Tax Planning

Form 8858: What You Need to Know Before You File

Concept art of an article about IRS Form 8858: man in suit sitting at a desk filling out paperwork (AI Art)

What is Form 8858

If you’re trying to figure out whether you need to file Form 8858 and how to do it, you’re in the right place.

US citizens and permanent residents who own overseas business interests in the form of Foreign Disregarded Entities (FDEs) or Foreign Branches (FBs) must file this form.

Form 8858 helps the IRS keep track of financial information about these entities. And although it might not affect your taxes directly, getting it right is important to avoid steep fines.

This guide is here to simplify things for you. We’ll walk you through who needs to file, the details you need to include, and how to steer clear of common mistakes. Whether you’re just starting out or double-checking your compliance, our straightforward advice aims to clear up any confusion and make the filing process smoother.

Keep reading to get all the information you need to handle Form 8858 with confidence and avoid unnecessary stress and penalties.

Key Terms

Form 8858: A tax form required by the US government to report information about certain foreign business activities and entities.

US persons: This term includes US individuals and corporations, partnerships, and trusts formed in a US state, along with domestic estates. For individuals, a US person is a US citizen, permanent resident (holder of a green card), or someone who spends a sufficient amount of time in the US as to be taxed as a permanent resident.

Foreign Disregarded Entities (FDEs): Business entities located outside the US that are 100% owned by a US person. For tax purposes, the IRS does not treat FDEs as separate entities. Instead, their financial activities are reported on the owner’s US tax return.

Foreign Branches (FBs): A foreign business operation engaged in by a US person. The existence of an FB is defined by its particular circumstances. For instance, a non-US office used by a US person to carry out non-US business activities would constitute an FB. In most cases, a domestic corporation operates an FB, but an FB can also be attributed to an individual.

FBs are not separate legal entities but are parts of the US person that operate abroad. Their activities must be reported to the IRS on the US person’s tax return.

NOTE: For tax purposes, “US” includes all 50 states, but not US territories including: Puerto Rico, Guam, American Samoa, the Trust Territory of the Pacific Islands, or the U.S. Virgin Islands.

Who Must File Form 8858

US persons must file Form 8858 if they are in any of the following categories:

  1. Tax Owners of FDEs or FBs: A US person who owns a Foreign Disregarded Entity (FDE) or operates a Foreign Branch (FB) at any time during the tax year. This is a “Category 1 filer.”
  2. Direct or Indirect Owners of FDEs or FBs: A US person that directly (or indirectly through a tier of FDEs) is a tax owner of an FDE or operates an FB. This is a “Category 2 filer.”
  3. Form 5471 Filers for Controlled Foreign Corporations (CFC): A US person that is required to file Form 5471 with respect to a CFC that is a tax owner of an FDE or operates an FB at any time during the CFC’s annual accounting period. This is a “Category 3 filer.” (A CFC is any foreign entity taxed as a foreign corporation in which more than 50% of the shares, by vote or value, are owned by US persons. For purposes of attributing US ownership of the shares, US persons holding less than 10% of them aren’t counted. US shareholders in any foreign entity taxed as a foreign corporation must file Form 5471 annually.)
  4. Form 8865 Filers for Controlled Foreign Partnerships (CFP): A US person that is required to file Form 8865 with respect to a CFP that is a tax owner of an FDE or operates an FB at any time during the CFP’s annual accounting period. This is a “Category 4 filer.” (A CFP is any foreign entity taxed as a foreign partnership in which more than 50% of the partnership interest, by vote or value, are owned by US persons. For purposes of attributing US ownership of the interest, US persons holding less than 10% of them aren’t counted as partners. US partners in any foreign entity taxed as a foreign partnership must file Form 8865 annually.)
  5. Partners in certain partnerships. A US person that is a partner in a partnership that owns an FDE or operates an FB and applies Section 987 of the Internal Revenue Code to the activities of the FDE or FB. This is a “Category 5 filer.” (Section 987 relates to the taxation of FB transactions.)
  6. Certain domestic corporations that are partners in certain US partnerships. A domestic corporation (other than a RIC, a REIT, or an S corporation) that is a partner in a US partnership, which made certain elections on Schedules K-2 and K-3 of Form 1065. This is a “Category 6 filer.”

Note: There are specific exceptions to the filing requirements, including for those in consolidated groups and owners of dormant FDEs. Contact us for further help.

Tax Owners vs. Direct Owners of FDEs and FBs

When it comes to completing Form 8858 for the IRS, it’s important to distinguish between two key types of ownership:

  1. Tax Owner: This is the person or entity recognized as the owner of the assets and liabilities of a Foreign Disregarded Entity (FDE) for tax purposes. As a tax owner, you must include the financial details of the FDE in Form 8858.
  2. Direct Owner: This is the actual legal owner of the FDE. The direct owner may differ from the tax owner in certain situations. For instance, the tax owner and the direct owner of a Category 6 filer are different.

