Exceptions to Filing Form 8865: Part I

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As most international tax attorneys in Minneapolis would point out, Form 8865 (“Return of U.S. Persons With Respect to Certain Foreign Partnerships”) is used to report the information required under section 6038 (reporting with respect to controlled foreign partnerships), section 6038B (reporting of transfers to foreign partnerships), or section 6046A (reporting of acquisitions, dispositions, and changes in foreign partnership interests), and is required for certain defined categories of filers. However, there are certain exceptions to filing Form 8865.

This article will briefly explain the Form 8865 exceptions for multiple Category 1 filers and for indirect partners under the constructive ownership rules (there are more exceptions that will be explained in future articles). This article is not intended to constitute tax or legal advice.

Multiple Category 1 Filers Exception

In general, Category 1 filers must file Form 8865. As the instructions to Form 8865 note, “A Category 1 filer is a U.S. person who controlled the foreign partnership at any time during the partnership’s tax year. Control of a partnership is ownership of more than a 50% interest in the partnership.” However, if during a partnership’s tax year more than one U.S. person qualifies as a Category 1 filer, only one of these Category 1 partners will be required to file Form 8865. (A U.S. person with a controlling interest in the losses or deductions of the partnership will not be permitted to be the lone filer of Form 8865 if another U.S. person has a controlling interest in capital or profits; only the latter may file the form). Note that Form 8865 must still be filed by taxpayers under the multiple filers’ exception if they are separately subject to the Category 3 or 4 filing requirements.

When the form is filed by only one U.S. person Category 1 filer, it still must contain all of the information that would be required if each Category 1 filer filed a separate Form 8865, including various required schedules. The Category 1 taxpayer who does not submit Form 8865 because of multiple filers must attach a statement entitled, “Controlled Foreign Partnership Reporting” to that person’s income tax return with the following information: (1) A statement that the person qualifies as a Category 1 filer, but is not filing Form 8865 under the “multiple Category 1 filers” exception; (2) the name, address, and identifying number (if applicable) of the qualifying foreign partnership; (3) a statement noting that the filing requirement has been, or will be, satisfied; (4) the name and address of the person submitting Form 8865 for the foreign partnership; and (5) the IRS Service Center where the Form 8865 must be filed, if sent by mail.

Constructive Owners Exception

For Category 1 or 2 filers who do not own a direct interest in a foreign partnership, and who are only required to file because of the constructive ownership rules (please see form instructions and IRS regulations for the specific definition of this complex term), an exception from filing is possible, provided that: (1) Form 8865 is filed by the U.S. person(s) through which the indirect partner constructively owns an interest in the foreign partnership, (2) the U.S. person through which the indirect partner constructively owns an interest in the foreign partnership is also a constructive owner and meets all the requirements of this constructive ownership filing exception, or (3) Form 8865 is filed for the foreign partnership by another Category 1 filer under the “multiple Category 1 filers exception”. To qualify for this exception, the indirect partner must also file a statement entitled “Controlled Foreign Partnership Reporting” with its tax return containing certain specified information (see Form 8865 instructions for more details).

Contact The International Tax Firm of Sherayzen Law Office for Help With Form 8865 Filing

International taxation concerning foreign partnerships is very likely to involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office is highly experienced in Form 8865 matters, whether you need help with respect to annual compliance or offshore voluntary disclosure. Contact Us by telephone or email to schedule a confidential consultation!

Form 1042-S and Tax Withholdings

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IRS Form 1042-S (“Foreign Person’s U.S. Source Income Subject to Withholding”) is used to report various items of income, amounts withheld under Chapter 3 of the Internal Revenue Code, and distributions of effectively connected income by a publicly traded partnership or nominee. The items subject to reporting on Form 1042-S involve amounts paid to foreign persons, including presumed foreign persons, that are subject to withholding, even if no amount was actually deducted and withheld from the payment (such as, because of a treaty or IRC exception), or if any withheld amount was repaid to the payee.

This article will explain the basics of Form 1042-S, especially the amounts subject, and not subject to reporting on the form. (Please also note that the IRS has issued a recent draft version of Form 1042-S that may entail future changes). US laws concerning international taxation can involve many complex tax and legal issues, so you are advised to seek an experienced attorney in these matters. Sherayzen Law Office, PLLC can assist you in all of your tax and legal needs, and help you avoid making costly mistakes.

What Amounts are Subject to Reporting on Form 1042-S?

According to the IRS, “Amounts subject to withholding are amounts from sources within the United States that constitute (a) fixed or determinable annual or periodical (FDAP) income; (b) certain gains from the disposal of timber, coal, or domestic iron ore with a retained economic interest; and (c) gains relating to contingent payments received from the sale or exchange of patents, copyrights, and similar intangible property. Amounts subject to withholding also include distributions of effectively connected income by a publicly traded partnership.” (See the instructions to Form 1042-S for further details).

