IRS Form 8858 with Examples: Foreign Disregarded Entities

IRS Form 8858 Beginner’s Filing Tax Guide with Examples

Form 8858 for Disregarded Entities (What You Should Know)

The Internal Revenue Service has developed several different international information reporting forms that U.S. Taxpayers may have to file to report their foreign assets, accounts, investments, entities, and trusts. One of the less common but equally important foreign tax forms involves U.S. persons who have ownership of Foreign Disregarded Entities (FDE) and Foreign Branches (FB). In a common scenario, a U.S. person may move overseas and form an LLC or similar type of entity in that foreign country — and the foreign entity may be disregarded for tax purposes. As a result, the Taxpayer may be able to avoid having to file Form 5471 but may still have to file Form 8858  (and even some attachments to Form 5471). Let’s look at seven important facts about IRS Form 8858 as it impacts individuals with FDEs.

*Golding & Golding previously published The (New) Form 8858 Reporting Requirements Explained article back in 2020 and has since updated and expanded the summary.

Who is a U.S. Person for Form 8858 Purposes?

In general, when it comes to individuals a U.S. person consists of either a U.S. Citizen, a Lawful Permanent Resident, or a foreign national who meets the Substantial Presence Test.

• • • Example 1: Jennifer is a U.S. Citizen who lives and works overseas and decides to form her own foreign company to operate as a cryptocurrency consultant. The company is considered a disregarded in the foreign country as it only has a single-member.

    • Example 2: Michael is a U.S. Lawful Permanent Resident who lives and works overseas (but does not live in a treaty country). Michael decides to form his own foreign disregarded entity to start his own pet-sitting business.

What is an FDE (Foreign Disregarded Entity)?

A Foreign Disregarded Entity is an entity that is not created or organized in the United States — and that operates as an entity that is ‘disregarded.’ A good way to conceptualize a foreign disregarded entity is that it is the foreign country equivalent of forming a single-member LLC (SMLLC) in the United States, only the LLC is being formed outside of the United States and not under U.S. law.

• • • Example 1: Jennifer forms a DRE in Mexico to run her consulting business and she is the only person who owns the company. In Mexico it will be treated as a disregarded entity and this will require Jennifer to file a Form 8858 for U.S. tax purposes.

    • Example 2: Michael is living in Canada and forms a ULC under Canadian tax law. This type of entity is also considered disregarded so that Michael is operating a foreign disregarded entity and similar to Jennifer will also have to file an IRS Form 8858.

What is Form 8832?

The Form 8832 is an IRS ‘Entity Classification’ tax form. Some Taxpayers will have to file Form 8832 to make an entity election for either a domestic or foreign entity. If it is not the first year that the entity was formed, then the Taxpayer may qualify to make a late election, but it is not always. There are various default rules to consider when making an entity classification as well. The foreign entity default rules are as follows:

• Foreign default rule.

  • • • Unless an election is made on Form 8832, a foreign eligible entity is:

        • A partnership if it has two or more members and at least one member does not have limited liability.

        • An association taxable as a corporation if all members have limited liability.

        • Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.

Per Se Corporation Rule

Even when a Taxpayer wants to file a Form 8832 to disregard the entity, it is important to note that the U.S. government has determined that certain types of foreign entities are not eligible to be disregarded for tax purposes. In other words, even if the U.S. person wants to disregard the entity, they do not have the right to do so because it is a per se corporation. Two common types of per se corporations are the Canadian corporation and a Sociedad Anonima — the latter which is common in several countries such as Chile, Panama, and Peru.

• • • Example 1: Peter is a U.S. Citizen who forms a Canadian corporation. Peter wants to disregard the entity in the United States but because it is a Canadian corporation it is considered a per se corporation and cannot be disregarded for U.S. tax purposes.

    • Example 2: Arthur is a U.S. Citizen who moves overseas and creates a Sociedad Anonima to manage his foreign estate. Since is a per se corporation, it also cannot be disregarded for U.S. tax purposes.

When is Form 8858 Due?

Form 8858 is due to be filed annually each year that a us person files their U.S. tax return. Therefore, depending on which date the tax return is due and whether the Taxpayer qualifies as a foreign resident and/or files for an extension will determine when Form 8858 is required. It is important to note that a Taxpayer does not have to file a separate extension on Form 7004 to apply for an extension to file IRS Form 8858.

What Category of Filer is the Taxpayer?

Similar to Form 5471 and Form 8865, there are various categories of filers when it comes to filing Form 8858. Depending on which category of filer the Taxpayer qualifies for will determine which specific schedules they have to file — and how detailed the filing will be.

Civil and Criminal Penalties 

If Form 8855 is not filed timely, the IRS may issue fines and penalties against the Taxpayer. Not all Taxpayers will be penalized and some Taxpayers may be able to avoid or abate penalties depending on whether they can show non-willfulness and/or prove reasonable cause.

As provided by the IRS:

• “Failure to file information required by section 6038(a) (Form 8858 and Schedule M (Form 8858)).

  • • • A $10,000 penalty is imposed for each annual accounting period of each CFC or CFP for failure to furnish the required information within the time prescribed.

      • If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per CFC or CFP) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.

      • Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901 and 960.

      • If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c)(2) for limits on the amount of this penalty.

      • Criminal penalties. Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by section 6038.”

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.