Transnational tax information reporting: A guide for the perplexed

By John C. Zimmerman, CPA, J.D.

IMAGE BY SHUOSHU/ISTOCK
IMAGE BY SHUOSHU/ISTOCK
 

EXECUTIVE
SUMMARY

 
  • Complex federal laws in the international tax arena have made practicing in the area difficult, where failure to comply with the numerous filing requirements exposes taxpayers and others to onerous penalties.
  • Practitioners should be aware that some forms are required to be filed with the Financial Crimes Enforcement Network to fulfill filing requirements under various provisions of the Bank Secrecy Act.
  • Several information returns must be filed with the IRS to report foreign tax transactions, as required by the Code, regulations, and other guidance.
  • The forms discussed include those required under the Foreign Account Tax Compliance Act (Chapter 4) and Chapter 3 withholding requirements.

Tax information reporting has become a complex task for institutions, businesses, and individuals. Nowhere has the burden been greater than on parties required to report on transnational transactions. A labyrinthine web of disclosure and withholding requirements has arisen over the years. These rules can affect U.S. persons (generally defined in Sec. 7701(a)(30) as domestic individuals, corporations, partnerships, estates and trusts) and non-U.S. persons (any individual or entity that is not a U.S. person). The introduction several years ago of the Foreign Account Tax Compliance Act (FATCA) added to what had already become a huge burden for entities involved in the international arena.

Tax information reporting has become a complex task for institutions, businesses, and individuals. Nowhere has the burden been greater than on parties required to report on transnational transactions. A labyrinthine web of disclosure and withholding requirements has arisen over the years. These rules can affect U.S. persons (generally defined in Sec. 7701(a)(30) as domestic individuals, corporations, partnerships, estates and trusts) and non-U.S. persons (any individual or entity that is not a U.S. person). The introduction several years ago of the Foreign Account Tax Compliance Act (FATCA) added to what had already become a huge burden for entities involved in the international arena.

The problems that can be faced are well-illustrated by the Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund (discussed below). The IRS estimates that it will take 20 hours to complete this form. However, it can take multiples of those 20 hours to learn the convoluted rules necessary to complete the form.

The purpose of this article is to provide a guide that acts to alert the practitioner to when an information return may be necessary. Making the determination often requires a time-consuming examination of the instructions for the form involved.

One problem a practitioner is likely to face is that it may be uncertain whether it is necessary to file an information return in certain circumstances. For example, a foreign independent contractor who performs services in a foreign country for a U.S. person is not subject to tax withholding or income tax liability in the United States when paid by the U.S. person. However, a question may arise as to whether that foreign person must file a form with the U.S. person notifying that no withholding is required. Although it is not clear whether there should be a filing in that situation, the foreign person should be advised to file Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals) (discussed below). In other words, all doubt should be resolved in favor of filing.

For purposes of this article, an information return is any return that requires special disclosure about a U.S. person with foreign-source income or investments and non-U.S. persons with U.S.-source income and investments. In some instances, an information return can be filed with the taxpayer's tax return. In other instances, it may have to be filed separately from the tax return. Failure to comply with the filing requirements for any information return can result in substantial penalties.

The methodology used to identify the necessary forms for transnational tax reporting involved culling over 2,000 files on the IRS website at irs.gov. However, no claim is made that the list below is definitive. Further useful information on some of the forms discussed in this article may be obtained from IRS Publications 515, Withholding of Tax on Nonresident Aliens and Foreign Entities,and 519, U.S. Tax Guide for Aliens, both on the IRS website.

Transnational tax information forms

FinCEN Form 105, Report of International Transportation of Currency or Monetary Instruments

FinCEN Form 105, which is available on the Financial Crimes Enforcement Network's (FinCEN's) website (fincen.gov), has instructions that state that it must be filed by:

  1. Each person who physically transports, mails, or ships, or causes to be physically transported, mailed, or shipped currency or other monetary instruments [defined in the form's instructions] in an aggregate amount exceeding $10,000 at one time from the United States to any place outside the United States or into the United States from any place outside the United States, and
  2. Each person who receives in the United States currency or other monetary instruments in an aggregate amount exceeding $10,000 at one time which have been transported, mailed, or shipped to the person from any place outside the United States.

Exceptions to filing and when and where the form must be filed are also listed in the instructions. Generally, the form must be filed within 15 days after receipt of the currency or monetary instrument being reported. Civil and criminal penalties for failure to file a return, material misstatements or omissions on a return, or filing a false or fraudulent return can be as great as $500,000 and/or up to 10 years in prison.1

FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR)

A U.S. person who has a financial interestin or signature authority over at least one foreign financial account must file this form if the aggregate value of all these accounts exceeds $10,000 at any time during the calendar year.2 These accounts include a bank account, a foreign financial account holding stock and securities, a foreign mutual fund, a foreign-issued life insurance or annuity contract with a cash-value, foreign grantor trusts for which the taxpayer is a grantor, and indirect interests in foreign financial accounts through an entity if beneficial ownership in the entity exceeds 50%.

FinCEN Form 114 must be filed by April 15 of the following year, but an automatic six-month extension that filers do not have to apply for is provided. The form must be filed electronically through FinCEN's Bank Secrecy Act E-Filing System.

The minimum penalty for failure to file is $12,459 unless reasonable cause can be shown. The penalty for willful failure to file is the greater of $124,588, or 50% of the balance in the account(s) that should have been reported.3 A willful violation may also be subject to criminal penalties.4

Form 673, Statement for Claiming Exemption From Withholding on Foreign Earned Income Eligible for the Exclusion(s) Provided by Sec. 911

Sec. 911 allows U.S. citizens and residents to exclude a limited amount of foreign earned income if certain criteria are met and the taxpayer files a Form 2555, Foreign Earned Income (discussed below), with Form 1040, U.S. Individual Income Tax Return. Form 673 is filed with the U.S. employer to claim an exemption on withholding of income tax for income that qualifies for the exclusion.

Form 706-CE, Certificate of Payment of Foreign Death Tax

U.S. citizens and residents, as defined in the instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, are allowed to claim a credit against their U.S. estate tax liability for death taxes paid to foreign countries.5 Form 706-CE must be filed before the IRS will allow a credit for foreign death taxes claimed on a Form 706. Form 706-CE is submitted to the foreign government, which will then certify the form and send it to the IRS at the address provided in the form's instructions.

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

Sec. 6038B(a) and its regulations require that certain transfers of property by a U.S. person be reported on Form 926. Though the term U.S. person is not defined in Sec. 6038B, it is defined in Sec. 7701(a)(30) as any U.S. individual resident or citizen, a domestic partnership, a domestic corporation, an estate other than a foreign estate, and a trust controlled by U.S. persons subject to U.S. legal jurisdiction. If the transfers are made by a domestic or foreign partnership, then the form is filed by the domestic partners, not the partnership.

