If you’re involved with certain foreign partnerships, you may need to file Form 8865. This guide provides an overview of Form 8865, including what it is, when it’s required, and who’s responsible for completing and filing it with the IRS. It’s one of the more complicated tax filing obligations, so it’s often a good idea to consult with a tax professional if you have one or more international tax obligations.
If you’re unsure what to do or how to do it, don’t hesitate to contact Wiggam Law.
Key Takeaways
- IRS Form 8865 – informational tax return that U.S. persons must file if they have a sufficient ownership or financial interest in a foreign partnership.
- Filing requirements – depend on the type and extent of the interest the U.S. person has in the foreign partnership.
- Filing exceptions – for certain trusts, constructive owners, and situations where there may be multiple 8865 filers.
- Not filing Form 8865 – may result in financial penalties and criminal charges.
- Talk to a tax professional for help with the preparation and filing of this tax form.
What Is IRS Form 8865?
Form 8865 is similar to IRS Form 1065, U.S. Return of Partnership Income, which reports credits, deductions, losses, and profits from partnerships. However, with Form 8865, taxpayers report the financial information of foreign partnerships instead of domestic partnerships.
Conceptually, Form 8865 reporting is similar to FinCEN Form 114 (the form needed to meet FBAR filing requirements) in that it’s an attempt to force individuals and organizations under United States jurisdiction to disclose their international financial interests. The goal is to make it harder for these tax-paying entities to commit financial crimes, such as tax evasion or money laundering.
When Is the 8865 Form Required by the IRS?
If you’re a “U.S. person” with a sufficient connection to a “foreign partnership,” then you likely have to prepare and file Form 8865 with the IRS. The type of connection you have determines the type of information you need to provide and whether a reporting exception applies. Here’s what you need to consider:
What Is a U.S. Person for IRS Form 8865 Purposes?
The Internal Revenue Code defines a U.S. person as:
- A citizen or resident of the United States;
- A domestic partnership;
- A domestic corporation; or
- Any non-foreign trust or estate.
What Qualifies as a Foreign Partnership?
A foreign partnership is a partnership that’s been created under the laws of an international jurisdiction. If the partnership was formed under U.S. law (state or federal), then it’s not a foreign partnership.
What Type of Connection Must a U.S. Person Have to a Foreign Partnership?
You may need to file this form if you
- have a certain level of control in the foreign partnership;
- transfer property to a foreign partnership;
- acquire an interest in a foreign partnership;
- dispose of a portion of their interest in the foreign partnership; and/or
- have a substantial change in your interest in a foreign partnership.
One thing of note concerning foreign partnership interests is that the IRS recognizes something called “constructive ownership.” This means if a U.S. person has an interest in the foreign partnership, the IRS will consider that U.S. person’s owners, partners, or beneficiaries to also have an interest in the foreign partnership. Therefore, if your spouse has an interest in a foreign partnership, the IRS will likely consider you to have an interest in the partnership as well.
Once you determine you’re required to file IRS Form 8865, you need to decide which category of filer you are.
Form 8865 Filing Categories
If you’re required to file, you could fall into one or more of the following four categories:
- Category 1 Filer: U.S. person who had more than a 50% ownership interest in the foreign partnership during any part of the tax year.
- Category 2 Filer: U.S. person who had at least a 10% ownership interest in the foreign partnership during any part of the tax year while that partnership was controlled by U.S persons who each had at least a 10% ownership interest in the partnership.
- Category 3 Filer: U.S. person who transferred property to the foreign partnership during the tax year in return for an interest in that partnership. This transfer must result in at least a 10% interest in the foreign partnership, or the value of the property transferred must exceed $100,000 within a 12-month period from the date of transfer.
- Category 4 Filer: U.S. person who had one of the following three reportable “10% events” occur during the tax year: an acquisition that resulted in a 10% or greater interest in the partnership, a 10% disposition of partnership interest (this includes decreasing the interest by 10% or going from a greater than 10% interest to a less than 10% interest), or the interest in the partnership increased or decreased by at least an equivalent of a 10% interest.
The type of filing category determines which tax schedules you’ll need to file. If you qualify for multiple categories, you’ll need to submit the schedules for both Categories.
Form 8865 Schedule Filing Requirements
The following table summarizes what Schedules are needed based on a taxpayer’s Form 8865 Category filing status:
| Filing Requirement | Required for Category 1 Filers? | Required for Category 2 Filers? | Required for Category 3 Filers? | Required for Category 4 Filers? |
| Identifying Information from Page 1 of Form 8865 | Yes | Yes | Yes | Yes |
| Schedule A—Constructive Ownership of Partnership Interest | Yes | Yes | Yes | Yes |
| Schedule A-1—Certain Partners of Foreign Partnership | Yes | No | Yes | No |
| Schedule A-3—Affiliation Schedule | Yes | Yes | Yes | Yes |
| Schedule B—Income Statement—Trade or Business Income | Yes | No | No | No |
| Schedule G (Form 8865)—Statement of Application of the Gain Deferral Method Under Section 721 | Yes | No | Yes | Yes |
| Schedule H (Form 8865)—Acceleration Events and Exceptions Reporting Relating to Gain Deferral Method Under Section 721(c) | Yes | No | Yes | Yes |
| Schedule K—Partners’ Distributive Share Items | Yes | No | No | No |
| Schedule K-1 (Form 8865)—Partner’s Share of Income, Deductions, Credits, etc. (direct partners only) | Yes | Yes | No | No |
| Schedule K-2 (Form 8865)—Partners’ Distributive Share Items—International | Yes | No | No | No |
| Schedule K-3 (Form 8865)—Partner’s Share of Income, Deductions, Credits, etc.—International | Yes | Yes | No | No |
| Schedule L—Balance Sheets per Books | Yes | No | No | No |
| Schedule M-1—Reconciliation of Income (Loss) per Books With Income (Loss) per Return | Yes | No | No | No |
| Schedule M-2—Analysis of Partners’ Capital Accounts | Yes | No | No | No |
| Schedule N—Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities | Yes | Yes | No | No |
| Schedule D—Schedule D (Form 1065), Capital Gains and Losses | Yes | No | No | No |
| Schedule O (Form 8865)—Transfer of Property to a Foreign Partnership | No | No | Yes | |
| Schedule P (Form 8865)—Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership | No | No | No | Yes |
Filing Form 8865 With the IRS
As far as IRS forms go, this is one of the more complicated ones to complete. So while you’re allowed to prepare and file this form on your own, you should strongly consider seeking professional help.