The IRS has established these distinct ownership categories to prevent any possible avoidance of Form 8858 filing requirements.

It’s important to note that being the tax owner requires you to file Form 8858, even if you’re not the direct owner legally.

Grasping the difference between being a tax owner and a direct owner is key to understanding your responsibilities regarding Form 8858 for any FDEs you’re involved with. Ensure you examine your ownership setup thoroughly to maintain compliance.

What Information Needs to be Reported on Form 8858

By filing Form 8858, US persons provide information about the activities, assets, and liabilities of their foreign disregarded entities and foreign branches. This helps the IRS ensure proper reporting of income, deductions, and credits related to these foreign operations.

Schedules Included in IRS Form 8858

IRS Form 8858 includes several schedules which must be completed by all filing categories.

  • Schedule C: Provides the Income Statement of the foreign disregarded entity (FDE) or foreign branch (FB). Schedule C-1 must be completed by Category 5 filers.
  • Schedule F: Reports the Balance Sheet of the FDE or FB.
  • Schedule G: Collects other general information through a series of yes/no questions.
  • Schedule H: Calculates the Current Earnings and Profits of the FDE or FB.
  • Schedule J: Reports Foreign Income Taxes Paid or Accrued by the FDE or FB.

Two other schedules must be completed only by certain FDEs or FBs.

  • Schedule I: Determines the Transfer Loss Amount, if the FDE or FB is owned directly by a domestic corporation or indirectly through a tiered structure.
  • Schedule M: Documents Transactions Between the FDE or FB and the Form 8858 filer or other related entities. This schedule is in a document from Form 8858, although the instructions for it are in the general instructions for the form.

Completing these schedules provides the IRS with comprehensive financial and operational details about the foreign disregarded entities and branches owned by US taxpayers.

Form 8858 Instructions

How to File Form 8858

To properly file IRS Form 8858, follow these steps:

  1. Complete Form 8858: Fill out all the required information on the main Form 8858 itself.
  2. Complete Schedule M: In addition to the main form, you must also complete Schedule M, which is a separate form that provides additional details.
  3. Attach Organization Chart: You must attach an organization chart that shows the structure of the foreign disregarded entity (FDE) or foreign branch (FB).
  4. Gather Required Information: Ensure you include all the specific information and documentation required by the IRS instructions for Form 8858.
  5. File with Tax Return: Attach the completed Form 8858, Schedule M (if required), and organization chart to your federal income tax return (i.e. Form 1120, 1065, 1040), including any extensions, and file them together. (If filing electronically, Form 8858 must be attached electronically. Computer-generated versions of Form 8858 can be filed if they conform to the official form.)

For more detailed guidance on the specific information required and how to properly complete each section, be sure to review the detailed instructions provided by the IRS for Form 8858. You must file this form accurately to avoid potential penalties.

Filing Form 8858 for Dormant Foreign Disregarded Entities (FDEs)

Even if a foreign disregarded entity (FDE) is dormant, meaning it has no activity or operations, US taxpayers who meet the filing requirements must still submit IRS Form 8858.

That said, there is a simplified “summary filing” procedure that can be used for dormant FDEs.

If you choose to use this summary filing option, you will only need to complete certain key information on the form, rather than the full detailed reporting.

That includes:

  • Identifying details about the FDE, like name, address, and taxpayer identification number.
  • Indicating that the FDE was dormant for the entire tax year.
  • Signature and date.

By using the summary filing procedure, you can streamline the reporting requirements for dormant foreign disregarded entities while still meeting your obligations to the IRS.

Just be sure to review the full instructions for Form 8858 provided by the IRS to understand the eligibility criteria and specific details required for the summary filing option.

When is Form 8858 Due

  • Form 8858 needs to be filed annually.
  • Form 8858 is due at the same time as your federal tax return. In most cases, that would be April 15th. You can automatically extend the filing deadline by six months (ordinarily, October 15) by the appropriate extension form. For individuals, this is Form 4868. If you live outside the United States, the deadline can be extended to December 15.

What Are the Penalties for Not Filing Form 8858?

The penalties for failing to file IRS Form 8858 can be quite severe. They range from significant financial penalties to potential criminal charges.

Financial Penalties

  • The base penalty for a CFP or CFC failing to file Form 8858 when required is $10,000 per year, per foreign disregarded entity.
  • If the IRS sends a notice that the form needs to be filed, additional penalties of $10,000 per month can be assessed, up to a maximum of 5 months. The maximum penalty is $50,000 for each failure.
  • There are generally no civil penalties if a US individual fails to file Form 8938.
  • Additionally, if the failure to file Form 8858 results in the loss of foreign tax credit (FTC) benefits, a 10% penalty on the FTC amount can be imposed. This percentage can increase if the form is not filed after the IRS has notified the taxpayer of the requirement.

