Purpose of the Form: This form is used to report certain transfers of tangible or intangible property to a foreign corporation.

Filing Requirement: US persons must file Form 926 if they:

• Transfer more than $100,000 in cash or property during the preceding 12-month period ending on the date of transfer to a foreign corporation; or
• Own at least 10% of the voting power or total value of the corporation immediately after the transfer (regardless of the amount transferred)

Tax Implications: Generally, there is no income or loss flowing onto an individual’s income tax return. US taxpayers may be required to recognize a gain if they transfer appreciated property to the foreign corporation.

Due Date and How to File: Form 926 is filed with the individual income tax return and must be filed by the due date of that return, including extensions.

Penalties: Failure to file Form 926 carries a penalty of 10% of the value of property transferred, up to $100,000 per return. If the failure to file Form 926 was due to intentional disregard, the penalty is unlimited.

Additionally, failure to file Form 926 keeps the tax return open indefinitely. Generally, the statute of limitations for the IRS to audit a tax return is three years. However, if a taxpayer is required to file Form 926 but fails to do so, the statute of limitation for the tax year never starts, so the IRS can go back and audit the entire tax return forever.

Purpose of the Form: This form is used by US persons that own Foreign Disregarded Entities (FDEs) or operate a Foreign Branch (FB).

Filing Requirement: US persons that are tax owners of FDEs, operate a FB, or that own interest in a Controlled Foreign Corporation (CFC) or Controlled Foreign Partnership (CFP) that is a tax owner of FDE or FB are required to file Form 8858 annually.

Tax Implications: Operating results of an FDE or FB are reported on the owner’s income tax return.

Due Date and How to File: Form 8858 is filed with the individual income tax return and must be filed by the due date of that return, including extensions.

Penalties: Taxpayers who fail to timely file a complete and correct Form 8858 may be subject to civil monetary penalties, criminal penalties, or both. A $10,000 penalty is imposed on a US person where the CFC or CFP fails to timely file a correct Form 8858 (with escalation after failure notification) up to $60,000 per violation per year. The IRS may also reduce foreign taxes available for credit by 10% with escalation after failure notification. Additional penalties may be imposed for undisclosed foreign financial asset understatements.

Additionally, failure to file Form 8858 keeps the tax return open indefinitely. Generally, the statute of limitations for the IRS to audit a tax return is three years. However, if a taxpayer is required to file Form 8858 but fails to do so, the statute of limitation for the tax year never starts, so the IRS can go back and audit the entire tax return forever.

Purpose of the Form: This form is used by certain US persons who are owners of a foreign partnership.

Filing Requirement: A US person is required to file Form 8865 if they meet the requirements of at least one of the four categories.

• Category 1 filer: A US person who controlled a Foreign Partnership (FP) at any time during the partnership’s tax year.
  • Example: A US individual who owns more than 50% directly, indirectly, or constructively of the Controlled Foreign Partnership (CFP) is considered a Category 1 filer.

• Category 2 filer: A US person who owned at least 10% of the FP while the FP was controlled by US persons each owning at least a 10% interest.
• Category 3 filer: A US person who contributed property to a foreign partnership:
  • While they owned at least 10% of the FP immediately after contribution (regardless of the amount contributed); or
  • If they owned less than 10%, the value of property contributed (during the 12-month period ending on the date of transfer) exceeded $100,000.

• Category 4 filer: A 1) US person who acquired or disposed of an interest during the year resulting in this person falling below the 10% ownership threshold; or 2) a US person’s direct proportional interest has changed by +/- 10%.

Tax Implications: Operating results of the partnership are reported on the owner’s income tax return.

Due Date and How to File: Form 8865 is filed with the individual income tax return and must be filed by the due date of that return, including extensions.

Penalties: Taxpayers who fail to timely file a complete and correct Form 8865 may be subject to civil monetary penalties, criminal penalties, or both. Form 8865 penalties vary depending on filer categories as follows:

• Category 1 and 2 filer. Civil monetary penalties generally start at $10,000, which can increase after failure notification. Any additional penalties for failure to furnish timely information are limited to a maximum of $50,000 per foreign partnership, for a total of $60,000. The IRS may also reduce foreign taxes available for credit by 10% with escalation after failure notification.
• Category 3 filers. Filers who fail to properly report a contribution to a foreign partnership, are subject to a penalty equal to 10% of the fair market value of the property at the time of the contribution, up to $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 fair market value.
• Category 4 filers. Failure to properly report information for this category results in a $10,000 penalty. In addition, criminal penalties can apply unless it is shown that such failure is due to reasonable cause. Additional penalties for failure to furnish timely information are limited to a maximum of $50,000, for a total of $60,000.

Additional penalties may be imposed for undisclosed foreign financial asset understatements.

Additionally, failure to file Form 8865 keeps the tax return open indefinitely. Generally, the statute of limitations for the IRS to audit a tax return is three years. However, if a taxpayer is required to file Form 8865 but fails to do so, the statute of limitation for the tax year never starts, so the IRS can go back and audit the entire tax return forever.

