What is Form 8865?
Who must file the IRS Form 8865?
What are the essential elements you should know!
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Let me explain to you what is Form 8865 and how it works in simple terms!
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What Is Form 8865
Form 8865 is a form used by the Department of the Treasury and Internal Revenue Service called “Return of U.S. Persons With Respect to Certain Foreign Partnerships”.
If you have purchased an interest in a foreign partnership or have inherited an interest in a foreign partnership, you may have to file Form 8865 to report your ownership interest to the IRS.
In essence, any U.S. person who has an interest in a partnership organized or formed outside of the United States or on the basis of foreign law must file Form 8865.
The IRS requires US persons to file the IRS Form 8865 so they can track who is a partner in foreign partnerships in the same way they track who is a partner in a US partnership using Form 1065.
Form 8865 Categories of Filers
There are four types of filers under Form 8865.
Category 1 filer is a US person who controls a foreign partnership at any time during the partnership’s tax year where control means having more than 50% interest in the partnership.
Category 2 filer is a US person who owns a 10% or greater interest in the partnership at any time during the foreign partnership’s tax year while the partnership was controlled by US persons.
Category 3 filer is a US person who has contributed property to the partnership during the partnership’s tax year and received ownership interest in return directly or constructively of at least 10% or has made a contribution of $100,000 or more.
Category 4 filer is a US person with a reportable event under Section 6046A during the calendar year relating to an acquisition, disposition, or change in proportional interest.
How Form 8865 Works
Let me explain to you how Form 8865 works.
Keep in mind that this article is intended to give you general information.
If you have questions or need to better understand the 8865 filing requirements, you should consult with a tax attorney or professional.
Who Must File IRS form 8865
If you own interest in a foreign partnership created, formed, or organized outside of the United States or under a law other than the laws of the United States, you must file an 8865 Form.
In essence, any U.S. person qualifying under any of the categories outlined in Form 8865 (Categories of Filers) will be required to file the form.
Determine Your Form 8865 Category of Filers
Once you’ve identified that you must file the tax form 8865, you will need to determine in what category of U.S. persons you will fall (you can also fall into several categories simultaneously).
The different categories are as follows:
- Category 1: U.S. persons who own more than 50% interest in a foreign partnership
- Category 2: If you are a contributing party to a foreign partnership if you contributed at least $100,000 to the foreign partnership or that, through your contribution, you own at least 10% of the foreign partnership
- Category 3: U.S. persons with at least 10% interest in a foreign partnership and the partnership is owned in majority by U.S. persons
- Category 4: U.S. persons who have an interest of at least 10% in the foreign partnership
Determine Applicable Form 8865 Schedules
Depending on the category that applies to you, you will then need to attach a different schedule to your 8865 Form.
The different Form 8865 schedules that you have are:
- Schedule A: Constructive Ownership of Partnership Interest
- Schedule A-1: Certain Partners of Foreign Partnership
- Schedule A-3: Affiliation Schedule
- Schedule B: Income Statement—Trade or Business Income
- Schedule D: Schedule D (Form 1065), Capital Gains and Losses
- Schedule G: Statement of Application of the Gain Deferral Method Under Section 721
- Schedule H: Acceleration Events and Exceptions Reporting Relating to Gain Deferral Method Under Section 721(c)
- Schedule K: Partners’ Distributive Share Items
- Schedule K-2: Partners’ Distributive Share Items—International
- Schedule K-3: Partner’s Share of Income, Deductions, Credits, etc.—International
- Schedule L: Balance Sheets per Books
- Schedule M: Balance Sheets for Interest Allocation
- Schedule M-1: Reconciliation of Income (Loss) per Books With Income (Loss) per Return
- Schedule M-2: Analysis of Partners’ Capital Accounts
- Schedule N: Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities
- Schedule K-1: Partner’s Share of Income, Deductions, Credits, etc. (direct partners only)
- Schedule O: Transfer of Property to a Foreign Partnership
- Schedule P: Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership
Form 8865 Filing Requirements
Once you’ve determined your category, you will then be able to use the below table to determine which schedule you must file.
