Form 8858 is a form often required by the IRS for people who own certain foreign entities. If you are required to complete this form, you must do it accurately and on time to avoid incurring penalties from the IRS.
What Is Form 8858?
Form 8858 is entitled “Information Return of U.S. Persons with Respect to Foreign Disregarded Entities.” If this form is a requirement, you can file it along with your annual income tax return.
The stated purpose of Form 8858 is to provide information to the IRS about certain entities owned by U.S. taxpayers.
Defining “Foreign Disregarded Entity”
According to the IRS, a foreign disregarded entity, or FDE, is an entity that wasn’t established or organized in the U.S. FDEs are also disregarded as a separate entity for U.S. tax purposes, which means that any income earned by this entity is included with the tax owner’s other income. In most cases, these entities are designated as FDEs because of the elections selected on Form 8832.
If you own the FDE’s assets and liabilities for tax purposes, you are the “tax owner” of the FDE. In some cases, the FDE’s tax owner may differ from its legal owner.
Form 8858 Filing Requirements
You may need to file Form 8858 if you qualify as the tax owner of an FDE at any point during your annual accounting period or tax year. You may also file this form if it is necessary for you to submit Form 5471, the “Information Return of U.S. Persons with Respect to Certain Foreign Corporations.” Finally, if it is a requirement to submit Form 8865, the “Return of U.S. Persons with Respect to Certain Foreign Partnerships,” you may need to file Form 8858 as well.
Form 8858 is due at the same time as your income tax return. If you apply for an extension on your income tax return, the extension will apply to Form 8858 as well. To file the form properly as the tax owner of an FDE, attach it to your information return or your income tax return. If you are not the FDE’s tax owner, attach it to Form 5471 or Form 8865.
In certain cases, you may qualify for an exception to the requirement to complete Form 8858. For example, if both you and another U.S. taxpayer are Category 4 or Category 5 filers of Form 8865, only one person may be required to file this form. However, because you may face penalties if you don’t file this form, it is important to check with a tax professional to make sure you aren’t required to do so before you choose to omit it from your tax filings for the year.
Completing the Form
The way in which you must complete Form 8858 depends on your reason for filing. If you are filing the form because you were the tax owner of an FDE at some point during your accounting period or tax year, you should complete the whole form. However, you won’t need to attach Schedule M, which is a separate form.
If you are completing Form 8858 because you are a Category 4 filer of Form 5471, you should complete the form in its entirety. You should also attach schedule M. Category 5 filers of Form 5471 only need to complete the identifying information found on the first page of Form 8858.
If you are completing Form 8858 because you are a Category 1 filer of Form 8865, you should complete the whole form and the Schedule M, which is a separate form. If you are completing Form 8858 as a Category 2 filer of Form 8865, only the identifying information on the first page is a requirement.
When an FDE is dormant, Form 8858 is necessary for any individual who meets the filing requirements. However, you may be able to use a simpler procedure known as a “summary filing” for dormant FDEs. If you choose to use the summary procedure, you will only need to complete certain information on the form. Specifically, you must make sure the top margin of the return states, “Filed Pursuant to Announcement 2004-4 for Dormant FDE.” You must also include your tax year, address and name, as well as the dormant FDE’s annual accounting period. Finally, you must complete items 1a through 1e, item 1g, items 3a through 3d, and items 4a through 4c. Some of these items may not be applicable, depending on the specifics of your situation.
Form 8858 Penalties
If you don’t file Form 8858 when it is a requirement, you may face both civil and criminal penalties. For every annual accounting period in which you fail to file the information required, you will owe a $10,000 penalty. When the IRS sends you a notice informing you of your failure to file this form, you will have 90 days to comply before additional penalties begin to accumulate. If you don’t file the form within this 90-day period, you will owe an additional penalty of $10,000 for every 30 days or part of 30 days that passes after this deadline expires.
In addition to these penalties, you will also incur a 10 percent reduction in the amount of foreign taxes you can use to calculate certain credits. If you fail to file the form within the 90-day period after receiving notice from the IRS, an additional 5 percent reduction applies for every three-month period or part of a three-month period that passes.
In some cases, criminal penalties may also apply to taxpayers who don’t file a required Form 8858. Criminal penalties may include additional fines and/or time in prison.