Purpose of the Form: This form is used by US persons (and executors of US decedents’ estates) to report transactions with foreign trusts, ownership of foreign trusts, and receipt of gifts from foreign persons.

Filing Requirement: A US person (or executor of a US decedent) is required to file Form 3520 if they meet any of the requirements listed below:

• A US person completed a transaction with a foreign trust, such as, but not limited to:
  • they transferred money or other property to a foreign trust
  • they received a distribution from a foreign trust
  • they held a qualified obligation from the trust that is currently outstanding
  • the foreign trust holds an outstanding qualified obligation of a US person who is a US owner or beneficiary.
• An executor of the estate of a US decedent where:
  • the decedent made a transfer to a foreign trust by reason of death
  • the decedent was treated as the owner of any portion of a foreign trust immediately prior to death
  • the decedent’s estate included any portion of the assets of a foreign trust
  • an executor of the estate of a US person who received a distribution from a foreign trust
• A US person is an owner of all or any portion of a foreign trust at any time during the tax year.
• A US person received large gifts or bequests from foreign persons.

Tax Implications: The US income taxation of a foreign trust depends on whether the trust is a grantor or nongrantor trust.

• Income from a foreign grantor trust is generally taxed to the trust’s grantor, rather than to the trust itself or to the trust’s beneficiaries.
• Income from a foreign nongrantor trust is generally taxed when distributed to US beneficiaries, except to the extent US source or effectively connected income is earned and retained by the trust, in which case the nongrantor trust would pay US income tax for the year such income is earned.

Gifts or bequests from foreign partnerships or corporations may be taxable to the recipient.

Due Date and How to File: Form 3520 is due at the same time as individual income tax return, including extensions. However, it must be mailed to a specialized processing center separate from the individual income tax return.

Penalties: Taxpayers who fail to timely file a complete and correct Form 3520 may be subject to civil monetary penalties, criminal penalties, or both. Form 3520 penalties vary depending on filer categories. Civil monetary penalties generally start at the greater of $10,000 or the following:

• 35% of the gross value of any property transferred to a foreign trust for failure to report the creation of or transfer to the foreign trust
• 35% of the gross value of distributions received from a foreign trust for failure to report receipt of the distributions
• 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a US person

Additional penalties will be imposed if the noncompliance continues for more than 90 days after the IRS mails a notice of failure to comply with the required reporting.

Penalties on unreported gifts start from 5% of the gift per month, up to maximum penalty of 25% of the gift.

Additional penalties may be imposed for undisclosed foreign financial asset understatements.

Finally, failure to file Form 3520 keeps the tax return open indefinitely. Generally, the statute of limitations for the IRS to audit a tax return is three years. However, if a taxpayer is required to file Form 3520 but fails to do so, the statute of limitation for the tax year never starts, so the IRS can go back and audit the entire tax return forever.

Purpose of the Form: This form is used by a foreign trust with at least one US owner to provide information about the trust, its US beneficiaries, and any US person who is treated as an owner of any portion of the foreign trust.

Filing Requirement: A foreign trust with a US owner must file Form 3520-A for the US owner to satisfy its annual information reporting requirements under IRC Section 6048(b). Each US person treated as an owner of any portion of a foreign trust under the grantor trust rules is responsible for ensuring that the foreign trust files Form 3520-A and provides the required annual statements to its US owners and US beneficiaries. If a foreign trust fails to file Form 3520-A, the US owner must complete a substitute Form 3520-A and attach to the owner’s Form 3520.

Tax Implications: The US income taxation of a foreign trust depends on whether the trust is a grantor or nongrantor trust.

• Income from a foreign grantor trust is generally taxed to the trust’s grantor, rather than to the trust itself or to the trust’s beneficiaries.
• Income from a foreign nongrantor trust is generally taxed when distributed to US beneficiaries, except to the extent US source or effectively connected income is earned and retained by the trust, in which case the nongrantor trust would pay US income tax for the year such income is earned.

Due Date and How to File: Form 3520-A is due by the 15^th day of the 3rd month after the end of the trust's tax year (e.g., due March 15 if the trust’s tax year is the calendar year) and can be extended an additional six months with Form 7004. Form 3520-A must be mailed to a specialized processing center separate from the individual income tax return.

Penalties: A US owner of a foreign trust that fails to timely file a complete and correct Form 3520-A may be subject to civil monetary penalties, criminal penalties, or both. Civil monetary penalties generally start at the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the US person and may increase after failure notification. Additional penalties may be imposed for undisclosed foreign financial asset understatements.

Additionally, failure to file Form 3520-A keeps the tax return open indefinitely. Generally, the statute of limitations for the IRS to audit a tax return is three years. However, if a taxpayer is required to file Form 3520-A but fails to do so, the statute of limitation for the tax year never starts, so the IRS can go back and audit the entire tax return forever.