The transfers are those made to foreign corporations in exchanges described in Secs. 332, 351, 354, 355, 356, 361, and 367. Certain transfers are exempt from the filing requirement.

Sec. 6038B(c) provides that a penalty of 10% of the property's fair market value (FMV) be imposed if the reporting requirements are not met. However, the penalty shall not exceed $100,000 unless the reporting failure was due to intentional disregard. Sec. 6662(j) provides that a 40% penalty may apply on any underpayment that results from an undisclosed foreign financial asset understatement.

Form 1040-C, U.S. Departing Alien Income Tax Return

Resident and nonresident aliens who plan to leave the United States must file a Form 1040-C or Form 2063, U.S. Departing Alien Income Tax Statement (discussed below), at an IRS office at least two weeks before departure in order to receive a certificate of compliance.6 The certificate cannot be issued more than 30 days before departure. The return reports the departing alien's income and deductions; the alien pays the expected tax liability. However, the alien may also be required to file a final tax return on a Form 1040 or Form 1040NR, U.S. Nonresident Alien Income Tax Return. If further reporting is required after the alien leaves, a credit will be available for taxes paid with the Form 1040-C or Form 2063.

Note that the Form 1040-C instructions provide a number of exceptions for those who are not required to file. These exceptions include certain visa holders and others.

Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

A withholding agent is required to withhold taxes on the U.S.-source income of a foreign person and report the withholding on Form 1042. A withholding agent may be a U.S. person or foreign individual, trust, estate, partnership, corporation, nominee, government agency, association, or tax-exempt organization. It may also be a foreign financial institution described in Regs. Sec. 1.1473-1(d)(2).

The withholding agent can be held personally liable for amounts that are not withheld from the foreign person's U.S.-source income and may be assessed penalties and interest.

Note that the instructions on when and from whom withholding is necessary are vast and complex and should be mastered by anyone who agrees to act as a withholding agent.

Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding

While Form 1042 is used to report tax withholding, Form 1042-S is used to report payments of U.S.-source income to foreign persons. It must be filed by a withholding agent. A foreign person includes nonresident aliens, foreign partnerships, foreign corporations, foreign estates, and foreign trusts. The Form 1042-S must be filed even if tax was not withheld because the income was tax exempt. A Form 1042 must be filed if a Form 1042-S is filed. An extension of time to file the Form 1042-S may be obtained by filing a Form 8809, Application for Extension of Time to File Information Returns.

Form 1042-T, Annual Summary and Transmittal of Forms 1042-S

Form 1042-T is used to transmit paper Forms 1042-S, but is not used if the Forms 1042-S are submitted electronically. Also, if a withholding agent is filing 250 or more Forms 1042-S, they must be submitted electronically. Form 1042-T cannot be used to submit Form(s) 1042.

Form 1120, Schedule N, Foreign Operations of U.S. Corporations

Schedule N must be filed if a corporation answers "yes" to any of the eight questions it asks. These questions deal with (1) the corporation's ownership interests in foreign disregarded entities, certain foreign partnerships, and controlled foreign corporations (CFCs) (Forms 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities, 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, and 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations); (2) whether the corporation received a distribution from, or it was the grantor of, or transferor to, a foreign trust (Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts); (3) whether the corporation has foreign bank accounts that require filing FinCEN Form 114 and/or Form 8938, Statement of Specified Foreign Financial Assets; and (4) whether the corporation is claiming the extraterritorial exclusion (Form 8873, Extraterritorial Income Exclusion). Note that in each case where the corporation answers "yes," it may be required to file additional forms, discussed in this article, with the Schedule N.

Form 1120-IC-DISC, Schedule P, Intercompany Transfer Price or Commission

An interest charge domestic international sales corporation, or IC-DISC, is a domestic corporation that elects to be treated as an IC-DISC on Form 4876-A, Election to Be Treated as an Interest Charge DISC. In general, IC-DISC shareholders, not the corporation, are taxable on the corporation's income. Shareholders also pay interest on their share of DISC-related deferred tax liability.7 Schedule P is used to show the computation of taxable income used to determine the transfer price from a related supplier to an IC-DISC or the IC-DISC commission from a related supplier. A related supplier is a related party defined by reference to Sec. 482 as being either controlled or in control of the IC-DISC that singly engages in a transaction directly with the DISC.8

Form 1120-FSC, Schedule P, Transfer Price or Commission

Foreign sales corporations (FSCs) were governed by Secs. 921-927 and were eliminated by Congress for years after Sept. 30, 2000. However, FSCs in existence at that time were allowed to continue to operate. Basically, FSCs may exclude a portion of export income from U.S. taxation if certain criteria are satisfied. Schedule P is used to figure an allowable transfer price to charge the FSC or an allowable commission to pay the FSC when allocating foreign trading gross receipts between the FSC and its related supplier (basically an entity controlled by the FSC or an entity that controls the FSC).9

Form 2063, U.S. Departing Alien Income Tax Statement

According to the IRS, Form 2063 "is used to request IRS certification that all U.S. income tax obligations have been satisfied by a resident alien whose taxable period has not been terminated, or a departing nonresident alien having no taxable income from U.S. sources."10

Form 2555, Foreign Earned Income

Sec. 911 allows individual citizens and residents of the United States living abroad to exclude from taxation a limited amount of income earned abroad. The taxpayer must live abroad for 330 full days during any 12-consecutive-month period. A limited exclusion is also available for housing costs. Form 2555 is filed with the taxpayer's Form 1040.

Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

Sec. 6048 requires that information be filed for certain foreign trusts. U.S. persons (see generally Sec. 7701(a)(30)) and executors of estates of U.S. decedents must file Form 3520 for (1) certain transactions with foreign trusts; (2) ownership of foreign trusts under the rules of Secs. 671-679; (3) receipt of a distribution or a loan that could be treated as a distribution from a foreign trust; and (4) the receipt of certain large gifts or bequests from certain foreign persons. A large gift or bequest is the receipt by the U.S. person of more than $100,000 from a nonresident alien or foreign estate. However, if the gift recipient receives $50,000 from nonresident alien 1 and $50,001 from nonresident alien 2, and 1 and 2 are related to each other (defined in Secs. 267 and 707(b)), then the more-than- $100,000 threshold will be met. The reporting threshold for gifts from foreign corporations and partnerships is more than $16,111 for 2018 ($15,797 for 2017). The due date for the Form 3520 is the same as the due date for the tax return for the U.S. person (generally by April 15 if the U.S. person is an individual), including extensions. However, it is filed separately in the Ogden, Utah, IRS office.

