U.S. Tax Form 8865 Return of U.S. Persons with Respect to Certain Foreign partnerships
Who Must Use This Form?
A partnership formed in a foreign country that is controlled by U.S. partners is required to file tax Form
8865. Control means that five or fewer U.S. persons who each own a 10% or greater interest in the
partnership also own (in the aggregate) more than 50% of the partnership interests.
A US person who is a partner in a foreign partnership (or an entity electing to be taxed as a partnership)
is required to file Form 8865 to report the income and financial position of the partnership and to report
certain transactions between the partner and the partnership. The form is required to be filed with the
partner's tax return.
A controlled foreign corporation (with multiple owners) that elects to be taxed as a disregarded entity,
should file Form 8865 and should file a Form K-1 for each U.S. partner.
What Information Is Required?
This form requires substantially the same information as a U.S. partnership Form 1065 and much of the same
information that is required by a foreign corporation Form 5471 . The form requires a statement of the net
(taxable) profits of the partnership, details of any capital gains (long or short term) a summary of the K-1
forms for the partners, a balance sheet (at the beginning and end of the year), a reconciliation of the
partner's capital accounts from the beginning to the end of the year and a page providing information about
transactions between the controlled foreign partnership, its partners and any related entities.
The form also provides for the disclosure of the name, address and taxpayer I.D. of the partners,
information about transfers of property to the partnership and any changes in the ownership interest of any
partner.
When Is It Due?
The form is required to be filed with the income tax return of each partner, including any extensions of
time to file.
Where Should It Be Filed?
With the IRS Center where the taxpayer files its tax return.
How Long Does It Take To Prepare?
The IRS estimates that the average time required to prepare and mail the Form 8865 and the supporting
schedules is about 57 hours, not including the time required for record keeping or learning about the
applicable law and IRS instructions. This compares with the IRS estimate of about 55 hours to prepare a
domestic partnership return on Form 1065. This may be accurate for an operating business with substantial
business activity and many partners, but it's likely to be excessive for a small partnership with less than
five partners and with only modest investment activity to report.
Why Comply ? (Penalties)
A U.S. controlled foreign partnership or a 10% U.S. partner of a U.S. controlled foreign partnership may be
subject to a penalty of $10,000 per year for each partnership return that is not filed. A 10% partner who
makes a contribution of property to a foreign partnership and does not disclose the transfer is subject to a
penalty of 10% of the amount transferred up to $100,000.
Comments
The U.S. partners of a U.S. controlled foreign partnership are required to file an annual report with the
IRS on Form 8865.
Like the controlled foreign corporation, the form is required when the foreign partnership is controlled by
U.S. persons who each own 10% or more of the partnership and who collectively own more than 50% of the
partnership interests. Anyone who has an ownership interest in a foreign partnership needs to read the
specific filing requirements to determine if they are required to file this form.
Form 8865 is also required by code section 6046A to disclose the acquisition or the disposition of any
interest in a foreign partnership -- but only if the partner has a 10% or greater interest in the
partnership or if the value of property contributed to the partnership exceeds $100,000. Where the partner
is not required to file Form 8865 and where no other U.S. person is required to file that form, it appears
that the U.S. partners are simply required to report their share of any foreign partnership income on their
Form 1040 or 1120 or whichever other tax return may be applicable.
