Form 926 Beginner’s Guide: Common Questions & Answers

Form 926: IRS Transfer of Property to a Foreign Corporation

A Form 926 Beginner’s Guide 

There are many different international information reporting forms that a U.S. Taxpayer may have to file each year to report their foreign income, accounts, assets, and transactions. While many taxpayers are familiar with some of the more common forms such as the FBAR and Form 8938, there are some less common forms that taxpayers should also be aware of in case they find themselves in a situation in which they have to file additional IRS foreign tax form in one or several years. One less common but equally important international information reporting form is IRS Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation). Typically, this form is only filed in situations in which a U.S. person (individual or entity) must report the transfer of certain property to a foreign corporation. Let’s take a look at five key things to know about Form 926.

Who Must File and Purpose of Form Use Form 926

The purpose of Form 926 is to report certain transfers to foreign corporations. The idea is the IRS wants to track any asset or money transfers from the United States to a foreign corporation to avoid a further increase in the tax gap. Not all transactions are reportable, so it’s important to determine whether or not the transfer is reportable or if an exception applies.

• • • “Who Must File

      • Generally, a U.S. citizen or resident, a domestic corporation, or a domestic estate or trust must complete and file Form 926 to report certain transfers of property to a foreign corporation that are described in section 6038B(a)(1) (A), 367(d), or 367(e). See section 6038B and Regulations sections 1.6038B-1 and 1.6038B-1T for more information.”

Section 6038B and Form 926

Section 6038B is used to describe some of the types of transfers that are reportable. Generally, this will include transfers in accordance with the liquidation of subsidiaries, transfers to corporations controlled by the transferor; reorganizations; distribution of stock and securities of a controlled corporation,  and certain nonrecognition gain or loss transactions. But, not all transactions are reportable.

Are Cash Transactions Subject to 926 Reporting?

The most common type of transfer to a foreign company is typically going to be a cash transfer. Whether the taxpayer who makes the transfer must file a Form 926 would depend on what happens after the transfer. If immediately after the transfer, the transfer directly or indirectly holds at least 10% of the voting power or total value of the corporation or it’s more than $100,000, then the form is required.

Technical Exceptions to Form 926

Whether or not the taxpayer qualifies for an exception would depend on the specific code section that ignited the requirement to file Form 926 in the first place. It is important that taxpayers carefully review the specific code section and exceptions to determine whether or not they may be able to circumvent the filing requirement

Penalties are Rough 

If a taxpayer fails to properly file a form, they may become subject to fines and penalties. There are multiple penalties at the taxpayer can get hit with:

• • • “Penalties for Failure To File If a taxpayer fails to comply with section 6038B, the penalty equals 10% of the fair market value of the property at the time of the transfer. The penalty will not apply if the failure to comply is due to reasonable cause and not to willful neglect. The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided.

    • Section 6662(j) Penalty A 40% penalty may be imposed on any underpayment resulting from an undisclosed foreign financial asset understatement. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment.”

Late Filing Penalties May Be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist Taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs. Prior Year Non-Compliance

Once a Taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, Taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for Taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

*This resource may help Taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.