Sec. 6677(a) provides that failure to include all the information required on Form 3520 or failure to timely file Form 3520 may result in a penalty, which is the greater of $10,000 or 35% of the reportable amounts (defined in Sec. 6677(c) and the instructions for Form 3520) that must be reported or 5% of the portion of the foreign trust's assets treated as owned by a U.S. person under the grantor trust rules of Secs. 671-679. Additional penalties may be imposed if filing noncompliance exceeds 90 days. Sec. 6677(d) abates the penalty if the failure to file is due to reasonable cause and not willful neglect. The instructions for the form list exceptions to the filing requirements.11

Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Sec. 6048(b))

A foreign trust must give a copy of Form 3520-A to a U.S. owner. Each U.S. person (defined in the form's instructions) treated as an owner is responsible for ensuring that the foreign trust files the Form 3520-A with the IRS. An owner is the person that is treated as owning any of the assets of a foreign trust under the grantor trust rules of Secs. 671-679. The return is due the 15th day of the third month following the trust's year end. The initial penalty imposed on the U.S. owner for the trust's failure to file with the IRS or giving incomplete information is 5% of the gross value of the trust's assets treated as owned by the U.S. person. Additional penalties may be imposed if noncompliance exceeds 90 days. Note that these penalties are in addition to any penalties imposed for noncompliance with the requirements for filing Form 3520. The Form 3520-A must be filed with the IRS office in Ogden, Utah.

Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations

Form 5471 is filed by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations to satisfy the reporting requirements of Sec. 6038 and Sec. 6046.12 The form is filed with the U.S. person's income tax return.

Form 5471, Schedule M, Transactions Between Controlled Foreign Corporation and Shareholders or Other Related Persons

Sec. 6038(a)(1)(D) requires that transactions between a foreign corporation and certain U.S. persons be reported. Schedule M, accompanying the Form 5471, must be filed to report transactions between a CFC and its shareholders or other related persons. A $10,000 penalty is imposed for each annual accounting period the information is not filed. Additional penalties may be imposed for continued failure to file the schedule.

Sec. 957(a) defines a CFC as any foreign corporation of which more than 50% of the voting power or the total value of all stock is owned by U.S. shareholders, after applying the ownership attribution rules of Sec. 958(b), on any day of the foreign corporation's tax year. Before Jan. 1, 2018, a U.S. shareholder was a U.S. person who owned at least 10% of the total combined voting power of all classes of a foreign corporation's stock that were entitled to vote. However, the so-called Tax Cuts and Jobs Act, P.L. 115-97, enacted on Dec. 22, 2017, has expanded this definition under Sec. 951(b) to also include a U.S. person who holds 10% or more of the value of all classes of stock in the foreign corporation. Therefore, more than 50% of the vote or value of the stock must be owned by five or fewer U.S. shareholders (taking into account attribution rules) to be a CFC.

Form 5471, Schedule O, Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of Its Stock

Sec. 6046(a) lists the shareholders who must file Schedule O. Any person who fails to report the requested information is subject to a $10,000 penalty. Additional penalties may be imposed for continued failure to file, in addition to any penalties imposed for failure to file the Schedule M (see above).

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code)

Form 5472 allows taxpayers to comply with the reporting requirements of Secs. 6038A and 6038C. It must be filed with the corporation's income tax return by the due date of the return, including extensions. The form is required if a "reporting corporation" has a "reportable transaction" with a foreign or domestic related party. A reporting corporation is a 25% foreign-owned U.S. corporation (defined in the form's instructions) or a foreign corporation engaged in a trade or business within the United States. In general, a reportable transaction involves transactions listed in Part IV of the form for which the sole consideration was monetary, or any transaction in Part IV for which (1) the consideration paid or received was not monetary consideration or (2) less than full consideration was received. A related party includes any direct or indirect 25% foreign shareholder of the reporting corporation and any person who is related to the reporting corporation within the meaning of Sec. 267(b) or 707(b)(1). A separate Form 5472 must be filed for each foreign or related U.S. person with which the reporting corporation had a reportable transaction.

A $10,000 penalty will be imposed on the "reporting corporation" for either (1) failure to file; (2) not providing complete information; or (3) not maintaining records as required by Regs. Sec. 1.6038A-3. Additional penalties may be imposed if noncompliance exceeds 90 days after IRS notification.

Form 5713, International Boycott Report

A U.S. person, generally defined in Sec. 7701(a)(30), must file Form 5713 with its income tax return, including extensions, if it has operations in a "boycotting country." The instructions also state that a controlled group, a member of which has operations in a boycotting country, a U.S. shareholder of a foreign corporation that has operations in a boycotting country, a partner in a partnership that has operations in a boycotting country, and a person treated as the owner of a trust that has operations in a boycotting country must file the form. The term "operation" means all forms of business or commercial activities. Boycotting countries include Iraq, Kuwait, Lebanon, Qatar, Saudi Arabia, Syria, the United Arab Emirates, and Yemen. It also includes any other country in which the U.S. person (or member of a controlled group in which the U.S. person is a member) has operations and knows or has reason to know requires any person to cooperate with or participate in an international boycott.

Form 6166, Certification of U.S. Tax Residency

See the discussion below for Form 8802.

Form 8023, Elections Under Sec. 338 for Corporations Making Qualified Stock Purchases

Sec. 338 allows a corporation that purchases stock of another corporation (the target corporation) that results in 80% ownership (as defined in Sec. 1504(a)(2)) to elect to treat the stock purchase as an asset purchase if certain criteria are met, essentially allowing the acquiring corporation to step up (or down) the bases of the acquired corporation's assets to their FMV. The election is made on Form 8023.

Regs. Sec. 1.338-2(e)(3) allows U.S. shareholders:

(as defined in section 951(b)) of a foreign purchasing corporation that is a controlled foreign corporation (as defined in section 957, taking into account section 953(c))) to file a statement of [a] section 338 election on behalf of the purchasing corporation if the purchasing corporation is not required under §1.6012-2(g) (other than §1.6012-2(g)(2)(i)(B)(2)) to file a United States income tax return for its taxable year that includes the acquisition date.

Regs. Sec. 1.338-2(e)(1) states that a qualifying foreign purchasing corporation (defined in the regulation) "is not required to file a statement of a Sec. 338 election for a qualifying foreign target [defined in the regulation] before the earlier of 3 years after the acquisition date and the 180th day after the close of the purchasing corporation's taxable year within which a triggering event occurs."