Where and When to File the 8865 Form
The filing deadline for Form 8865 is the same as your regular income tax return (or partnership or exempt organization return, if applicable). Therefore, you’ll typically file Form 8865 with your income tax return. If you aren’t required to file an income tax return, you’ll just file Form 8865 when you would normally file an income tax return.
Filing Failure Penalties
The severity of penalties depends on what type of filer you are.
Failing to file if you’re in Category 1 or 2 may lead to:
- A $10,000 penalty for each tax year of each foreign partnership. If the information isn’t filed within 90 days after the IRS sends a non-filing notice, an additional $10,000 for each partnership gets added for every 30 days the return is late, with a maximum penalty of $50,000.
- A 10% reduction of foreign tax credits, with an additional 5% loss every three months if the return and accompanying information aren’t filed.
- Criminal penalties under Sections 7203, 7206, and 7207 of the Internal Revenue Code if the return is never filed or if you provide false information when filing.
If you’re a Category 3 filer, potential penalties include:
- A monetary penalty equal to 10% of the property’s fair market value at the time of transfer to the foreign partnership, up to a maximum of $100,000. This cap is removed if the failure was the result of intentional disregard.
- If the transfer results in a gain in the contributed property’s value, that gain must be recognized and treated as if the contributed property had been sold for its increased value. This penalty may not be imposed if the reasonable cause exception applies.
If you’re a Category 4 filer, potential penalties include:
- A $10,000 penalty. If the information isn’t filed within 90 days after the IRS sends a non-filing notice, an additional $10,000 gets added for every 30 days the return is late, with a maximum penalty of $50,000.
- Criminal penalties under Section 7203, unless a reasonable cause exception applies.
Form 8865 Filing Exceptions
There are four main Form 8865 filing exceptions.
Multiple Category 1 Filers
If more than one U.S. person qualifies as a Category 1 filer for a foreign partnership in a given tax year, then only one of these persons must file IRS Form 8865. The other U.S. persons that don’t have to file Form 8865 must instead attach a special statement to their income tax return. This statement should be titled “Controlled Foreign Partnership Reporting” and contain a declaration that you’re a Category 1 filer but don’t need to file, and information about how the filing requirement was met (for instance, the name and address of the person who filed).
Constructive Ownership
A Category 1 or 2 filer that has a constructive interest in the foreign partnership may still be exempt from 8865 filing requirements if any of the following conditions apply:
- The U.S. person that the constructive owner is connected to files Form 8865.
- The U.S. person that the constructive owner is connected to is also a constructive owner who is eligible for the constructive ownership exception.
- Another Category 1 filer has filed Form 8865 for the foreign partnership under the multiple Category 1 filing exception.
To claim the constructive ownership exception, you must include a statement with your income tax return titled “Controlled Foreign Partnership Reporting,” which contains a declaration of the exemption and details about the constructive owner and the partnership.
Affiliated Group Consolidated Return
A common parent corporation may file one Form 8865 on behalf of all members of an affiliated group of corporations filing a consolidated tax return. The Form 8865 filed by the common parent corporation must include all the information that would have been included if each affiliated group member filed their own Form 8865, unless they also qualify under the constructive owners exception.
Trusts
State and local government employee retirement plan trusts don’t have to file Form 8865.
Form 1065 Partial Exception
If the foreign partnership files Form 1065, then Category 1 and 2 filers may use a copy of the schedules from the completed Form 1065 in place of the equivalent schedules of Form 8865.
IRS Form 8865 FAQs
What triggers the IRS Form 8865 filing requirement?
Broadly speaking, you’ll need to file Form 8865 if you’re a U.S. citizen, resident, or business entity and have a financial or legal interest in a foreign partnership.
Are there Form 8865 filing exemptions?
Yes, and they can be quite complex. They often apply if you’re connected to another required 8865 filer, or you’re a state or local government retirement plan.
What happens if I don’t file Form 8865?
Assuming you were required to file this form, you could face hefty monetary penalties in the tens of thousands of dollars, as well as criminal charges.
What kind of information gets reported on Form 8865?
The information required depends on what type of Category filer you are. At a minimum, you must provide your identifying information and your relationship with the foreign partnership. You may also need to provide information about business income, deductions, Alternative Minimum Tax, and balance sheets.
Am I required to hire a tax professional to file Form 8865?
No, but given its complexity and the intricacy in figuring out if (and what) you have to file and the consequences for not filing properly, it’s highly advisable to do so.
Get Help With Foreign Partnerships Today
To learn more, you can contact Wiggam Law by calling (404) 233-9800 or using our online contact form. We can help you with all of your international and domestic tax concerns.
Sources
https://www.irs.gov/forms-pubs/about-form-8865