The specific amounts subject to Form 1042-S reporting include, among others, the following U.S. source items: interest on deposits, the entire amount of corporate distributions, interest (including the part of a notional principal contract payment that is characterized as interest), rents, royalties, compensation for independent personal services performed in the U.S., compensation for dependent personal services performed in the U.S. (only if the beneficial owner is claiming treaty benefits, however), annuities, pension distributions and other deferred income, most types of gambling winnings, cancellation of indebtedness, effectively connected income (ECI), notional principal contract income, guarantee of indebtedness, and amounts paid to foreign governments, foreign controlled banks of issue, and international organizations (even if they are exempt under section 892 or 895).

What Amounts are Not Subject to Reporting on Form 1042-S?

There are numerous amounts that are not subject to reporting on Form 1042-S. Some of these amounts include the following: Interest and OID from short-term obligations (generally payable within 183 days or less), interest on a registered obligation that is targeted to foreign markets qualifying as portfolio interest under certain circumstances, bearer obligations targeted to foreign markets if a Form W-8 is not required, notional principal contract payments that are not ECI, and accrued interest and OID (generally, interest paid “on obligations sold between interest payment dates and the part of the purchase price of an OID obligation that is sold or exchanged in a transaction other than a redemption”), among others.

When Must Form 1042-S be Filed?

Regardless of Forms 1042-S is filed on paper or electronically, it must be filed with the IRS by March 15th and there is an additional requirement that the submitted Form 1042-S also be furnished to the recipient of the income by that same date.

Interest Rates for the Third Quarter of 2013

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On May 23, 2013, the Internal Revenue Service today announced that interest rates will remain the same for the calendar quarter beginning July 1, 2013, as in the prior quarter. The rates will be:

• three (3) percent for overpayments [two (2) percent in the case of a corporation];
• three (3) percent for underpayments;
• five (5) percent for large corporate underpayments; and
• one-half (0.5) percent for the portion of a corporate overpayment exceeding $10,000.

Under the Internal Revenue Code, the rate of interest is determined on a quarterly basis. For taxpayers other than corporations, the overpayment and underpayment rate is the federal short-term rate plus 3 percentage points.

Generally, in the case of a corporation, the underpayment rate is the federal short-term rate plus 3 percentage points and the overpayment rate is the federal short-term rate plus 2 percentage points. The rate for large corporate underpayments is the federal short-term rate plus 5 percentage points. The rate on the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the federal short-term rate plus one-half (0.5) of a percentage point.
The interest rates announced today are computed from the federal short-term rate determined during April 2013 to take effect May 1, 2013, based on daily compounding.

US Taxpayers with Foreign Assets – June 2013 Tax Deadlines

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U.S. citizens and resident aliens, including those with dual citizenship who have lived or worked abroad during all or part of 2012, may have a U.S. tax liability and a filing requirement in June of 2013.

June 17, 2013 – Tax Returns to U.S. Citizens and Resident Aliens Living Overseas; May Also Apply to Nonresident Aliens

The first filing requirement deadline is Monday, June 17, 2013. This deadline applies to U.S. citizens and resident aliens living overseas, or serving in the military outside the U.S. on the regular due date of their tax return. Eligible taxpayers get two additional days because the normal June 15 extended due date falls on Saturday this year. In order to use this automatic two-month extension, taxpayers must attach a statement to their return explaining which of these two situations applies.

Nonresident aliens who received income from U.S. sources in 2012 also must determine whether they have a U.S. tax obligation. The filing deadline for nonresident aliens can be April 15 or June 17, 2013, depending on sources of income.

Worldwide Income Should Be Reported; Form 8938 and Schedule B

Remember that US federal law requires U.S. citizens and resident aliens to report any worldwide income, including income from foreign trusts and foreign bank and securities accounts. In most cases, affected taxpayers need to fill out and attach Schedule B to their tax return. Certain taxpayers may also have to fill out and attach to their return Form 8938, Statement of Foreign Financial Assets.

Part III of Schedule B asks about the existence of foreign accounts, such as bank and securities accounts, and usually requires U.S. citizens to report the country in which each account is located.

Generally, U.S. citizens, resident aliens and certain nonresident aliens must report specified foreign financial assets on Form 8938 if the aggregate value of those assets exceeds certain thresholds. Instructions for Form 8938 explain the thresholds for reporting, what constitutes a specified foreign financial asset, how to determine the total value of relevant assets, what assets are exempted and what information must be provided.

June 30 (June 28), 2013 – TD F 90-22.1 (FBAR)

Separately, taxpayers with foreign financial accounts whose aggregate value exceeded $10,000 at any time during 2012 must file Treasury Department Form TD F 90-22.1 (also known as “FBAR”). This is not a tax form and is due to the Treasury Department by June 30, 2013 – it is important to emphasize that the form must be RECEIVED by June 30, NOT mailed.

Due to the fact that June 30 falls this year on a Sunday, it means that, realistically, the taxpayers should aim to make sure that the IRS received the 2012 FBARs by June 28.

Contact Sherayzen Law Office for Help With Your International Tax Obligations

If you have foreign accounts or foreign income, contact Sherayzen Law Office to make sure that you are in full compliance with your US tax obligations. Our experienced tax firm can assist you with all types of IRS international tax obligations.

