The United States taxes its citizens and residents on their worldwide income. But the Internal Revenue Service cannot require foreign payers of income to Americans to report such income to the IRS.
To fill the information void, the IRS imposes a series of information returns upon Americans concerning their international transactions.
An earlier article I wrote examined one of those information returns, Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations. This article concerns another of the international information returns, Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.
A U.S. person that transfers cash to a foreign corporation must report the transfer on Form 926 if (a) immediately after the transfer, the person holds directly or indirectly, at least 10% of the total voting power or the total value of the foreign corporation, or (b) the amount of cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer exceeds $100,000.
The Form 926 Instructions say that where a partnership, domestic or foreign, transfers property to a foreign corporation, the partners are deemed to have made the transfer, in proportion of their interests in the partnership. But the Instructions do not define “partnership” for this purpose. Is it limited to a partnership formed as such under local law, or does it include a limited liability company taxed as a partnership, by reason of an election filed under Treasury Regulation § 301.7701(a), or by application of the default classification rule of Treasury Regulation § 301.7701(b)?
Form 926 is filed with the taxpayer’s tax return. A taxpayer who fails to file Form 926 is subject to a penalty equal to 10% of the value of property transferred to the foreign corporation. The penalty is limited to $100,000, unless the failure to file Form 926 was due to intentional disregard of the law. If the IRS proposes or assesses the penalty, the taxpayer should seek to have it abated for reasonable cause.
The assessment statute of limitations is tolled, not only as to the penalty for failure to file Form 926, but also as to the taxpayer's income tax return for that year, until the IRS is furnished the information required to be reported on Form 926. In other words, there is no assessment statute of limitations with respect to an unfiled Form 926.
The IRS will not assess the penalty against a taxpayer who files delinquent Forms 926 before the IRS discovers the delinquency and brings it to the taxpayer’s attention. Therefore, a taxpayer with unfiled Forms 926 should file them as soon as possible.
Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.
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