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New U.S. International Tax Reporting Disclosures Required on 2016 U.S. Federal Form 1065 Partnership Tax Return

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Remember when international reporting disclosures required on U.S. Federal Form 1065 partnership tax returns were focused on foreign partner tax withholding? In 2017, partnerships that file U.S. federal partnership tax returns for the 2016 tax year using Form 1065, must make more extensive international tax reporting disclosures. Here are some items to pay close attention to on Form 1065.

  • Page 2, Line 10: the partnership must disclose whether it owned or had signature authority over any foreign accounts and whether it is required to file the FinCEN Form 114 Foreign Bank Account Report (FBAR). If the answer to this question is yes, then the partnership may have an FBAR filing requirement. There is a $10,000 USD civil penalty per year for the non-willful failure to file the FBAR on time. The penalties increase to the greater of $100,000 USD or 50% of the account balance per year for an intentional or willful failure to file the FBAR.
  • Page 3, Line 11: the partnership must disclose whether the partnership received a distribution from, or was the grantor of, or a transferor to a foreign trust. If the answer to this question is yes, then the partnership may have a Form 3520 and/or Form 3520-A filing requirement. There are substantial penalties that apply for the failure to file these forms on time.
  • Page 3, Line 15: the partnership must disclose whether it owned 100% of a foreign disregarded entity and whether it is filing Form 8858 with the partnership tax return. There is a $10,000 USD penalty per year for the failure to file Form 8858 on time.
  • Page 3, Line 16: the partnership must disclose whether it is filing Forms 8804 and 8805, to report foreign partner tax withholding on Effectively Connected Taxable Income (ECTI) under the provisions of I.R.C. Section 1446.
  • Page 3, line 17: the partnership must disclose whether it owned an interest in a foreign partnership and whether it is filing Form 8865 with the partnership tax return. There is a $10,000 USD penalty per year for the failure to file Form 8865 on time.
  • Page 3, Line 19: the partnership must disclose whether it owned an interest in a foreign corporation and whether it is filing Form 5471 with the partnership tax return. There is a $10,000 USD penalty per year for the failure to file Form 5471 on time.
  • Page 3, Line 20: the partnership must disclose whether any partners in the partnership are foreign governments.
  • Page 3, Line 21: the partnership must disclose whether it made any payments subject to U.S. federal nonresident withholding tax under the Chapter 3 provisions of I.R.C. Sections 1441 through 1464, or Chapter 4 FATCA provisions of I.R.C. Sections 1471 through 1474. This type of tax withholding is based on certain types of passive income such as interest, dividends, rents, and royalties, etc. The partnership is required to respond to this question on the tax return to indicate whether it is required to file U.S. federal Forms 1042 and 1042-S, to report the tax withholding.
  • Page 3, Line 22: the partnership must disclose whether it is required to file Form 8938, to report specified foreign financial assets. There is a $10,000 USD penalty per year for the failure to file Form 8938.

These new disclosure requirements on U.S. federal Form 1065 partnership tax returns likely resulted from the IRS’s continuing efforts to increase compliance with U.S. international tax reporting requirements. With global expansion and increasing cross-border international activities, these reporting requirements are particularly important to discuss with a qualified U.S. international tax reporting and compliance expert. If your U.S. or foreign partnership files a U.S. federal Form 1065, these reporting requirements should be a top priority to avoid substantial penalties. Under some circumstances, it is possible for U.S. filers, including partnerships, to qualify for certain amnesty relief from penalties for prior year failure to file delinquencies. With proper guidance, a partnership can potentially qualify for certain IRS amnesty procedures that will allow late filing of Forms 5471 and FBARs, etc. without late filing penalties.

Historically, partnerships were required to disclose ownership of foreign corporations and partnerships on U.S. federal Form 1065, and ownership by foreign parties. These disclosures are still required on the 2016 U.S. federal Form 1065.

For more information, please contact Aronson LLC’s international tax advisor Alison Dougherty at 301.231.6290 or ADougherty@aronsonllc.com.

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Caution: Corporations with NOLs and a Foreign Subsidiary Must File Federal Tax Returns with Form 5471 on Time to Avoid Penalties

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Avoid this common misunderstanding. U.S. corporate leaders may assume that their U.S. federal Form 1120 corporate income tax return does not need to be filed on time if the company has a loss for the year. If the U.S. corporation owns an interest in a foreign subsidiary corporation, this misunderstanding can cost a U.S. corporation with a net operating loss substantially in penalties.

The applicable penalties are assessed based on failure to file U.S. federal Form 5471 with the tax return on time. There is a $10,000 USD penalty per year, per foreign subsidiary corporation for failing to file the Form, which reports ownership of a foreign subsidiary corporation, on time.

U.S. federal corporate income tax penalties, such as late filing and late payment penalties are typically assessed on the unpaid tax due with the tax return. If the corporation has a net operating loss for the year and zero taxable income, then no tax is due with the tax return so certain penalties would not be assessed.

Late filing penalties are automatically assessed on any U.S. federal corporate income tax return that is filed after the due date with a Form 5471 attached. In some cases, a corporation may incur net operating losses for several years and stop filing U.S. federal corporate tax returns during that time. Resulting in a problem: how to resolve the prior year Form 5471 filing delinquencies when the corporation starts to earn a profit in subsequent years and starts filing tax returns again.