For the requirements of U.S. shareholders, see the discussion under Form 8883, below.

Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

Sec. 1441 requires, in general, that 30% be withheld from compensation paid to a nonresident alien individual for personal services performed either as an independent contractor or, in certain circumstances, an employee in the United States. Form 8233 allows for a reduction or elimination of the 30% withholding requirement when the nonresident alien can claim reduced withholding from a tax treaty the United States has with the country in which the alien is a resident. The nonresident alien who is claiming the treaty benefits provides the form to the withholding agent. If the withholding agent is satisfied that the information is accurate and the exemption is warranted, the withholding agent must complete and sign the certification in Part IV of the form and submit it within five days of acceptance to the IRS office in Philadelphia.

IRS Publication 901, U.S. Tax Treaties, lists the countries that have treaties that exempt payments for personal services from 30% withholding. However, under Sec. 871(b)(1), a nonresident alien individual must be engaged in a trade or business within the United States for the income to be taxed in the United States. Therefore, if the services are performed in a foreign country by a nonresident alien individual, he or she will not be subject to U.S. taxation or withholding.

Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests

Sec. 1445 requires that 15% (10% before Feb. 17, 2016) be withheld from the proceeds of the sale of a U.S. real property interest acquired from a foreign person. The withholding obligation is imposed on the buyer or other transferee (the withholding agent). The withholding obligation also applies to foreign and domestic corporations, qualified investment entities (i.e., a real estate investment trust or certain regulated investment companies), and fiduciaries of certain trusts and estates. A U.S. real property interest is defined in Sec. 897(c) as any interest other than as a creditor in (1) real property located in the United States or the U.S. Virgin Islands; (2) certain personal property associated with the use of real property; (3) a domestic corporation, unless it is shown that the corporation was not a U.S. real property holding corporation (defined in Sec. 897(c)(2)) during the previous five years or during the period the transferor held the interest, if shorter. In the case of dispositions by certain domestic corporations, partnerships, trusts, and the executors of estates, the withholding rate may be as high as 35% under Sec. 1445(e).

The form together with tax withheld must be filed with the IRS office in Ogden, Utah, by the 20th day after the funds were transferred to the seller. Note that an exception to withholding applies to the sale of U.S. real property interests sold for $300,000 or less that will be used as a residence.

Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests

Foreign persons who sell a U.S. real property interest are required to file a tax return for the year in which the sale occurs. A foreign person who sells a U.S. real property interest must attach Form 8288-A to the tax return to receive credit for taxes withheld and paid by the withholding agent with Form 8288 (see above). Form 8288-A is prepared by the withholding agent for the disposition and filed with the IRS, which provides a copy of the form to the foreign person.

Form 8288-B, Application for Withholding Certificate for Dispositions by Foreign Persons of U.S. Real Property Interests

The transferor or transferee in a disposition by a foreign person of a U.S. real property interest subject to the withholding requirements of Sec. 1445 (see the above discussion for Form 8288) can file Form 8288-B with the IRS office in Ogden, Utah, to request a reduction or elimination of the withholding requirement if certain criteria are met.

Form 8404, Interest Charge on DISC-Related Deferred Tax Liability

Income from an IC-DISC is generally taxed directly to the shareholders, not the corporation (see above under Form 1120-IC-DISC, Schedule P). In certain instances, shareholders may be able to defer income recognition from an IC-DISC.13 When income recognition is deferred, the shareholders must pay interest on the deferral, which is calculated and reported on Form 8404. The form is filed by the due date of the taxpayer's tax return (not with the tax return), excluding extensions, for the tax year that ends with or includes the IC-DISC's tax year. Corporations, trusts, and decedents' estates file the form with the IRS office in Cincinnati. Individuals file the form with the IRS office in Philadelphia.

Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

A passive foreign investment company (PFIC) is defined in Sec. 1297(a) as — except as otherwise provided — any foreign corporation if either (1) 75% or more of the corporation's income for the tax year is passive income (defined in Sec. 1297(b)) or (2) the average percentage of assets (determined in accordance with Sec. 1297(e)) held by the corporation during the tax year that produce passive income or are held for the production of passive income. Complex rules are set forth in Sec. 1298. Sec. 1291 provides a punitive tax regime on U.S. persons who receive "excess distributions" (defined in Sec. 1291(b)) from a PFIC or dispose of stock in a PFIC. Form 8621 is filed with the tax return of a U.S. person that is a shareholder in the PFIC.

A PFIC shareholder may be able to alleviate some of Sec. 1291's harsh tax consequences by electing to be a qualified electing fund under Sec. 1295. If the election is made, the shareholder will be taxed on his or her share of undistributed income of the QEF under Sec. 1293. Also, Sec. 1297(d) exempts from PFIC treatment a U.S. shareholder (defined in Sec. 951(b)) who owns stock in the corporation if the corporation is considered to be a CFC (see the discussion under Form 5471, Schedule M, above).

Though it is generally overlooked, any U.S. investor in a foreign mutual fund may be subject to the Form 8621 filing requirement. Moreover, recent requirements that certain foreign financial institutions under FATCA (see below under Forms 8938, 8957, and 8966) report U.S. investors and account holders to the U.S. Treasury help to ensure that the IRS will be able to identify U.S. taxpayers who are required to file Form 8621. Many of these investors may be unaware that they have a filing requirement in addition to FATCA and FinCEN Form 114 (see above).

Form 8621-A, Return by a Shareholder Making Certain Late Elections to End Treatment as a Passive Foreign Investment Company

Shareholders in a former PFIC can make a "purging election" under Sec. 1298(b)(1), which will be treated for tax purposes as a deemed sale or deemed dividend. The result of the election is that the shareholder's stock will no longer be considered stock in a PFIC. The election is made on Form 8621. However, Form 8621-A is used if the shareholder makes the election late. The form is filed with the IRS office in Ogden, Utah.

Form 8689, Allocation of Individual Income Tax to the U.S. Virgin Islands

U.S. citizens or residents (other than bona fide residents of the U.S. Virgin Islands) who have income from sources in the USVI or income effectively connected with a trade or business in the USVI may be subject to tax there. Form 8689 allocates the citizen's or resident's tax between the United States and the USVI. The form is attached to the individual's Form 1040.

Form 8802, Application for United States Residency Certification

U.S. citizens and residents who have income sourced in a foreign country may want to claim the benefits of a tax treaty the United States has with that country. Form 8802 is used to request that the IRS issue Form 6166, a letter of U.S residency certification, to claim the benefits of an income tax treaty or value-added-tax exemption in the foreign country. An $85 fee must be paid with the application, which is filed with the IRS office in Philadelphia. The Form 6166 will be sent to the U.S. citizen, resident, or a third-party appointee.

