In my international tax practice, I have encountered frequent examples where business owners fail to comply with the U.S. tax reporting requirements with respect to a “foreign disregarded entity” (“FDE”). Therefore, in this essay, I will try to make some very broad observations with respect to the entity and Form 8858.
FDE is a business entity that is a foreign corporation under local law, but, is, or has elected under the “check-the-box” rules of Treas. Regs. §301.7701-3 to be disregarded as, an entity separate from its owner for U.S. federal income tax purposes.
If a U.S. person owns or is considered to be the owner of an FDE, then he must file Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities, with respect to such FDE. The ownership may be a direct, indirect, or constructive; the IRS provides certain guidelines in order to determine whether an indirect or constructive ownership of an FDE exists.
One of the most dangerous aspects of Form 8858 is that it may need to be filed in conjunction with Forms 8865 or 5471. Failure to properly file Form 8858 is likely to render Forms 8865 or 5471 incomplete, resulting in significant penalties being imposed.
While Form 8858 is used in part to compute the taxable income or E&P (earnings and profits) of the FDE, the Form also serves an important function for the IRS – an audit guideline for the IRS examiners. This becomes most obvious by looking at the Schedule G questions, which appear to focus on potential audit issues.
Contact Sherayzen Law Office For Legal Help With Disregarded Entities
This very short legal note is intended only to point out some very broad contours with respect to FDEs, Form 8858 and its purposes. The subject matter is extremely complex and should be only approached with the help of an international tax attorney.
If you have any questions with respect to Form 8858 compliance, contact Sherayzen Law Office by phone or email. Our experienced international tax firm will guide you through the complex maze of the IRS regulations with respect to Form 8858 and help you comply with its complex tax accounting and reporting requirements.