The IRS Form 8865 reports (annually) information about US persons’ partial or total interest in foreign partnerships or foreign partnership-equivalent entities.
The triggers to the Form 8865 foreign partnership reporting obligation are broad and – to be absolutely clear – extremely complex. This is illustrated by the Form’s four different reporting Categories, by the Form’s sixteen different Schedules which may be attached to the Form, and by its 24 pages of Instructions which (in theory) explain and guide compliance with this sprawling reporting regime.
Failing to file the Form 8865 exposes you to enormous penalties. Form 8865 penalties begin at $10,000 per violation, and can easily reach six figures for those who didn’t file these Forms for ten or more years continuously.
Rather than recite, at great length, the technical triggers to each of the Form 8865’s four reporting Categories, we recommend consulting with a Form 8865 tax attorney if you have any involvement with:
It’s difficult to understand how to report your foreign assets – or if you even need to do so. Thankfully, there is a simple way to meet this challenge. If you have any ownership or beneficial economic relationship with any kind of foreign entity, take a free consultation with international tax attorney Andrew L. Jones, who can promptly help you determine whether you have to file any of the following:
If you failed to file a Form 8865, or filed one that was incorrect, incomplete, or late/delinquent, you are potentially subject to a $10,000 Form 8865 penalty from the IRS for each year of violation.
We invite you to read onward, but the surest way of determining if you have a Form 8865 problem is to actually talk with Form 8865 tax attorney and tax lawyer Andrew L. Jones. Call (415) 745-1924 now to determine:
In working with a Form 8865 tax expert, all options are on the table, and your discussions with tax attorney Andrew L. Jones – who will be your direct point of contact – are protected by the robust attorney-client privilege.
Call (415) 745-1924 for an immediate, free and completely confidential conversation with experienced Form 8865 tax lawyer Andrew L. Jones.
Foreign partnerships are often not actually titled as a partnership (either that English word or the foreign language equivalent). This creates a problem: if you don’t know that the foreign entity you have an interest in actually is a partnership, you’ll fail to file a Form 8865.
How then to solve this problem? Our recommendation is to ask yourself one fundamental question. That question: are you conducting business or seeking profit, either alone or with others, through some type of foreign entity or non-human format?
Often, but not always, this profit-seeking arrangement will be recognized in the native (non-US) country through some manner of registration with a state or national authority. Again, though, the local country may not recognize your arrangement as a partnership (under its laws), and may in fact have a name (for the local entity type) which seems to be completely different from a partnership.
However, as long as you have answered ‘yes’ – that you are conducting business or seeking profit, alone or with others, through some type of foreign entity or non-human format – then it is virtually certain that you are involved with either (1) a foreign corporation, (2) a foreign partnership or (3) a foreign trust.
Once you know this, you can stop your self-research and simply take a free consultation with US tax lawyer Andrew L. Jones to determine which of those categories applies to your entity or activity.
The Form 8865 is filed as an attachment to the US person’s annual income tax return. It is due, therefore, on April 15 (or, if properly extended, October 15) of the year following the reporting year.
The Form 8865 statute of limitations (the period of time in which the IRS may assess penalties for noncompliance with this reporting requirement) typically expires 3 years from that April 15th date – or the later date if the due date of tax return was timely extended.
This means that even if the IRS later has questions or concerns about the Form 8865, as long as it was filed timely and correctly, once this three-year statute of limitations has passed, the IRS cannot assess failure-to-file penalties.
However, from the 2007 reporting year and onward, if the required Form 8865 was never filed, the statute of limitations for both that Form 8865 and the entire tax return to which it is attached will both never expire. The statute for the Form 8865 and the overall tax return itself, will instead only expire three years after that Form 8865 is filed late or delinquent.
The only defense to this ‘frozen statute of limitations’ provision is that if the failure to file the Form 8865 was due to reasonable cause, then only the statute of limitations for the Form 8865 (rather than the entire tax return) will be frozen as described.
In a related matter, if a US person fails to report $5,000 or more of gross income derived from a specified foreign financial asset (like an interest in a foreign partnership), then the entire tax return’s statute of limitations is extended to six years, even if the interest in a foreign partnership did not actually trigger the requirement to file a Form 8865.
As described above, the Form 8865 is late or delinquent if it was due but not filed timely. For all tax years from 2007 forward, it will always be due until filed, and if not timely filed, a delinquent Form 8865 can always be assessed the major IRS penalties described below.