Assume a taxpayer fails to file Form 8858 when it is a requirement. The IRS sends a notice informing the taxpayer of this failure, but the taxpayer ignores the notice for a total of four months. In this case, the taxpayer will owe a civil penalty equal to $20,000 ($10,000 for the initial violation and another $10,000 for the time that passed after the IRS’ 90-day grace period). The taxpayer will also be subject to a 10 percent reduction in the foreign taxes that are available for credit for the initial violation, plus another 5 percent reduction for ignoring the notice. Depending on the situation, this taxpayer could face criminal charges as well.
Avoiding Penalties Related to Form 8858
The IRS imposes significant penalties on anyone who fails to file form 8858. Because the stakes for this violation are so high, it is important to do everything you can to avoid penalties. The best way to avoid penalties for failing to file Form 8858 is to make sure you actually submit the form by its due date. If you aren’t sure whether you are required to submit Form 8858, you should consult a tax professional for guidance.
Submitting Delinquent Forms
In some cases, you may not realize you need to submit Form 8858 until it is already delinquent. In such cases, you may still be able to avoid penalties if you meet certain requirements. However, the first step in resolving this situation is to file the delinquent forms as soon as possible. Perhaps the best option available for submitting delinquent returns is to submit them under the Delinquent International Information Return Submission Procedures.
To qualify to submit your delinquent forms using this procedure, you must have a reasonable cause for failing to file your required forms on time. You cannot use this procedure if the IRS has been in contact about the missing forms, if you are under a criminal or civil investigation from the IRS or if you need to use the Streamlined Filing Compliance Procedures or Offshore Voluntary Disclosure Program.
One of the most important components of qualifying for the Delinquent International Information Return Submission Procedures is showing reasonable cause. Simply submitting your delinquent information returns won’t be sufficient. To maximize your chances of a positive outcome, you will need to include a written, thorough statement that explains the reasoning for your failure to file these forms. If you don’t include a statement, or if the IRS doesn’t agree that you had reasonable cause for your violation, you may face penalties even after filing the missing forms.
Reasonable cause statements don’t need to follow any set template, as the IRS reviews them on a case-by-case basis. The goal of the reasonable cause statement is to show the IRS that you were not willfully ignoring your responsibilities and that the failure to file wasn’t an intentional act. If you have more than one delinquent Form 8858, make sure you attach a reasonable cause statement to each one you submit. You must sign this statement under penalty of perjury.
When submitting forms under the Delinquent International Information Return Submission Procedures, you must make sure that every form you submit is accurate. You must also attach your form to the amended tax return, and you must include your reasonable cause statement. Finally, you must certify that the entity in question did not engage in tax evasion.
Some taxpayers are reluctant to file a delinquent Form 8858 because they are concerned that doing so will trigger an audit. However, according to the IRS, filing these forms will not automatically trigger an audit. Nonetheless, taxpayers should be aware that they may still undergo an audit through the IRS’ normal audit selection process.
Statute of Limitations
It is important to note that simply submitting your delinquent returns under the Delinquent International Information Return Submission Procedures will not guarantee that you will be able to avoid penalties. It will be up to the IRS to determine what penalties, if any, you will face. However, it is still important to file these forms as soon as you realize they are delinquent because of rules related to the IRS’ statute of limitations.
The statute of limitations is a law that requires the IRS to bring legal action against you for specific violations within a certain amount of time. After the statute of limitations expires, you won’t need to worry about facing penalties related to your delinquent returns. For Form 8858, the statute of limitations expires three years after the filing of the form. Thus, if you never file the form, the statute of limitations never begins, and the IRS can bring action against you indefinitely. However, as soon as you have filed your delinquent forms, the clock begins ticking. After three years pass from the date of your filing, the IRS won’t be able to bring any new action against you for this violation.
Working With a Tax Professional
Form 8858 is just one of several information returns you may need to file if you have any assets or financial interests overseas. In addition, if you live overseas, your tax requirements become even more complicated. The penalties for failing to comply with IRS regulations can be extreme, leading to expensive fines and even the possibility of criminal prosecution. For this reason, taxpayers should be proactive about filing all of their required paperwork and paying all required taxes on time.
If you aren’t sure which forms you are required to file, or if you simply want to make sure you are always in full compliance with all IRS regulations, hiring a tax professional to help you is highly recommended. A qualified tax professional will be able to review your situation in detail and explain how IRS regulations apply to you. Your tax professional will also be able to help you complete all of the required paperwork accurately and submit it on time.
Even if you have already failed to comply with one or more IRS regulations, working with a tax professional can still be beneficial. In these cases, the tax professional can help you review your options for resolving the issue so you can make the best choices. With the help of the right professional, you may be able to reduce or even eliminate any penalties associated with tax code violations.