Foreign Information Returns & The IRS: When Time Limits Never Expire
Generally, the IRS has three years to select an income tax return for audit. But if the taxpayer never files an income tax return, the three-year statute of limitations period doesn't start, providing the agency with unlimited time to make additional tax adjustments. Although many taxpayers are familiar with this rule, few taxpayers recognize that a similar rule applies to unfiled foreign information tax returns.
Because there are numerous foreign information return obligations under federal tax law, it is fairly easy and even common for taxpayers to miss a filing deadline. In these instances, the statute of limitations for the IRS to make adjustments remains open indefinitely until the taxpayer files the information return and for three years thereafter. This extended statute of limitations period applies even if the taxpayer properly and timely filed an income tax return, although the extent of items subject to adjustment depends on whether the taxpayer had reasonable cause for the delinquent foreign information return.
Not all foreign information returns are subject to this extended statute of limitations rule. Specifically, section 6501(c)(8) only identifies eight information returns that extend the audit period, which include: (i) IRS Form 8621; (ii) IRS Form 5471; (iii) IRS Form 8865; (iv) IRS Form 926; (v) IRS Form 8938; (vi) IRS Form 3520 (but only for foreign trust reporting); (vii) IRS Form 3520-A; and (viii) IRS Form 5472. A summary of these foreign information returns follows.
U.S. persons with interests in passive foreign investment companies (PFICs) must generally file an IRS Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. PFICs are foreign corporations that meet either an income test or an asset test. Under the income test, a foreign corporation qualifies as a PFIC if 75% or more of its gross income in a tax year originates from passive income (e.g., interest, dividends, etc.). A foreign corporation can also qualify as a PFIC under the asset test if at least 50% of its assets produce passive income or are held for the production of passive income. Under these tests, many foreign mutual funds qualify as PFICs.
U.S. persons with ownership or other interests in a foreign corporation must often file an IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The reporting requirements for an IRS Form 5471 are some of the more complex foreign information reporting obligations under the Code as U.S. persons must determine whether they fall under one or more reporting categories (each of which requires the disclosure of certain information).
A common IRS Form 5471 reporting obligation arises when a U.S. person has 'control' over a foreign corporation—i.e., more than 50% of the vote or value of the corporation's stock. A lesser-known reporting category relates to U.S. persons who are officers or directors of a foreign corporation when a U.S. person acquires 10% or more of the corporation's stock in a tax year.
For more information on IRS Form 5471, see here.
There is also a foreign information return requirement for U.S. persons who have ownership or other interests in foreign partnerships. Similar to the IRS Form 5471 reporting requirements, the IRS Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, must be filed if a U.S. person falls within one or more reporting categories. For example, a U.S. person is a category one filer if the person controls the foreign partnership at any time during the partnership's tax year. For these purposes, control means more than 50% of the profits or capital interests of the partnership or 50% of the deductions or losses. In addition, U.S. persons must file an IRS Form 8865 if they make certain contributions to foreign partnerships in a tax year, provided the person has at least a 10% interest in the partnership and meets a specified dollar threshold.
U.S. persons who make certain contributions to foreign corporations or who enter into reorganization transactions with a foreign corporation party must file IRS Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.
For more information on IRS Form 926, see here.
U.S. persons with interests in 'specified foreign financial assets' must usually file an IRS Form 8938, Statement of Specified Foreign Financial Assets. Generally, a 'specified foreign financial asset' includes: (i) foreign financial accounts (e.g., banking or investment accounts); (ii) ownership in foreign entities (e.g., partnerships and corporations); (iii) debt issued by foreign persons; and (iv) interests in foreign trusts and estates.
For more information on IRS Form 8938, see here.
U.S. persons who make contributions to or receive distributions from a foreign trust must report these transactions on IRS Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. In addition, U.S. persons who are treated as grantors or deemed owners of foreign trusts must file an IRS Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner.
For more information on IRS Form 3520, see here
For more information on IRS Form 3520-A, see here.
Certain corporations (domestic and foreign) and certain foreign-owned U.S. disregarded entities must file an IRS Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. For example, a U.S. corporation with at least one foreign person who owns 25% or more of the corporation's vote or value must file an IRS Form 5472.
For more information on IRS Form 5472, see here.
Taxpayers who fail to timely file any one or more of these foreign information returns are subject to extended statute of limitations periods. Worse yet, the statute of limitations period for the IRS to conduct an audit never expires if the taxpayer fails to file the applicable foreign information return. Taxpayers interested in regaining compliance should consult with a tax professional as there are IRS programs available that may provide relief for delinquent foreign information returns, including the Streamlined Filing Compliance Procedures.
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