However, a late-filed Form 8865 may not be penalized if the taxpayer can make a showing of reasonable cause. This is a challenge that we will shortly see is best met by a Form 8865 tax attorney.
A Form 8865 filing may be audited by the IRS at any time within the statute of limitations. While extremely unlikely, a timely-filed Form 8865 could be found so incomplete or inaccurate that it could be treated as a failure to file and subject the US person to Form 8865 penalties.
Such a Form 8865 examination can also occur when a person obligated to file the Form 8865 didn’t file the Form 8865 when he or she should have.
In all cases (filing or non-filing), the IRS’ focus in a Form 8865 audit is whether the failure to file a timely, correct and complete Form 8865 is excused by reasonable cause. If reasonable cause exists, the IRS may not impose a Form 8865 penalty.
This means, implicitly, that the Form 8865 penalty regime is indifferent to whether the failure to file the Form 8865 was willful or negligent. This is in sharp contrast to the Foreign Bank Account Report penalty regime, in which a negligent failure to file is treated very differently from a willful failure to file.
In essence, the failure to timely file a complete and correct Form 8865 is a penalizable act/omission unless the taxpayer had reasonable cause for his noncompliance.
The failure to timely file a Form 8865 (or timely filing a Form 8865, but one which was incorrect or incomplete) is subject to a $10,000 penalty for each year of noncompliance.
As an example of the enormous potential size of Form 8865 penalties, consider a US person who had a 70% interest in a foreign partnership for the last ten reporting years, and failed to file the Form in each of those years. If this failure to file the required Form 8865 was negligent, the IRS may impose and collect penalties of $100,000. This enormous penalty is possible, of course, because while the taxpayer may have filed Form 1040 tax returns in each of the last ten years, he did not file the Form 8865 – and the failure to file the Form 8865 means that from 2007 forward, the statute has never expired, both as to the Form 8865 and the tax return itself.
The frozen statute of limitations for the tax return itself is a major risk. It allows the IRS to assess any other penalty, and any amount of unpaid tax, from every tax return year from 2007 forward. The most common financial danger from this provision is that under US tax law, foreign partnerships are often quite profitable and would have (if properly reported) been required to report and pay significant income tax. Under normal circumstances, the IRS is barred from collecting tax three years (and more rarely, six years) after the tax return was filed. However, in this scenario, the failure to file the Form 8865 froze the statute of limitations back to 2007.
If you filed a late, incomplete, or incorrect Form 8865 – or didn’t file one at all – you face penalties. A reasonable cause argument can help you avoid those penalties – but that argument is best written by a Form 8865 expert tax attorney who has gathered relevant facts, analyzed the error, and can make a winning argument to the IRS.
Involving a Form 8865 tax lawyer will ensure that you have an expert working for you – an expert who knows what facts matter for determining whether your Form 8865 filing violation was (1) willful, (2) negligent (also referred to as non-willful), or (3) occurred for reasonable cause.
Remember that whether a Form 8865 violation was willful or negligent does not change the penalty outcome. (Although a willful failure to file a Form 8865 may be penalizable under other general Internal Revenue Code provisions, such as a fraudulent return filed with the IRS, a false statement to the IRS, etc.)
Instead, the only way to avoid a $10,000-per-year Form 8865 penalty is making a winning reasonable cause argument.
To understand reasonable cause, it will be helpful to contrast it against the legal concept of negligence. Generally stated, negligence (in missing a legal obligation) is characterized by:
By contrast, reasonable cause can (generally and simplistically) be said to exist where there was no reasonable pathway to become aware of an obligation. At a bare minimum, it requires that the taxpayer have missed no reasonably-apparent clues to his or her obligation, particularly clues that he or she documentably encountered at any point.
Additionally, the IRS views certain obligations (like the existence of the annual income tax return Form 1040) as so universally known to individuals of average sophistication that failure to comply cannot generally occur for reasonable cause. By contrast, quality fact-gathering and argumentation can convince the IRS that a taxpayer who failed to comply with more obscure Form filing obligations (like the Form 8865) nonetheless did meet the reasonable cause standard of exercising ‘ordinary business care and prudence.’
Interestingly, we think that the actions of the average US taxpayer would not meet this ‘ordinary business care and prudence’ standard. In our view, the average US taxpayer is routinely sloppy and non-diligent and makes errors on his tax returns (or fails to report or file certain income items altogether).
For this reason, we can say (again, generally and simplistically) that the reasonable cause standard requires the taxpayer behave in an above-average manner – arguably in a manner well above that of the average US taxpayer.