In addition to the prior year Form 5471 filing delinquencies, the U.S. corporation may have been required to file a prior year Foreign Bank Account Report (FBAR) to report foreign accounts owned by the foreign subsidiary corporation. Late FBAR filings can also lead to a minimum penalty of $10,000 USD per year.

It’s vital to speak to a qualified U.S. international tax reporting professional to resolve the prior year filing delinquencies. Form 5471 reporting and FBAR preparation often involve specialized skills in the area of U.S. international tax that many general tax practitioners may not have. A qualified U.S. international tax-reporting specialist can provide guidance on how to navigate certain IRS amnesty filing procedures including Form 5471 and FBAR penalty abatement.

With proper guidance, a corporation may qualify for certain IRS amnesty procedures that will allow late filing of Forms 5471 and FBARs, without any late filing charges. It is advisable for a corporation to catch-up with its prior year filings before filing its current year tax return, Form 5471, and FBAR. This approach will improve the corporation’s chances of qualifying for relief from the penalties.

For more information, please contact Aronson international tax advisor Alison Dougherty at 301.231.6290 or ADougherty@aronsonllc.com.

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U.S. Treasury Issues New Proposed FBAR Rules

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The U.S. Treasury has issued proposed regulations governing the filing of U.S. Foreign Bank Account Reports (FBAR). The new rules provide several key revisions to the existing FBAR regulations under 31 CFR § 1010.350. The FBAR regulations are issued under the legislative authority of the Bank Secrecy Act. Key points of the proposed regulations include:

1. The requirement would be eliminated for U.S. officers, employees, and agents of U.S. entities to report signature authority over foreign financial accounts owned by the entity if the individual does not have any financial interest in the account. The U.S. officer, employee, and agent of the U.S. entity would not have to report such accounts on their respective individual FBAR, if the accounts are reported on an FBAR filed by their employer or any other entity within the same corporate or business structure. The employer would be required to maintain records for five years to document all U.S. officers, employees, and agents with signature authority over the entity’s accounts.

2. The relief which currently allows limited reporting on the FBAR when a filer has 25 or more reportable accounts would be eliminated. The proposed rule would require U.S. persons with 25 or more reportable accounts to provide the detailed account information for each reportable account on the FBAR in the same manner as filers with less than 25 accounts.

3. The new FBAR filing due date will be April 15, with a six month extension allowed to October 15, beginning with FBARs filed for the calendar year 2016.

For more information, please contact Aronson LLC tax advisor Alison Dougherty at (301) 231-6290 or ADougherty@aronsonllc.com.

 

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Reporting Foreign Accounts and Offshore Assets

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Are you in Compliance for 2015? If you are a U.S. person it is important to make sure that you are properly disclosing foreign accounts and offshore assets to avoid substantial penalties. A U.S. person must file the FinCEN Form 114 Report of Foreign Bank and Financial Accounts (“FBAR”) to disclose foreign accounts if the highest aggregate balance or value of all reportable accounts exceeds $10,000 USD during the calendar year. Other accounts such as foreign pension and retirement plan accounts, insurance policies and annuities are considered to be reportable accounts in addition to foreign bank deposit and investment accounts.

The filing threshold for the FBAR is substantially lower than the U.S. Federal Form 8938 Statement of Specified Foreign Financial Assets. Unlike the FBAR which is filed electronically with the FinCEN, Form 8938 is filed with a U.S. individual’s U.S. Federal Form 1040 individual income tax return. For the year 2015 and prior years beginning with the year 2011, the Form 8938 filing requirement applies only to individuals. New U.S. Treasury Regulations were issued on February 22, 2016, which implement the requirement for U.S. companies to file the Form 8938 for tax years beginning after December 31, 2015.

The civil penalty is $10,000 USD for the non-willful failure to file the FBAR and the Form 8938 on time. There are even more substantial penalties including the possibility of criminal prosecution for the intentional or willful failure to file the FBAR. The 2015 FBAR is due on June 30, 2016. The 2015 Form 8938 is due with the U.S. Federal Form 1040 individual income tax return on April 18, 2016, or on the extended due date of October 15, 2016, if an extension is filed timely.

There are many other U.S. international tax reporting and compliance requirements that apply to U.S. persons. If a U.S. person owns an interest in a foreign company, there could be a filing requirement each year or for the year in which the U.S. person acquires or disposes of the ownership interest. Depending on the classification of a foreign company for U.S. Federal tax purposes as a foreign corporation, foreign partnership or foreign disregarded entity, the Form 5471, 8865 or 8858 may need to be filed with the U.S. owner’s U.S. tax return. There is a $10,000 USD civil penalty for the failure to file any of these forms on time. Certain U.S. international tax reporting and compliance requirements regarding passive foreign investment companies (PFICs) apply to U.S. persons with ownership of an interest in a foreign investment fund such as a foreign mutual fund.

The IRS has certain amnesty programs and procedures available for U.S. taxpayers who did not file the required forms in prior years to report foreign accounts and offshore assets.

For more information, please contact Aronson LLC Tax Advisor, Alison Dougherty at (301) 231-6290 or ADougherty@aronsonllc.com.

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