Form 8858 Overview: Who Needs to File (with Examples)

December 29, 2023

Understanding Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches,” is crucial for navigating the complex world of international taxes, particularly for owners of offshore businesses or assets. This form provides transparency concerning certain types of offshore entities.

Many taxpayers are unaware of their obligation to file Form 8858, risking severe financial penalties for non-compliance. International taxes can be very confusing, both for taxpayers and professionals who don’t have specific experience in this realm.

At Gordon Law, we make tax filing simple and stress-free for everyone, including those with international tax concerns. In this guide, we’ll demystify the filing requirements for Form 8858, with detailed examples of who needs to file.

What is Form 8858?

Form 8858, “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities and Foreign Branches,” is a tax form used by the IRS to collect information about certain foreign companies, or entities, owned by U.S. taxpayers. It reports information about the company’s ownership and financial details.

Since Form 8858 is an information return, it typically does not result in additional tax owed—unless you fail to file, in which case you can incur significant penalties. This form is intended to prevent U.S. taxpayers from hiding assets overseas and provide transparency around the ownership of foreign entities.

Example of blank IRS Form 8858

Form 8858 Filing Requirements

The filing requirements for Form 8858 are detailed and specific. Any U.S. person who owns or controls a Foreign Disregarded Entity (FDE), or who operates a Foreign Branch, must file this information return along with their annual tax return. For individuals, the filing deadline is usually April 15.

Filers must disclose various financial and operational details about their FDE or Foreign Branch. This includes income, expenses, assets, liabilities, and transactions between the FDE or Foreign Branch and its owner or other related entities.

If you’re not sure whether you need to file or have any questions about Form 8858, don’t hesitate to reach out to our experienced international tax attorneys.

What is a Foreign Disregarded Entity (FDE)?

A Foreign Disregarded Entity (FDE) is a business entity in a foreign country that is disregarded for tax purposes. This means the entity itself doesn’t pay any tax, but the income and tax obligations pass through to the owner(s).

Often, an FDE is a single-member LLC. It can be owned by an individual, corporation, trust, or other entity.

Who Must File Form 8858?

Form 8858 must be filed by U.S. persons, including individuals, corporations, partnerships, or trusts, that own a Foreign Disregarded Entity or operate a Foreign Branch. This applies to both tax owners and direct owners of the FDE. Consider these examples:

Scenario 1: Direct Ownership of a Foreign Disregarded Entity

John, a U.S. citizen, is the sole owner of a bakery in France named Paris Delights. This bakery is set up as a single-member LLC, meaning it’s owned entirely by John and is not considered a separate entity for U.S. tax purposes.

In this scenario, Paris Delights is a Foreign Disregarded Entity (FDE), and John is the direct owner. John has a responsibility to file Form 8858 along with his annual tax return.

Infographic with the heading 'Who Needs to File Form 8858?' and the subtitle 'Scenario 1: Direct Ownership of a Foreign Disregarded Entity'. The infographic is segmented into 4 parts, each with an illustration and accompanying text. 1: The text reads: 'John is a U.S. citizen. He owns a bakery in France called Paris Delights.' The illustration shows a white man with dark hair next to colorful macarons. 2: The text next says: 'The bakery is an LLC, so its income and expenses pass through to John's personal tax return. The entity is disregarded for tax purposes.' The illustration shows a bakery storefront, and an arrow pointing from the storefront to John. 3: The text reads: 'The bakery is considered a Foreign Disregarded Entity (FDE).' The illustration shows the bakery storefront with a red 'no' symbol on top of it. 4: The text says: 'As the direct owner of an FDE, John must file Form 8858 with his tax return.' Next to it is a simple illustration of IRS Form 8858. The bottom of the infographic features the Gordon Law logo with the text 'International Tax Attorneys'.

Scenario 2: Tax Ownership of a Foreign Disregarded Entity

Sometimes, the concept of ownership can be a little more complicated—typically, when one entity owns another. This is where tax ownership comes into play.

Maria, a U.S. citizen, owns 60% of a Controlled Foreign Corporation (CFC) named GlobalTech Ventures. GlobalTech Ventures owns a foreign subsidiary called TechLink Solutions, which is considered a Foreign Disregarded Entity. Complicating matters even further, TechLink Solutions owns another entity, Innovate International, which is also structured as a Foreign Disregarded Entity.

In U.S. tax terms, GlobalTech Ventures is the tax owner of both companies.

In this scenario, Maria has indirect ownership and control of two Foreign Disregarded Entities through her 60% stake in GlobalTech Ventures. Therefore, she’s obligated to file Form 8858 for both TechLink Solutions and Innovate International. She would also need to file Form 5471 to report information about the Controlled Foreign Corporation, GlobalTech Ventures.

The IRS mandates this to maintain transparency and oversight over U.S. persons’ involvement in multiple levels of foreign entities.