Form 8804, Annual Return for Partnership Withholding Tax (Sec. 1446)

Sec. 1446 requires that a partnership withhold income tax from a foreign partner (as defined in Sec. 1446(e)) if the partnership has gross income that is effectively connected with a trade or business (as defined in Sec. 1446(c)) in the United States. Form 8804 must be filed to report the total liability for the partnership's tax year. The partnership must make four installment payments of the tax. The amount that must be withheld is discussed in the Form 8804 instructions, generally the highest rate applicable to the type of partner (i.e., 39.6% for individuals and 35% for corporations, with exceptions, until Dec. 31, 2017, 37% for individuals and 21% for corporations beginning in 2018). Form 8804 is filed separately from the Form 1065, U.S. Return of Partnership Income. It is due by the 15th day of the third month following the end of the partnership's tax year or the 15th dayof the sixth month for partnerships that keep their books and records outside of the United States and Puerto Rico. It is filed with the IRS office in Ogden, Utah, and a penalty applies to persons required to withhold who fail to withhold or pay the withholding tax.

Form 8804-C, Certificate of Partner-Level Items to Reduce Sec. 1446 Withholding

A foreign partner files the Form 8804-C to provide to a partnership a certification under Regs. Sec. 1.1446-6 to reduce or eliminate the partnership's withholding tax obligation under Sec. 1446. The partnership, not the foreign partner, submits the Form 8804-C with a Form 8813 (see below) to the IRS office in Philadelphia.

Form 8804-W, Installment Payments of Sec. 1446 Tax for Partnerships

Form 8804-W is a worksheet used to determine the estimated Sec. 1446 payments.

Form 8805, Foreign Partner's Information Statement of Sec. 1446 Withholding Tax

Form 8805 is used to show the total amount of effectively connected taxable income allocable to a foreign partner, and tax credit for taxes paid by the partnership on behalf of the foreign partner. A separate Form 8805 must be filed for each foreign partner. The foreign partner must attach a copy of the Form 8805 to its tax return if it wants to receive credit for taxes paid by the partnership on its behalf.

Form 8806, Information Return for Acquisition of Control or Substantial Change in Capital Structure

At first glance, it would appear that Form 8806 only applies to domestic corporations since the instructions state that it must be filed to report an acquisition of control or substantial change in the capital structure of a domestic corporation. Control means at least 50% of the total combined voting power of all classes of stock entitled to vote or at least 50% of the total value of shares of all classes of stock.

However, the instructions state that the form must also be filed if the reporting corporation or shareholder is required to recognize gain under Sec. 367(a). Sec. 367 governs the tax consequences of transfers of property by U.S. persons to foreign corporations. The form could also be required if a domestic corporation merges with or acquires a foreign corporation. The form must be filed with the IRS's Large Business and International division in Washington within the earlier of 45 days after the transaction or Jan. 5 of the year following the calendar year in which the transaction occurred. Failure to file by the due date may result in a $500-per-day penalty up to a maximum of $100,000. Additional penalties may also apply.

Form 8813, Partnership Withholding Tax Payment Voucher (Sec. 1446)

Form 8813 accompanies the quarterly estimated tax payments made by the partnership on behalf of foreign partners required under Sec. 1446 (see Form 8804 above). It is filed with the IRS office in Ogden, Utah.

Form 8833, Treaty-Based Return Position Disclosure Under Sec. 6114 or 7701(b)

A tax treaty the United States has with a foreign country can override the Internal Revenue Code if there is a conflict (see Sec. 894). Form 8833 complies with the requirement of Sec. 6114 that a taxpayer who claims the benefits of a treaty when such a conflict exists disclose the reason for the position. The form is also used by a dual-resident taxpayer to disclose a treaty-based position required by Regs. Sec. 301.7701(b)-7. An alien individual is a dual-resident taxpayer if he or she is considered to be a resident for tax purposes under both the United States and another country's laws. Form 8833 is filed with the taxpayer's tax return.

Form 8840, Closer Connection Exception Statement for Aliens

A nonresident alien who meets the substantial presence test, defined in Form 8840's instructions, can be taxed as a U.S. resident. However, the closer connection to a foreign country exception in Regs. Sec. 301.7701(b)-2 will allow the nonresident to continue to be taxed as a nonresident if the Form 8840 is filed and a closer connection to the foreign country or countries can be shown. The exception is not available if the nonresident was in the United States for at least 183 days during the year or in certain other circumstances. The form is filed with the nonresident's tax return. If a tax return is not filed, then the Form 8840 is filed with the IRS office in ­Austin, Texas.

Form 8843, Statement for Exempt Individuals and Individuals With a Medical Condition

Form 8843 is filed by alien individuals who want to exclude days in the United States from being considered for purposes of the substantial physical presence test because they were exempt individuals or were unable to leave the United States because of a medical condition or medical problem. Meeting the substantial physical presence test can result in the alien's being taxed as a U.S. citizen or resident. Exempt individuals include teachers and trainees, certain students, professional athletes in the United States to compete in charitable sports events, and certain visa holders. The form is filed with the alien's tax return or with the IRS office in Austin, Texas, if no return is filed.

Form 8854, Initial and Annual Expatriation Statement

Sec. 6039G requires that individuals giving up their U.S. citizenship or residency provide a statement to the Treasury Department. Form 8854 is filed by U.S. citizens and long-term residents (a permanent resident who was in the United States for eight of the last 15 years) who are expatriating. Expatriates who do not file the form will continue to be taxed under the laws for citizens and residents of the United States. The form's instructions also provide that expatriates who meet certain income thresholds will continue to be taxed under Sec. 877, Expatriation to Avoid Income Tax, for a period of time following the expatriation. Expatriates subject to tax under Sec. 877 must continue to file Form 8854 annually. The form is filed with Form 1040 or Form 1040NR with the IRS office in Philadelphia.

Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities

U.S. persons (defined in the form's instructions) that are "tax owners" of a foreign disregarded entity (FDE) or that own interests in foreign tax owners must file Form 8858. An FDE is an entity not created or organized in the United States that is not treated as being separate from its owners for tax purposes under Regs. Secs. 301.7701-2 and 301.7701-3. In the United States, a limited liability company (LLC) would be an example of a disregarded entity because the LLC's owner, not the LLC, is taxable on the LLC's income. The tax owner of the FDE is the person that is treated as owning the assets and liabilities of the FDE for U.S. tax purposes. The tax owner could be a U.S. person, a CFC owned by a U.S. person or persons, or a controlled foreign partnership (CFP) owned by a U.S. person or persons (see the example on page 2 of the instructions). The FDE should also file Form 8832, Entity Classification Election.

