By Megan L. Brackney
Journal of Passthrough Entities
May - June 2015 Edition
Over the past several years, the IRS has focused on increased enforcement in the international tax arena. As explained by IRS Commissioner John Koskinen, “[t]he IRS has made great strides over the last several years both in finding tax evaders hiding assets overseas and bringing them to justice and in encouraging people to voluntarily disclose their foreign accounts and pay the taxes they owe.” High-profile prosecutions of U.S. taxpayers with foreign bank accounts and the enactment of the Foreign Account and Tax Compliance Act (FACTA) have caused thousands of taxpayers to become compliant through the IRS’s voluntary disclosure programs. The IRS has other tools at its disposal to collect information about the off shore investments of U.S. taxpayers, including the two forms discussed here, Form 8865 and Form 8938, which require U.S. taxpayers to report their interests in, and transactions with, foreign partnerships. Th is column discusses the reporting requirements and the penalties and other consequences of failure to timely file these forms.
Reporting Interest in Foreign Partnerships: Forms 8865 and 8938
Certain U.S. persons must report their interests in foreign partnerships under Code Secs. 6038 , 6038B and/or 6038D. For Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships , there are four categories of filers. The “Category 1 filer” is a U.S. person who controlled the foreign partnership at any time during the partnership’s tax year. “Control” of a partnership is ownership of more than a 50-percent interest in the partnership. A 50-percent interest in the partnership, in turn, is “an interest equal to fifty percent of the capital interest in such partnership, an interest equal to fifty percent of the profits interest in partnership, or an interest to which fifty percent of the deductions or losses of such partnership are allocated.” There may be more than one “Category 1 filer” for a partnership for a particular partnership tax year.