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Overview of Form 8865 and its purpose

Form 8865 pertains to the IRS’s Return of U.S. Persons With Respect to Certain Foreign Partnerships, an important tax form IRS used to monitor U.S. persons who are part of foreign partnerships that were not formed or registered in the United States or under U.S. law. A foreign partnership is a partnership that is not created or organized in the United States or under the laws of the United States or any state.

The requirement to file Form 8865 depends on various factors such as ownership percentage, the type of partnership, and specific thresholds outlined by the IRS guideline.

Who needs to file Form 8865?

You need to file tax Form 8865 if you are a U.S. person who falls under any of the four categories described above. A U.S. person includes:

• A U.S. citizen or resident alien.
• A domestic corporation.
• A domestic partnership.
• An estate or trust that is not a foreign estate or trust.

You may also need to file Form 8865 if you are a U.S. person who owns an interest in a domestic partnership that owns an interest in a foreign partnership. In this case, you are considered an indirect partner of the foreign partnership and you may have to report your share of the foreign partnership’s income, deductions, credits, and other items.

Related blog:

• Form 2555: Reporting Foreign Earned Income – XOA TAX
• A Guide to Form 8858 and Foreign Disregarded Entities for U.S. Taxpayers
• Form 8858 U.S Foreign Disregarded Entities for U.S Taxpayers

Key filing thresholds and exceptions

Form 8865 has four categories of filers, depending on the type and level of interest or involvement in the foreign partnership. These categories are:

• Category 1: For U.S. persons who owned or controlled more than 50% of the foreign partnership in any part of its tax year. There can be multiple Category 1 filers for the same foreign partnership in a tax year.
• Category 2: For U.S persons who own 10% or more of a foreign partnership controlled by U.S persons with at least a 10% interest. However, if a Category 1 filer exists, no one is considered a Category 2 filer.
• Category 3: For U.S. persons who transfer property to a foreign partnership in exchange for an interest in the partnership. Owned directly or constructively at least a 10% interest in the foreign partnership immediately after the contribution, or the value of the property contributed exceeds $100,000.
• Category 4: For U.S. persons who acquire, dispose of, or change their interest in a foreign partnership by at least 10% during the year. This category also applies to those who only change their interest by 2% but their spouse changes their interest by another 9%.

Once you have determined your category, you can identify the applicable schedules and filing obligations. It’s important to note that you might qualify as a constructive owner of a foreign partnership if you have a close enough relationship with the actual owner to be treated as if you were an owner yourself. For instance, if your spouse owns 100% of the stock of a company, you would be considered a constructive owner with the same ownership rights and responsibilities.

Filing Requirements for Categories of Filers

Filing Requirements	Category of Fillers
	1	2	3	4
Identifying information—page 1 of Form 8865	✓	✓	✓	✓
Schedule A—Constructive Ownership of Partnership Interest	✓	✓	✓	✓
Schedule A-1—Certain Partners of Foreign Partnership	✓		✓
Schedule A-3—Affiliation Schedule	✓	✓	✓	✓
Schedule B—Income Statement—Trade or Business Income	✓
Schedule G (Form 8865)—Statement of Application of the Gain Deferral Method Under Section 721	✓		✓	✓
Schedule H (Form 8865)—Acceleration Events and Exceptions Reporting Relating to Gain Deferral Method Under Section 721(c)	✓		✓	✓
Schedule K—Partners’ Distributive Share Items	✓
Schedule K-2 (Form 8865)—Partners’ Distributive Share Items—International	✓
Schedule K-3 (Form 8865)—Partner’s Share of Income, Deductions, Credits, etc.—International	✓	✓
Schedule L—Balance Sheets per Books	✓
Schedule M—Balance Sheets for Interest Allocation	✓
Schedule M-1—Reconciliation of Income (Loss) per Books With Income (Loss) per Return	✓
Schedule M-2—Analysis of Partners’ Capital Accounts	✓
Schedule N—Transactions Between Controlled Foreign Partnership and Partners or Other Related Entities	✓	✓
Schedule D—Schedule D (Form 1065), Capital Gains and Losses	✓
Schedule K-1 (Form 8865)—Partner’s Share of Income, Deductions, Credits, etc. (direct partners only)	✓	✓
Schedule O (Form 8865)—Transfer of Property to a Foreign Partnership			✓
Schedule P (Form 8865)—Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership				✓

Gathering Required Information:

• Identification: Provide personal details and EIN for business SSN for personal filer for both the filer and the foreign partnership.
• Ownership Percentage: Disclose the percentage of ownership in the foreign partnership.
• Partnership Activities: Describe the partnership’s business activity and country of organization.
• Income, Deductions, and Credits: Report the filer’s share of the partnership’s income, deductions, credits, and other relevant items.
• Tax Computations: Calculate self-employment tax and any applicable tax adjustments.
• Related Party Transactions: Disclose any financial transactions between the filer and the foreign partnership or related entities.
• Additional Information: Depending on the circumstance, there may be additional requirements, such as changes in ownership, terminations or acquisitions.

For those uncertain about Form 8865 completion, seeking foreign income exclusion, or having questions about U.S. ex-pat taxes, you can consult with our tax expert

Filing Deadlines and Penalties:

You must file Form 8865 by April 15 for individuals and March 15 for partnerships and corporations. If you need more time to file, you can request an extension by filing Form 4868 for individuals or Form 7004 for partnerships and corporations.

• For Category 1, 2, or 4 filers, $10,000 for each tax year of each foreign partnership for not giving the required information on time, plus an additional $10,000 for each month or part of a month that the failure continues after 90 days of the IRS notice, up to a maximum of $60,000 per information return, unless the failure is due to intentional disregard.
• For Category 3 filers who do not report certain transfers or contributions of property to a foreign partnership, 10% of the amount contributed, up to a maximum of $100,000, unless the failure is due to intentional disregard.

Exceptions to Filing Form 8865

Some filers may not need to file Form 8865, depending on their category and situation. For example, if you file a joint return or a consolidated return with other Category 1 filers, only one of you needs to file Form 8865. Also, if the foreign partnership files Form 1065 and gives all the information to the IRS and the U.S. partners, you may not need to file Form 8865. These are just some of the exemptions and reliefs that apply to Form 8865. To learn more, please see the full instructions on the IRS site.

Conclusion: Form 8865 may seem daunting at first but armed with the knowledge gained from this comprehensive guide, you can confidently tackle the reporting requirements for your foreign partnership. By understanding the form’s purpose, gathering the required information, and seeking professional assistance, you can navigate the process smoothly and ensure compliance with U.S. tax laws.

Sources: irs.gov, irs.gov/i8865