Form 8858 is filed with the tax owner's tax return, including extensions. However, if the U.S. person is not the tax owner of the FDE and is required to file a Form 5471, dealing with U.S. persons who own interests in foreign corporations and CFCs (see above), or Form 8865, dealing with CFPs (see below), and the CFC or CFP owns the FDE, then Form 8858 will be filed with the Form 5471 or Form 8865. A $10,000 penalty is imposed for failure to file and is increased for continued failure to file. Failure to file will also result in a reduction of the foreign tax credit.

Form 8858, Schedule M, Transactions Between Foreign Disregarded Entity of a Foreign Tax Owner and the Filer or Other Related Entities

Schedule M must be filed with Form 8858 to disclose certain transactions between the FDE and its tax owner. If the transactions occurred with a foreign currency, the form's instructions prescribe how the amounts should be translated into U.S. dollars.

Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships

Form 8865 complies with the requirement of Sec. 6038B(a)(1)(B) that certain transfers by U.S. persons to foreign partnerships be disclosed. The form's instructions list four categories of filers. They include (1) U.S. persons who own more than 50% of a foreign partnership; (2) five or fewer U.S. persons who own more than 50% of a foreign partnership, none of whom owns less than 10% of the partnership; (3) a U.S. transferor of property to a foreign partnership, if that person owns directly or constructively at least a 10% interest in the foreign partnership, or the value of property contributed during the 12-month period of the transfer exceeds $100,000; and (4) a U.S. person who had a "reportable event" under Sec. 6046A (acquisitions, dispositions, and changes in proportional interests). Form 8865 is filed with the U.S. person's tax return. For category 1, 2, and 4 filers, a $10,000 penalty will be imposed for failure to comply, which may increase to $50,000 for a continued failure to file, as well as a reduction of the foreign tax credit for category 1 and 2 filers. For category 3 filers, a penalty of 10% of the FMV (at the time of contribution) of the property contributed (up to a limit of $10,000) applies for failing to properly report a contribution.

Form 8865, Schedule N, Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities

Schedule N is filed by categories 1 and 2 filers of Form 8865 (see above) to report certain transactions between them and the foreign partnership. A partnership is a CFP if it falls within category 1 or 2.14

Form 8865, Schedule O, Transfer of Property to a Foreign Partnership (under Sec. 6038B)

This form is filed by category 3 filers of Form 8865 to provide information about the property contributed to the foreign partnership (see above).

Form 8865, Schedule P, Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership (under Sec. 6046A)

This form must be completed by each category 4 filer of Form 8865 to report the acquisition, disposition, and change of interest in a foreign partnership (see above).

Form 8873, Extraterritorial Income Exclusion

Extraterritorial income (ETI), as defined in the Form 8873 instructions, that is "qualifying foreign trade income" (also defined in the form's instructions) is eligible for exclusion from income, but only for certain binding contracts beginning before May 18, 2006. The ETI exclusion is not available for contracts entered into after May 17, 2006. The form is filed with the taxpayer's tax return.

Form 8883, Asset Allocation Statement Under Sec. 338

Form 8883 is used to report information about transactions involving the deemed sale of corporate assets under Sec. 338. If a Sec. 338 election is made for a foreign target corporation (see the discussion above for Form 8023) for which a Form 5471 is required to be filed (see the discussion above under Form 5471), then (1) the seller (or U.S. shareholder) must attach a copy of the Form 8883 to the last Form 5471 filed by the old foreign target corporation, and (2) the purchaser (or its U.S. shareholder) must attach a copy of the Form 5471 for the new foreign target corporation. Failure to file the Form 8883 may subject the taxpayer to the penalties listed in Secs. 6721-6724 unless reasonable cause can be established.

Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession

This form is filed to notify the IRS that the taxpayer became or ceased to be a bona fide resident of a U.S. possession (defined in Sec. 937(a)) in accordance with Sec. 937(c). The form must be filed if the taxpayer meets both of the following conditions: (1) The taxpayer's worldwide gross income (defined in the form's instructions) in the tax year is more than $75,000, and (2) one of three specified criteria (described in the form's instructions) relating to residency in a U.S. possession is met. The form is filed by itself with the IRS office in Philadelphia by the due date of the tax return, including extensions.

Form 8938, Statement of Specified Foreign Financial Assets

This form must be filed by a "specified person" (i.e., certain individuals and domestic entities described in the form's instructions) in accordance with Sec. 6039D to report specified foreign financial assets if the total value of all such assets in which the specified person has an interest is more than the appropriate reporting threshold. Interests in a "specified foreign financial asset" (generally a foreign bank account, stock and securities not issued by a U.S. person, partnership interests in a foreign partnership, foreign mutual funds, foreign trusts and estates, notional swaps and derivatives with a foreign counterparty or issuer, any financial instrument or contract that has an issuer that is not a U.S. person, and other items listed in the form's instructions) must be reported. Exceptions to reporting and threshold amounts for reporting are provided in the instructions.

Unmarried individuals living in the United States and domestic entities that have specified foreign financial assets exceeding $50,000 at the end of the year or $75,000 at any time during the year must file the form. The amounts increase to more than $100,000 and $150,000 for married taxpayers filing a joint return. Higher thresholds apply for individuals living outside the United States. The form is filed with the tax return. Note that assets reported on timely filed Forms 3520, 5741, 8621, and 8865 (see above for all) do not have to be reported on Form 8938. However, the forms on which those assets are reported must still be identified on the Form 8938. Failure to file may result in a $10,000 penalty that can increase to $50,000 for a continued failure.

Form 8957, Foreign Account Tax Compliance Act (FATCA) Registration

Form 8957 is filed by a foreign financial institution (FFI) and/or nonfinancial foreign entity (NFFE) (both defined in the form's instructions) to register itself and its branches as:

  • A participating foreign financial institution;
  • A registered deemed-compliant foreign financial institution;
  • A limited foreign financial institution;
  • A limited branch; or
  • A sponsoring entity.

The form is filed with the IRS office in Austin, Texas, unless it is filed electronically.

Form 8966, FATCA Report

FATCA, as described in Secs. 1471-1474 and the regulations thereunder, requires that 30% be withheld from payments made to certain FFIs and certain NFFEs. The withholding requirements do not apply if the FFIs and NFFEs agree to report to the United States information with respect to certain U.S. accounts and account holders in those entities. Form 8966 lists those account holders. The form must be filed by March 31. However, a 90-day extension of time to file the Form 8966 will be granted by filing Form 8809-1, Application for Extension of Time to File FATCA Form 8966.

