The Penalties for IRS Form 8865, Avoiding Form 8865 Fines

The Penalties for IRS Form 8865, Avoiding Form 8865 Fines

The Penalties for IRS Form 8865 

Form 8865 is one of the more common types of international information reporting forms that some U.S. Taxpayers have to file each year with the IRS. Form 8865 is used by U.S. Taxpayers to report certain foreign partnerships between a U.S. person and a foreign person. It could be a joint venture type of opportunity between two investors, a family partnership, or any other type of partnership that involves a U.S. person and a foreign person. Form 8865 is similar to form 5471 and typically not as complicated, but it does come with its own set of complexities — especially in a situation in which it is a controlled partnership with multiple reportable transactions. If a Taxpayer does not timely file a form 8865, they may become subject to fines and penalties — although, these penalties may be minimized, avoided, or abated by making a proactive representation to them through an offshore disclosure or reasonable cost submission. Let’s take a brief look at what the penalties are for failing to file form 8865 and what taxpayers can do to resolve or avoid the issue.

Penalties Failure to timely submit all information required of Category 1 and 2 filers

• • • A $10,000 penalty is imposed for each tax year of each foreign partnership for failure to furnish the required information within the time prescribed. If the information isn’t 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 foreign partnership) 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 furnish 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, 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 (and the underlying regulations) for the maximum reduction, the exception due to reasonable cause, and the limits on the amount of these penalties.

    • Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file or for filing false or fraudulent information. Additionally, any person that files under the constructive owners exception may be subject to these penalties if all the requirements of the exception aren’t met. Any person required to file Form 8865 who doesn’t file under the multiple Category 1 filers exception may be subject to the above penalties if the other person doesn’t file a correctly completed form and schedules. See Exceptions to Filing, earlier.

Failure to file information required of Category 3 filers

• • • Any person that fails to properly report a contribution to a foreign partnership that is required to be reported under section 6038B and the regulations under that section is subject to a penalty equal to 10% of the fair market value (FMV) of the property at the time of the contribution. This penalty is subject to a $100,000 limit, unless the failure is due to intentional disregard. In addition, the transferor must recognize gain on the contribution as if the contributed property had been sold for its FMV. See section 6038B for the exception due to reasonable cause. Failure to file information required of Category 4 filers. Any person who fails to properly report all the information requested by section 6046A is subject to a $10,000 penalty, in addition to the section 7203 criminal penalty, unless it is shown that such failure is due to reasonable cause. If the failure continues for more than 90 days after the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. The additional penalty shall not exceed $50,000.

    • Treaty-based return positions. File Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), to report a return position that a treaty of the United States (such as an income tax treaty; an estate and gift tax treaty; or a friendship, commerce, and navigation treaty):

      • Overrides or modifies any provision of the Internal Revenue Code, and

      • Causes (or potentially causes) a reduction of any tax incurred at any time.

        • Failure to make such a report may result in a $1,000 penalty ($10,000 in the case of a C corporation). See section 6712.

Section 6662(j)

• • • Penalties may be imposed for underpayment attributable to undisclosed foreign financial asset understatements. The term “undisclosed foreign financial asset” for any tax year includes any asset for which required information was not provided. An “undisclosed foreign financial asset understatement” means for any tax year, the portion of the understatement for that tax year which is attributable to any transaction involving an undisclosed foreign financial asset. No penalty will be imposed for any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause for such portion of the underpayment and the taxpayer acted in good faith for such portion of the underpayment. See sections 6662(j) and 6664(c) for additional information.

Failure to comply with a requirement of the gain deferral method.

• • • Failure to comply with a requirement of the gain deferral method, including a failure to comply with the procedural and reporting requirements imposed under Regulations sections 1.721(c)-3 and 1.721(c)-6 and section 6038B, may result in an acceleration event under Regulations section 1.721(c)-4(b)(2) and a penalty under section 6038B. See the specific instructions for Schedule G and Schedule H, later.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and/or 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.