Form 8865: Return of U.S. Persons With Respect to Certain Foreign Partnerships
Filing Requirements
If you are a United States person for any part of the year and own an interest in a foreign partnership, you might be required to file Form 8865. Here are the Form 8865 Instructions. A separate form is required for each foreign partnership. There are four categories of filers, which classify you according to your ownership and activities in the partnership.
Category 1
A Category 1 filer is a United States person who owned, directly or constructively, more than 50% interest in the partnership at any time during the partnership's year. Nearly all of the forms must be completed by a Category 1 filer, which is equivalent to preparing a US partnership return.
Category 2
A Category 2 filer is a United States person who at any time during the year of the partnership owned at least a 10% interest, directly or constructively, while the partnership was controlled by US persons each owning at least 10%. However, if the foreign partnership had a Category 1 filer at any time during the tax year, no person will be considered a Category 2 filer.
Category 3
A Category 3 filer is a United States person who contributed property during that person's tax year in exchange for and interest in the foreign partnership, if that person 1) owned at least 10% of the foreign partnership immediately after the contribution, or 2) the value of all property contributed by such person during the 12 month period ending on the date of the transfer exceeds $100,000.
Category 4
A Category 4 filer is a United States person who had a reportable event during that person's tax year, which includes acquisitions, dispositions, and changes in proportional interests.
A partnership includes a limited partnership, syndicate, group, pool, joint venture, or other unincorporated organization, through or by which any business, financial operation, or venture is carried on, that is not, within the meaning of the regulations, a corporation, trust, estate, or sole proprietorship. A foreign partnership is a partnership that is not created or organized in the United States under the law of the United States or any state or the District of Columbia.
What Happens If You Don't File Form 8865?
For Category 1 and 2 filers, the IRS imposes a $10,000 penalty for each tax year you fail to file the required information. If you ignore IRS notices about the failure, the penalty can increase to a maximum of $50,000. If you continue to fail to comply, the IRS may reduce your foreign tax credit. See Code Section 6038(b).
For Category 3 filers, if you fail to properly report a contribution to a foreign partnership, the IRS imposes a penalty equal to 10% of the property’s fair market value at the time of the contribution. This penalty generally cannot exceed $100,000. In addition, you must recognize the gain on the contributed property as if you had sold it for its fair market value. See Code Section 6038B.
For Category 4 filers, the IRS imposes a $10,000 penalty if you fail to properly report all requested information. If the failure continues for more than 90 days after the IRS mails a notice, the IRS adds another $10,000 penalty for each 30 days (or part of one) that you remain noncompliant after the 90 days expire. The additional penalty cannot exceed $50,000. See Code Section 6679(a).
All penalties remain subject to the reasonable cause exception.