Form 8975, Country-By-Country Report

Form 8975 must be filed by a U.S. person if it is the ultimate parent entity of a U.S. multinational enterprise (U.S. MNE) group with revenues of $850 million or more in the immediately preceding reporting period. The form is used to annually report certain information with respect to the filer's U.S. MNE group on a country-by-country basis. The parent entity must file Form 8975 with its tax return by its due date (including extensions).

Regs. Sec. 1.6038-4(b)(1) and the form's instructions define the ultimate parent of a U.S. MNE as a U.S. business entity that:

(i) [o]wns directly or indirectly a sufficient interest in one or more other business entities, at least one of which is organized or tax resident in a tax jurisdiction other than the United States, such that the U.S. business entity is required to consolidate the accounts of the other business entities with its own accounts under U.S. generally accepted accounting principles, or would be so required if equity interests in the U.S. business entity were publicly traded on a U.S. securities exchange; and (ii) [i]s not owned directly or indirectly by another business entity that consolidates the accounts of such U.S. business entity with its own accounts under generally accepted accounting principles in the other business entity's tax jurisdiction of residence, or would be so required if equity interests in the other business entity were traded on a public securities exchange in its tax jurisdiction of residence.

Form 8975, Schedule A, Tax Jurisdiction and Constituent Entity Information

A separate Schedule A must be filed for each tax jurisdiction in which a U.S. MNE "has one or more constituent entities resident." A constituent entity is any separate business entity of the U.S. MNE group, excluding certain foreign corporations and partnerships and permanent establishments of those foreign corporations and partnerships.

Form 9210, Alien Status Questionnaire

Form 9210 requests information about a nonresident alien in the United States, including the country in which the alien is a citizen, the type of visa the alien holds, and whether the alien is employed. As of this writing, no instructions accompany the form.

Form 14345, Application for Qualified Intermediary, Withholding Foreign Partnership, or Withholding Foreign Trust Status

Form 14345 is filed with the IRS to obtain permission to act as a qualified intermediary (QI) for purposes of withholding taxes. Rev. Proc. 2017-15 states that "[a] QI agreement may be entered into by persons described in §1.1441-1(e)(5)(ii), including foreign financial institutions (FFIs) (as defined in §1.1471-5(d)), foreign clearing organizations, and foreign branches of U.S. financial institutions and clearing organizations." The QI becomes the withholding agent for amounts it pays to its account holders under Chapter 3 (Secs. 1441-1446 on withholding from nonresident aliens and foreign entities) and Chapter 4 (Secs. 1471-1474, dealing with FATCA). Note that the form also lists eight other items that must be submitted with the application. The form must be submitted electronically by following the registration procedures at www.irs.gov.

Form 14452, Foreign Account or Asset Statement

In 2009, the IRS began an Offshore Voluntary Disclosure Program (OVDP) for taxpayers who had not been reporting foreign income and/or foreign financial accounts. Form 14452 must be filed for each foreign account or asset included in the disclosure. Taxpayers who make disclosures will also be subject to interest and penalties as well as past due income taxes. In addition to Form 14452, taxpayers will also have to file Form 14454 (see below); Form 14457 (see below); and a Consent to Extend the Time to Assess Civil Penalties Provided By 31 U.S.C. § 5321 for FBAR Violations.15 (For FBAR disclosures see FinCEN Form 114, above.) These forms are filed with the IRS office in Philadelphia at the address provided in Form 14457 (see below). See also the "Submission Requirements" for additional disclosures on the IRS website.16

Form 14454, Attachment to Offshore Voluntary Disclosure Letter

This form is filed with Form 14457 (see below). One attachment is required for each foreign financial account that the OVDP applicant controls or is the beneficial owner of.

Form 14457, Offshore Voluntary Disclosure Letter

The information requested on this form must be provided to be considered for acceptance into the OVDP (see above under Form 14452).

Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures

Form 14653 is filed by U.S. citizens and residents (or the estates of those taxpayers) who reside outside of the United States who want to participate in a streamlined amnesty procedure but have not disclosed the necessary information about foreign income or foreign assets. The form's instructions specifically mention the FBAR filing requirements for the past six years (see FinCEN Form 114, above) and tax returns for the past three years. However, the form also requires that the U.S. person attest that failure to "submit all required information returns . . . was non-willful conduct," meaning that any information return not filed must be filed in addition to the FBAR (e.g., the information returns discussed in this article such as Forms 3520, 5471, 8938, etc.). The U.S. filer must attest that the failure to comply was not willful. A detailed explanation must be provided for each failure.

Non-U.S. residents also file this form to show that they did not meet the substantial presence test of Sec. 7701(b)(3) for residency purposes.

Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures

U.S. citizens and residents (or their estates) residing in the United States will be required to submit similar information as required for U.S. citizens and residents residing outside of the United States (see the discussion for Form 14653 above). To qualify, the lack of compliance must not have been willful. A 5% penalty will be imposed on the "highest aggregate balance/value of the taxpayer's foreign financial assets that are subject to the miscellaneous offshore penalty during the years in the covered tax return period and the covered FBAR period."17

Form 14708, Streamlined Domestic Penalty Reconsideration Request Related to Canadian Retirement Plans

Form 14708 is filed if the filer of the Form 14654 (see above) included the value of a Canadian retirement plan described in Rev. Proc. 2014-55 for purposes of computing the 5% penalty. The filer must be an "eligible individual" as described in Rev. Proc. 2014-55. Form 14708 allows the taxpayer to reduce the amount of the overall penalty by the amount of the penalty paid for the value of the Canadian retirement plan. Therefore, if the only asset reported on Form 14654 was a Canadian retirement plan, the eligible taxpayer would be entitled to a refund of the whole penalty.

Form W-7, Application for IRS Individual Taxpayer Identification Number

Nonresident individuals who are not eligible to receive a Social Security number file Form W-7 with the IRS to receive an individual taxpayer identification number (ITIN). Examples of those individuals include nonresident individuals married to U.S. individuals who are filing a joint income tax return, nonresidents who are claiming reduced withholding (i.e., less than 30%) under a tax treaty, and nonresidents who are claiming a refund of taxes. An ITIN request should be filed with the IRS office in Austin, Texas, or with an acceptance agent or certified acceptance agent. The location of acceptance agents can be found by typing "acceptance agent program" in the search engine on the IRS website.

Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding and Reporting (Individuals)

Foreign individuals (excluding nonindividual foreign entities and U.S. persons) file Form W-8BEN with a withholding agent (see the above discussion under Form 1042) to obtain the reduced withholding on income from U.S. sources listed in the form's instructions. The normal withholding required is 30% on nonresident aliens, unless the foreign person can claim reduced tax treaty benefits.