IRS Serves Summons on FirstCaribbean International Bank’s US Wells Fargo Account

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The Department of Justice issued a release on April 30, 2013 that a federal court in San Francisco has entered an order authorizing the Internal Revenue Service (IRS) to serve a “John Doe” summons seeking information about U.S. taxpayers who may hold offshore accounts at Canadian Imperial Bank of Commerce FirstCaribbean International Bank (FCIB) through their correspondent account at Wells Fargo N.A. A John Doe summons enables the IRS to obtain information about possible violations of US tax laws by U.S. taxpayers whose identities are unknown. This specific summons directs Wells Fargo to produce records identifying U.S. taxpayers who have accounts at FCIB and other banks that used FCIB’s correspondent account.

The order was signed by Senior District Judge Thelton E. Henderson, and allows the IRS to identify U.S. taxpayers who hold or held interests in financial accounts at FCIB and other financial institutions that used the Wells Fargo correspondent account.

This article will briefly explain the IRS John Doe summons. It is not intended to constitute tax or legal advice

Correspondent Accounts

According to the DOJ, “A correspondent account is a bank deposit account maintained by one bank for another bank. Financial transactions involving U.S. dollars flow through U.S. banks. Therefore, foreign banks that do business in U.S. dollars, but have no office in the U.S., obtain a correspondent account at a U.S. bank in order to engage in such transactions. These transactions leave a trail in the U.S. that the IRS can access through the records of the correspondent bank accounts. These correspondent bank accounts have records of money deposited, money paid out through checks and money moved through the correspondent account by wire transfers.” The IRS can obtain all of this desired information through a John Doe summons issued to the U.S. bank holding the correspondent account.

Canadian Imperial Bank of Commerce’s FirstCaribbean International Bank

FCIB is based in Barbados and has branches in 18 Caribbean countries, according to the declaration of IRS Revenue Agent Cheryl R. Kiger, filed in support of the court petition. These countries include the British Virgin Islands, Dominica, Cayman Islands, Bahamas, and Barbados, among others. FCIB does not have any U.S. branches; however, it does maintain a U.S. correspondent account at Wells Fargo Bank N.A. Wells Fargo, headquartered in San Francisco, CA is the fourth largest bank in the U.S. by assets, and the largest bank when ranked by market capitalization, according to Wikipedia.

Per Agent Kiger’s declaration, the IRS discovered that U.S. taxpayers were using FCIB to help them escape detection of their offshore accounts by the IRS and to not pay U.S. federal income tax on money held in such offshore accounts. According to the DOJ release, after reviewing information submitted by more than 120 FCIB customers who enrolled in the IRS’s Offshore Voluntary Disclosure Program, the IRS determined that many FCIB customers in the John Doe summons class, “[M]ay have been under-reporting income, evading income taxes, or otherwise violating the internal revenue laws of the United States.”

Latest Example of How Offshore Voluntary Disclosure Programs Help IRS Identify Other Non-Compliant US Taxpayers

Since 2009, Sherayzen Law Office has predicted that the IRS Offshore Voluntary Disclosure Programs (now closed) will produce a wealth of information that the IRS will use to identify other targets for investigation and prosecution. We further predicted the more widespread use of John Doe summons. Finally, since the Wegelin bank case began, we have repeatedly advised our clients that the IRS is likely to use the correspondent accounts opened with U.S. banks to identify non-compliant taxpayers with undisclosed foreign accounts.

Over the past four years, we have seen all of our predictions come true, and the latest move by the IRS against the FirstCaribbean International Bank is just the latest example of it.

According to Kathryn Keneally, Assistant Attorney General for the Justice Department’s Tax Division, “The Department of Justice and the IRS are committed to global enforcement to stop the use of foreign bank accounts to evade U.S. taxes. This John Doe summons is a visible indication of how we are using the many tools available to us to pursue this activity wherever it is occurring. Those who are still hiding should get right with their country and their fellow taxpayers before it is too late.” Acting IRS Commissioner Steven T. Miller added, “This summons marks another milestone in international tax enforcement. Our work here shows our resolve to pursue these cases in all parts of the world, regardless of whether the person hiding money overseas chooses a bank with no offices on U.S. soil.”

Contact Sherayzen Law Office for Help With the Voluntary Disclosure of Your Foreign Bank Accounts

If you are a US taxpayer who is using foreign bank accounts to attempt to under-report US income or evade US tax laws, this summons should serve as a warning to you. The IRS will likely increase their use of enforcement mechanisms such as the John Doe summons in the near future, so you are highly advised to seek an experienced attorney in these matters.

For the U.S. taxpayers with have undisclosed financial accounts in FirstCaribbean International Bank, the time to act is now – before the IRS finds them.

This is why it’s a good idea to contact Sherayzen Law Office an experienced law firm in Offshore Voluntary Disclosures. Our international tax team can assist you in all of your tax and legal needs concerning undisclosed foreign accounts and income and help you avoid making costly mistakes.