Criminal Penalties

In certain egregious cases, criminal penalties may also apply for failing to file Form 8858 or other international information returns. This could include fines and even potential jail time. The severe penalties underscore the importance of properly filing IRS Form 8858 when required. Taxpayers with foreign disregarded entities or branches should carefully review their filing obligations to avoid these substantial consequences.

Case Study #1:
Global Tech Innovations LLC

Concept art of a case study about IRS Form 8858: illustration of man in suit in front of world map (AI Art)

Profile: Alex Carter, a US entrepreneur, owns Global Tech Innovations LLC. The company owns an Irish entity taxed as a CFC and a sales branch in Germany.

Scenario: Amidst rapid expansion, Alex missed filing Form 8858 for both the Irish and German operations for two years. The IRS audited and subsequently notified him of the oversight.

Penalties Applied:

  • Initial: $20,000 ($10,000 per year for two entities).
  • Notice: $200,000 ($10,000 per month for five months for two years and two entities).
  • Total: $220,000.

Criminal Penalties: While not yet applicable, continued non-compliance could escalate to criminal charges, particularly if evasion is suspected.

Note: This example is for illustrative purposes only and does not necessarily reflect any current or past client work.

Case Study #2:
EcoSolutions Worldwide

Concept art of a case study about IRS Form 8858: illustration of three businesspeople (AI Art)

  • Profile: Owned by a team of US taxpayers specializing in renewable energy, EcoSolutions Worldwide owns 100% of a Mexican entity taxed as a CFP which manufactures solar panels.
  • Scenario: The company neglected to file Form 8858 for the Mexican CFC. After an IRS notice and a 90-day lapse without response, a review identified a potential loss of foreign tax credits.
    • Penalties Applied: Initial: $10,000.
    • Post-Notice: $10,000 (for not filing within 90 days post-notice).
    • FTC Penalty: $5,000 (10% of a $50,000 FTC claim).
    • Total: $25,000.
  • Criminal Penalties: Ignoring IRS notices increases the risk of criminal prosecution.
  • Illustrative Note: This example is for illustrative purposes only and does not necessarily reflect any past client work.

Case Study #3:
Artisan Foods Co.

Concept art of a case study about IRS Form 8858: illustration female chef with ingredients and kitchen tools in background (AI Art)

  • Profile: Sophia Liu, a US taxpayer passionate about global cuisines, runs Artisan Foods Co. The company owns an Italian entity taxed as a CFC which operates a production facility in that country.
  • Scenario: Sophia was unaware of the filing requirement for Form 8858 and missed submissions for three years. An IRS notice went unnoticed due to her busy schedule.
    • Penalties Applied: Initial: $30,000 (for three years of non-compliance).
    • Post-Notice: $150,000 ($10,000 per month for 5 months for three years, post-notice).
    • Total: $180,000.
  • Criminal Penalties: Continued disregard for IRS notices could lead to criminal investigations.
  • Illustrative Note: This example is for illustrative purposes only and does not necessarily reflect any past client work.

Form 8858 is a remarkably complex tax form. It is recommended that you consult a qualified tax professional rather than trying to do it on your own.

What to Do If You Need to File IRS Form 8858 But Haven’t

If you have failed to file IRS Form 8858 in the past when you were required to do so, don’t panic. There are options available to help you get caught up.

  • Delinquent International Return Submission Procedures. US persons who have identified the need to file delinquent Form 8858s and who are not under a civil examination or a criminal investigation by the IRS and have not already been contacted by the IRS about the delinquent returns should file those returns through normal filing procedures. If the tax return for the year(s) in question has already been filed, you will need to file an amended return which includes the delinquent Form 8858. Penalties may apply, but you may attach a reasonable cause statement to each delinquent Form 8858 requesting a penalty waiver.
  • Amended Tax Returns: If you are already up to date on your tax filings, simply file an amended return to include the previously omitted Form 8858. Again, you may attach a reasonable cause statement to the delinquent Form 8858 requesting a penalty waiver.

It’s important to note that the statute of limitations for the IRS to audit your returns is different for foreign reporting requirements like Form 8858.

  • Normally, the IRS has 3 years to audit your tax returns.
  • However, for international reporting forms like Form 8858, the 3-year statute of limitations does not start until 3 years after you have filed the form when it was required.
  • This means the IRS can potentially audit any past year where Form 8858 was not filed, even if it was decades ago.

Taking proactive steps to address any past failures to file Form 8858 can help you avoid potentially severe penalties and ensure you remain in compliance with IRS regulations. Consulting a tax professional can also provide guidance on the best approach for your specific situation.

Need Help?

International structures can open a world of possibility to US investors when part of a proper wealth protection plan. However, they can come with different reporting and compliance hassles.

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