As should be apparent even from this brief discussion, whether the reasonable cause defense to the Form 8865 penalty exists, and whether it can be proven to the IRS is a hyper-technical matter. The fact-gathering, analysis, and (ultimately) write-up for IRS review is thus best left to a Form 8865 tax lawyer.
In short, the reasonable cause defense is beyond the limits of self-advice or self-help – get a professional involved.
‘Standard’ IRS penalty abatement is available for three types of common Form 1040 penalties – the failure-to-file, failure-to-pay, and failure-to-deposit tax penalties. They are routinely granted on a ‘just this once’ basis, provided a handful of other conditions of good tax-related behavior are met.
Penalties for failure to timely and correctly file the Form 8865 are, by contrast, not granted on a similar ‘for the asking’ or ‘just this one time only’ basis.
Instead, Form 8865 penalties can only be ‘abated’ by a finding that they are not legally justified. The grounds for not assessing a Form 8865 or granting Form 8865 amnesty is a finding by the IRS that the failure is due to reasonable cause, a legal concept described immediately above.
In summary, Form 8865 abatement or Form 8865 amnesty are not truly correct terms to describe the actual law (for defending against Form 8865 penalties). They are also not truly correct terms for describing defense against penalties on the grounds of reasonable cause.
Instead, we mention them here to aid the layman in understanding that it is possible to obtain a no-penalty outcome for delinquent or incorrect/incomplete Form 8865 filing. This requires proving reasonable cause.
While Form 8865 amendments are rare, there are certain instances in which it might become necessary or at least advisable to amend an original and timely-filed Form 8865 – perhaps the filer receives corrective source documents from the foreign partnership, or discovers that his calculations of income (as originally reported) were incorrect.
Filing a Form 8865 amendment is a problematic act, insofar as the IRS’ automated systems are generally set up to detect a ‘late’ filing (here, the amendment itself) and to automatically assess the Form 8865 penalties outlined here.
For this reason, we typically recommend that when submitting a Form 8865 amendment, the filer also submit (physically attached to the amendment) a detailed legal argument for why it is not the filer’s fault that the original filing contained inaccurate, incomplete, or missing information.
Such a statement should cite to the concepts of reasonable cause as outlined above – indeed, we can call it, for simplicity, a reasonable cause statement.
This statement is a legal argument with large IRS penalties at stake. For this reason, the person filing an amended Form 8865 should strongly consider consulting with and/or hiring a Form 8865tax lawyer. This attorney will first consider the critical question of whether to file an amendment at all. If this is the best path, the attorney will also gather facts, apply the law to these facts, and ultimately write the necessary reasonable cause statement to avoid Form 8865 penalties.
A Form 8865 voluntary disclosure is a filing of an amended or delinquent/late Form 8865 to the IRS. Very literally, the person is voluntarily disclosing a failure to either file a timely Form 8865 by the deadline, or voluntarily disclosing that an earlier, timely-filed Form 8865 contained substantial errors or omissions.
Any US person considering submitting a late/delinquent or amended Form 8865 to the IRS should strongly consider hiring a Form 8865 voluntary disclosure attorney to draft a reasonable cause statement as a defense to the penalties the IRS might impose for the late or amended filing.
Knowing that (1) a Form 8865 voluntary disclosure submitted late and without a reasonable cause statement is likely to be met with an automatically-assessed penalty and knowing that (2) you’ll want to fight back against that penalty by making an argument of reasonable cause, it makes logical sense to simply submit a reasonable cause statement at the same time you submit the late Form 8865.
To do anything else is simply delaying the inevitable confrontation, and wasting your time and mental bandwidth.
In a Form 8865 quiet disclosure or Form 8865 silent disclosure, the filer submits an amended or late Form 8865, and hopes that the IRS simply (somehow) doesn’t notice the delinquency or assess a penalty.
The IRS is increasingly aware of late or amended Form 8865 filings and has programmed its data management systems to assess penalties for late filings which contain no explanation of why the IRS shouldn’t assess the penalty. Thus, simply stated, Form 8865 quiet disclosure and Form 8865 silent disclosure doesn’t work.
The smart choice is working – from the beginning – with a Form 8865 tax attorney who can make a winning Form 8865 reasonable cause argument. Every single client for whom Andrew Jones has submitted a delinquent or amended return and a reasonable cause statement has avoided IRS penalty assessments.
Expertise is at a premium here. Make the call and speak now – for free – with Form 8865 expert Andrew L. Jones at (415) 745-1924.
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