Exception to Filing
There are a few exceptions relating to the filing of Form 8865.
If there are multiple category 1 filers filing a joint income tax return will not need to file a separate Form 8865 although they will need to file their schedules and statements separately.
Category 1 and 2 filers without direct ownership interest in the partnership are required to file due to constructive ownership but are exempt when:
- They file a Controlled Foreign Partnership Reporting statement
- The US person through whom they own constructive ownership is herself a constructive owner or the form is filed by another Category 1 filer under a Multiple Category 1 filer exception
Trusts relating to governmental retirement plans.
Category 1 and 2 filers who have filed a Form 1065 can use their equivalent schedules applicable to Form 8865.
Form 8865 Frequently Asked Questions
Let’s look at a few common questions we get relating to Form 8865.
Who must file Form 8865
A partnership that is formed outside the United States and is controlled by US partners will be required to file the tax form 8865.
Also, any US person who is a partner in a foreign partnership formed in another country will be required to file Form 8865.
A controlled foreign corporation that elects to be taxed as a disregarded entity will also need to file this form.
What information is required on Form 8865
Form 8865 requires that the partnership or partner provide the following information:
- Statement of net profits
- Details on any capital gains
- K-1 form for the partners
- Balance sheet
- Reconciliation of the partners’ capital accounts
- Information about transactions between controlled foreign partnerships, its partners, and related entities
When is Form 8865 due
The due date to file Form 8865 corresponds to each partner’s due date for their personal income tax returns.
For most taxpayers, the due date will be April 15 of the year.
If your income tax report filing deadline is extended, the deadline to file your Form 8865 will also be extended.
Where should Form 8865 be sent to
Since you will need to file Form 8865 with the IRS along with the partner’s personal income tax return, you’ll need to submit it to your IRS Center where the partner normally files his or her income tax report.
Why should I comply with the 8865 Form
It’s important to comply with the IRS requirements of filing your Form 8865 to avoid strict fines and penalties.
In fact, you may be subject to a $10,000 penalty per year for each partnership return that is not filed.
Also, a 10% partner that makes a contribution of property to a foreign partnership without disclosing the transfer to the IRS will be subject to a penalty representing 10% of the amount transferred to the partnership capped at $100,000.
What are the Categories of Filers
There are four categories of filers according to Form 8865.
If you are a US person with more than 50% of a controlled foreign partnership, you are a Category 1 filer (Controllers).
If you are a US person with at least 10% of a controlled foreign partnership, you are a Category 2 filer (Shareholders of US-controlled foreign partnership).
If you are a US person contributing at least $100,000 to a controlled foreign partnership or you at least 10% after your contribution, you are a Category 3 filer (Contributors).
If you are a US person with a reportable transaction under IRC Section 6046A during the calendar year, you are a Category 4 filer (Acquisitions, dispositions, and changes in proportional interest).
Where Can I Get The Form 8865 Instructions
To get the detailed instructions on how to file Form 8865, you can consult the Instructions for Form 8865 published by the IRS on its website.
IRS Form 8865 Takeaways
So, what is Form 8865?
How does it work?
In essence, Form 8865 is filed by U.S. persons to report information relating to their controlled foreign partnerships (Section 6038), any transfers they make to the foreign partnership (Section 6038B), and any acquisition, disposition, and changes in the foreign partnership interests (Section 6046A).
The IRS establishes four categories of US persons who must file Form 8865 along with their income tax returns.
If you need help and advice on how to complete your IRS form 8865, you should consult with a tax expert, attorney, or qualified individual to guide you.
According to the IRS, it may take approximately 57 hours to complete this form without taking into account the reading of the requirements and guides.
So be sure to start preparing for your filing early to avoid running out of time.
Let’s look at a summary of our findings.
Understanding Form 8865
If you enjoyed this article on Form 8865, I recommend you look into the following legal terms and concepts. Enjoy!
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