Form 8865 For Expats with a Foreign Partnership
Who is Form 8865 for?
IRS tax form 8865 was created for U.S. tax filers who have an interest in creating a Foreign Partnership. The official name for the tax form 8865 is “Return of U.S. Persons with Respect to Certain Foreign Partnerships”.
This form is similar to the IRS tax form 5471 (foreign corporations), yet it has its own distinct nuances and significance among tax forms.
But do you need to use it? The short answer is if you are a “United States person” for any portion of the tax year, and you own an interest in a foreign partnership, you must file IRS tax form 8865 with your annual taxes. If you own multiple foreign partnerships, then you must fill out a form for each partnership.
Now, for the longer answer. To find out if you must file form 8865, the IRS has created 4 categories or tests to see if you must use this form when filing your taxes.
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The 4 Categories. Which One are You?
Category number one is for a United States Person who owned at least 50% interest in a business partnership at any portion of the partnerships year. If you are considered a Category number 1 tax filer, you will need to complete most of tax form 8865.
Category number two is reserved for a United States Person who owned 10% or more of a partnership at any time during the tax year while the partnership was controlled by United States Person(s) each owning at least 10%.
Category number three is for a United States Person that exchanged property to gain an interest (at least 10%) in a foreign partnership.
Category number four was created for a United States Person who had a reportable event during the tax year. This would include any changes in proportional interests, making acquisitions, and dispositions.
So there are the 4 categories if you find yourself or any one of these four categories then you must file IRS tax form 8865.
Can I skip Filing this Form?
It is not advised you skip filing this form as the penalties are quite steep. You can be penalized $10,000 (starting at) for each year you do not file each required partnership return.
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How Long Does it Take To Prepare?
Form 8865 requires a lot of time to fill out. In fact, the IRS estimates that it takes a whopping 57 hours to fill it out and mail along with all its supporting schedules.
Schedules in Tax Form 8864 include:
- Consumer Ownership of Partnership Interest
- Certain Partners of Foreign Partnership
- Foreign Partners of Section 721c Partnership
- Affiliation Schedule
- Income Statement – Trade or Business Income
- Partners Distributive Share Items
- Balance Sheets Per Books
- Balance Sheets for Interest Allocation
- Reconciliation of Income Loss per Books with Income per Return
- Analysis of Partners’ Capital Accounts
- Transactions Between Controlled Foreign Partnership and Partners and Other Related Entities
If you have any questions concerning Tax Form 8865 be sure to give us a call. We would be glad to help answer any tax questions you might have.