Infographic titled 'Who Needs to File Form 8858?' with the subtitle 'Scenario 2: Tax Ownership of a Foreign Disregarded Entity'. It is divided into 3 main parts with accompanying illustrations. 1. The text reads: 'Maria is a U.S. citizen. She owns 60% of a foreign corporation called GlobalTech Ventures.' Accompanied by an illustration of a Latina woman with shoulder-length dark hair. 2. The text reads: 'Through GlobalTech Ventures, Maria indirectly owns and controls 2 additional LLCs. Both LLCs are considered Foreign Disregarded Entities (FDEs).' Icons represent GlobalTech Ventures with a globe, TechLink LLC with a link chain symbol, and Innovate LLC with a gear symbol. An illustration next to the text depicts the ownership structure of these 3 companies. It shows how GlobalTech is the umbrella company of the 2 LLCs, and Maria owns the majority share of GlobalTech. 3. The text reads: 'With her controlling stake in GlobalTech Ventures, Maria is the tax owner of both FDEs. She must file multiple Forms 8858 (one for each FDE) alongside her tax return.' An illustration shows Maria with 2 IRS documents, labeled 'TechLink LLC' and 'Innovate LLC'. The infographic concludes with the Gordon Law logo and the text 'International Tax Attorneys' at the bottom.

Scenario 3: Asset Protection Trust

Aliyah, a U.S. citizen, has established an asset protection structure using multiple offshore entities. It involves a Cook Islands Trust, called Global Safe Haven Trust, which owns a Nevis LLC, named Secure Assets LLC.

In this structure, Secure Assets LLC is a Foreign Disregarded Entity. Global Safe Haven Trust owns the LLC, and Aliyah is the primary beneficiary of the trust.

Aliyah is required to file Form 8858 with her U.S. tax return due to her indirect ownership of Secure Assets LLC. Additionally, Aliyah needs to file Forms 3520 and 3520-A related to foreign trusts.

Infographic titled 'Who Needs to File Form 8858?' The subtitle reads: 'Scenario 3: Asset Protection Trust'. The main text is divided into 3 parts. 1: 'Aliyah is a U.S. citizen. She's using a common method of offshore asset protection.' 2: 'In this structure, there's a Nevis LLC owned by a Cook Islands Trust. The LLC is considered a Foreign Disregarded Entity (FDE). The LLC holds the assets that Aliyah wants to protect, and she is the beneficiary of the trust.' 3: 'As the indirect owner of the LLC, Aliyah must file Form 8858 and other offshore disclosures alongside her tax return.' Alongside the text is an illustration of the ownership structure, depicting Aliyah's indirect control of the Nevis LLC. The bottom of the infographic displays the Gordon Law logo and the text 'International Tax Attorneys'.

Penalties for Non-Compliance with Form 8858 Filing

Understanding the potential penalties for failing to comply with Form 8858 filing requirements is crucial for U.S. persons with foreign disregarded entities or branches.

Failure to File

If you fail to file Form 8858 or provide insufficient or inaccurate information, the IRS can impose a penalty of $10,000 per tax year. You may be required to file multiple Forms 8858 each year, and this penalty applies to each instance of non-filing.

Continued Failure After IRS Notification

If the IRS sends you a notice that you must file Form 8858, you will receive 90 days to comply. After this 90-day grace period, an additional non-filing penalty of $10,000 may be charged every 30 days. The additional penalty is limited to a maximum of $50,000 for each failure.

Reduction of Foreign Tax Credits

Apart from monetary penalties, non-compliance with Form 8858 filing requirements can lead to a 10% reduction of Foreign Tax Credit benefits. This can have a significant impact on your overall tax liability.

Criminal Penalties

In cases of willful failure to file or fraudulent filing, criminal penalties including fines and imprisonment may be imposed. This underscores the seriousness with which the IRS views the obligation to report foreign entities and branches.

Reasonable Cause

It’s important to note that if you can show that the failure to file was due to reasonable cause and not due to willful neglect, the IRS may abate or not impose penalties. However, this is determined on a case-by-case basis and requires substantial documentation and justification.

Pro Tip: Concerned about Form 8858 penalties? Speak to our international tax lawyers about your options, including certain amnesty programs. The consultation is free and confidential!

How to File Form 8858

  1. Gather Information: Collect all relevant financial statements and transactional details of your FDE or Foreign Branch.
  2. Complete the Form: Fill in each part of Form 8858 carefully. Pay special attention to Schedule M, which requires reporting of transactions between the filer and the FDE or Foreign Branch.
  3. Attach to Tax Return: Form 8858 should be attached to your annual tax return (e.g., Form 1040 for individuals, Form 1120 for corporations).
  4. Review and Submit: Before submitting, ensure all information is accurate and complete. Mistakes or omissions can lead to penalties.
Pro Tip: Keep in mind that if you need to file Form 8858, you may be required to file other offshore tax forms, as well. These include the FBAR and FATCA for offshore accounts and assets, Form 3520 related to foreign trusts, Form 5471 related to foreign corporations, and several others. Because international tax forms are so complex, with substantial penalties for non-compliance, it’s recommended to work with an international tax lawyer to ensure a stress-free tax season.

Need Help with Form 8858 and Other Offshore Disclosures? Gordon Law Makes It Simple

Navigating the maze of offshore disclosure requirements, including Form 8858, can be a daunting task. That’s where Gordon Law steps in. With a deep understanding of these intricate tax laws, our team is dedicated to making your tax filing as straightforward and stress-free as possible.

Whether you’re dealing with a Foreign Disregarded Entity, managing international business interests, or trying to untangle the web of global tax obligations, our experienced professionals are here to guide you through every step. We ensure that your filings are accurate, compliant, and timely, safeguarding you against potential penalties and legal complications.

If you have any questions about international tax filing, don’t hesitate to contact us for a free consultation.

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