Form W-8BEN-E, Certificate of Status of Beneficial Owner for United States Tax Withholding and Reporting (Entities)

Foreign entities (not nonresident alien individuals and U.S. persons abroad or in the United States) file Form W-8BEN-E with a withholding agent (see the above discussion under Form 1042) to obtain reduced withholding on income from U.S. sources listed in the form's instructions. These are essentially the same income items listed for Form W-8BEN (see above). The normal withholding is 30%, unless the foreign entity can claim reduced tax treaty benefits.

Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits

A "covered expatriate" (defined in the form's instructions) files Form W-8CE with the payer of items listed in the form's instructions. In general, these items involve certain deferred compensation and nongrantor trusts. The payer may be required to withhold taxes from the covered expatriate.

Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States

Form W-8ECI is filed by a foreign person (a nonresident individual or foreign entity) with a withholding agent or payer if the foreign person is the beneficial owner (described in the form's instructions) of U.S.-source income effectively connected with a U.S. trade or business. No withholding is required on effectively connected income. Rather, the foreign person reports the income on the tax return it must file in the United States.

The form's instructions state that the exemption "does not apply to personal services income [instead use Form 8233, see above] and income subject to withholding under Sec. 1445 (dispositions of U.S. real property interests) [instead use Form 8288, see above] or Sec. 1446 (foreign partner's share of effectively connected income) [instead use Form 8804, see above]."

Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding and Reporting

Sec. 892(a) exempts foreign governments and international organizations from taxation on certain investment and interest income from U.S. sources. Sec. 895 exempts from taxation income on certain U.S. obligations derived by a foreign central bank. Payments to foreign tax-exempt organizations, foreign governments, and governments of U.S. possessions also qualify for exemption. Form W-8EXP is used by these entities to establish eligibility for exemption from the 30% tax and withholding. The instructions state that the form must be given to a withholding agent or payer by a:

foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U.S. possession receiving a withholdable payment or receiving a payment subject to Chapter 3 [Secs. 1441-1446] withholding, or are such an entity maintaining an account with an FFI requesting this form.

Note that the exemption does not apply to income received from a "commercial activity" and of income and gain from a "controlled commercial ­entity" (defined in the instructions).

Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding and Reporting

Form W-8IMY is provided to a payer of a reportable amount or withholdable payment by a foreign intermediary, foreign flowthrough entity, and foreign branches of a U.S. person that are receiving the payment on behalf of another person or as a flowthrough entity. The form serves to establish the entities' foreign status to the payer for purposes of Secs. 1441, 1442, and 1446. The filer agrees to be responsible for any withholding under Chapter 3 (Secs. 1441-1446 on withholding from nonresident aliens and foreign entities) and Chapter 4 (Secs. 1471-1474, dealing with FATCA). The form's filer is also responsible for any reduced withholding the foreign person may be allowed under a treaty. This means that the payer is alleviated from withholding responsibilities since the amounts are going to the filer.

Form W-9, Request for Taxpayer Identification Number and Certification

Form W-9 is filed by a U.S. person (defined in the form's instructions) with a withholding agent to establish that the person is a U.S. person not subject to withholding.

Form W-14, Certificate of Foreign Contracting Party Receiving Federal Procurement Payments

Sec. 5000C imposes a 2% tax on any foreign person who receives a "specified Federal procurement payment." Sec. 5000C(b) defines a specified procurement payment as a payment made by the U.S. government involving certain manufactured goods and services in a foreign country. Form W-14 is filed by the foreign contracting party with the "acquiring agency" (a U.S. government department, agency, independent establishment, or corporation) to claim a reduction or exemption from withholding based on international agreements (e.g., treaties), or if some of the goods are produced in, or services performed, in the United States. The form must also be filed if so requested by the acquiring agency even if the foreign person is not claiming an exemption or reduction.

Conclusion

The increasing trend toward globalization and the growing complexity of international financial transactions ensure that transnational tax reporting will become more complex and widespread over time. An increasing number of taxpayers who may be unaware of these trends are likely to be ensnared in the web of never-ending disclosure requirements. One big problem those taxpayers may have is that they will not even be aware that they have a disclosure requirement. Moreover, the future is likely to see additions to the types of property or transactions that will have to be disclosed. For example, at present there is no requirement that a U.S. owner of foreign real property disclose that ownership. This may change. Tax practitioners have to carefully advise clients of their legal reporting obligations.  

Footnotes

131 U.S.C. §§5321, 5322, 5317, and 5332; 31 C.F.R. §§1010.820, 1010.840, and 1010.830.

231 U.S.C. §5314.

3IRS, "Report of Foreign Bank and Financial Accounts (FBAR)" (rev. Sept. 25, 2017), available at www.irs.gov. For more on FBAR penalties, see Kemm, "Developing a Strategy to Fight FBAR Penalties," 48 The Tax Adviser 340 (May 2017).

431 U.S.C. §§5322(a) and (b) and 18 U.S.C. §1001.

5Sec. 2014.

6For more on this requirement, see Fava, "Departing Aliens and the Sailing Permit," 48 The Tax Adviser 518 (July 2017).

7Secs. 994 and 995. See the discussion of Form 8404 below.

8Regs. Sec. 1.994-1(a)(3).

9See Regs. Sec. 1.482-1(a).

10IRS, "About Form 2063, U.S. Departing Alien Income Tax Statement" (rev. Sept. 28, 2017), available at www.irs.gov.

11For more on the filing of Form 3520 by U.S. beneficiaries, see McNamara, "Reporting Foreign Trust and Estate Distributions to U.S. Beneficiaries (Part 1)," 48 The Tax Adviser 710 (October 2017).

12For more on Form 5471, see Pasmanik, "Form 5471 Substantial Compliance: What Does It Mean and Why Is It Critical?" 47 The Tax Adviser 412 (June 2016).

13Sec. 995(f).

14Regs. Secs. 1.6038-3(a)(1) and (2); Regs. Sec. 1.6038-3(b)(1).

15Available at www.irs.gov.

16Available at www.irs.gov.

17IRS, "[Streamlined Offshore Procedures for] U.S. Taxpayers Residing in the United States" (rev. Nov. 6, 2017), available at www.irs.gov.

 

Contributor

John C. Zimmerman is an associate professor of accounting in the Lee Business School at the University of Nevada, Las Vegas. This research was made possible by a faculty development leave from the University of Nevada, Las Vegas. For more information about this article, contact thetaxadviser@aicpa.org.

 

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