​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 theform.

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:

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
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.-sourceincome 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-relateddeferred 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.



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