corporation following the transfer, they may be exempt from filing.
However, it’s important to note that the rules are nuanced, and consulting the latest IRS guidelines or a tax professional is advisable to determine specific exemptions.
What if the property transferred has changed in value since the transfer?
If the property transferred to a foreign corporation has changed in value since the transfer, it’s the initial value at the time of transfer that matters for Form 926 reporting purposes.
The IRS is interested in the fair market value (FMV) of the property at the time of the transfer, as this value is crucial for determining the tax implications of the transfer. If the value changes after the transfer, it does not affect the reporting requirement on Form 926, but may have implications for future transactions or valuations of the foreign corporation’s assets.
Are there any penalties for failure to file Form 926?
If you fail to file Form 926 without reasonable cause, you may be subject to a penalty. Additionally, failure to file can open the door to further scrutiny of your tax returns and potentially extend the statute of limitations for the IRS to audit the tax year in question.
Here’s a detailed look at the penalties associated with failing to file Form 926:
- Base Penalty: The IRS imposes a penalty of 10% of the fair market value (FMV) of the property transferred to the foreign corporation at the time of the transfer.
- Penalty Cap: The penalty for not filing Form 926 is capped at $100,000 unless the failure to file is found to be due to intentional disregard of the filing requirements. In cases of intentional disregard, there is no cap on the penalty, which means the financial consequences can be significantly higher.
- Intentional Disregard: If the IRS determines that the failure to file was due to intentional disregard of the filing requirements, the penalties can escalate beyond the $100,000 cap.
- Increased IRS Scrutiny: Failing to file Form 926 not only results in financial penalties but also flags your account for increased scrutiny by the IRS. This can lead to more comprehensive audits of your tax returns.
- Extended Statute of Limitations: Typically, the IRS has a three-year statute of limitations to audit a tax return. However, failure to file Form 926 can extend this period, giving the IRS more time to investigate and potentially challenge your tax filings.
- Additional Consequences: Beyond the penalties for not filing Form 926, taxpayers may face other repercussions, such as penalties for underpayment of tax if the failure to report results in an underpayment of tax due. Interest on unpaid taxes and penalties starts accruing from the due date of the tax return, increasing the total amount owed over time.
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