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Many businesses and individuals engage in international income producing activities on a global scale across the borders of their respective home countries of residence. The scope of the U.S. federal tax system extends to U.S. taxpayers with outbound activities in other countries outside of the USA. The reach of the U.S. federal tax system also applies to nonresident taxpayers with inbound activities in the United States. U.S. international tax reporting and compliance is a critical area of the U.S. federal tax system that impacts U.S. federal income tax return filings.
U.S. taxpayers, including U.S. businesses and U.S. individuals, may need to file certain disclosures with U.S. federal tax returns to report ownership of and income earned from assets in other countries. Nonresident taxpayers, including foreign businesses and nonresident individuals, may need to file certain disclosures with U.S. federal tax returns to report ownership of and income earned from U.S. assets in the USA. U.S. international tax reporting and compliance is a high enforcement priority of the Internal Revenue Service (IRS) as the taxing authority of the U.S. federal government. The IRS has the authority to assess substantial penalties for the failure to comply with certain disclosures that are required to report inbound and outbound activities with respect to the USA.
From the outbound perspective, U.S. taxpayers are generally required to report foreign accounts including foreign bank accounts if they have ownership of or signature authority over a foreign account. There are different foreign account reporting requirements that can apply including the FinCEN Form 114 Foreign Bank Account Report (FBAR) and the U.S. federal Form 8939 Statement of Specified Foreign Financial Assets. These reports have different filing thresholds depending on the total combined value of all reportable foreign accounts.
U.S. taxpayers must also report ownership of foreign companies to the U.S. government. The reporting can be extensive requiring a complete set of financial statements of the foreign company to be disclosed with the U.S. owner’s U.S. federal tax return. U.S. owners of foreign corporations may need to file a U.S. federal Form 5471 in the year of acquisition or on an annual basis depending on the ownership structure. U.S. shareholders in foreign corporations also can be required to report certain transfers of cash or property to a foreign corporation on the U.S. federal Form 926. U.S. partners in foreign partnerships may need to file a U.S. federal Form 8865 depending on the ownership percentage and whether contributions of cash or property were transferred during the year. U.S. owners of foreign disregarded entities and foreign branches may need to file a U.S. federal Form 8858. These are extensive reports filed with the IRS. There are also other reporting requirements of different agencies of the U.S. federal government.
Other U.S. international tax reporting requirements apply to foreign gifts, relationships with foreign trusts, activities in boycotting countries, reliance on tax treaty positions, and ownership of foreign investment corporations known as passive foreign investment companies (PFICs). U.S. taxpayers may need to report their status as a grantor or certain activities such as loans, contributions, and distributions with respect to a foreign trust on the U.S. federal Forms 3520 and/or 3520-A. U.S. taxpayers are subject to the PFIC anti-deferral regime which generally requires disclosure of ownership and income from PFICs on the U.S. federal Form 8621.
For tax years beginning in the year 2021, the new extensive U.S. international tax reporting requirements on Schedules K-2 and K-3 apply to partnerships that file a U.S. federal Form 1065 partnership tax return, U.S. S corporations that file the Form 1120S, and certain U.S. partners that report foreign partnerships on Form 8865.
Other U.S. international tax reporting requirements apply to U.S. taxpayers that engage in outbound activities with respect to the USA. A U.S. individual or corporate taxpayer that earns foreign source income and pays or accrues foreign tax will file the U.S. federal Form 1116 or 1118 to claim foreign tax credits to offset U.S. federal tax liability. U.S. C corporations may be able to claim the foreign derived intangible income (FDII) or global intangible low-taxed income (GILTI) tax deductions on U.S. federal Form 8993. Certain U.S. taxpayers including U.S. C corporations could be subject to the base erosion and anti-abuse tax (BEAT) reportable on U.S. federal Form 8991 with respect to certain outbound base erosion payments. A U.S. shareholder reports GILTI from controlled foreign corporations (CFCs) on U.S. federal Form 8992. Foreign eligible entities may be able to elect or change their entity classification to or from foreign corporation and foreign pass-through entity status by filing the U.S. federal Form 8832. Multinational enterprises (MNEs) could be required to comply with U.S. and foreign country-by-country (CbC) reporting requirements including the U.S. federal Form 8975.
U.S. individuals that have earned income from working in foreign countries may qualify to claim the foreign earned income exclusion which is reported on the U.S. federal Form 2555. U.S. citizens and certain residents who expatriate may be required to file the U.S. federal 8854 for a certain number of years after they relinquish their U.S. tax resident status.
From the inbound perspective, U.S. taxpayers that make payments of certain types of U.S. source income to nonresident persons may be required to withhold and report U.S. nonresident withholding tax on U.S. federal Forms 1042 and 1042-S. U.S. C corporations with 25% foreign direct and indirect shareholders disclose reportable transactions with related parties on the U.S. federal Form 5472. U.S. disregarded entities, including single member U.S. LLCs, wholly-owned by nonresident persons also disclose reportable transactions with related parties on the Form 5472. Foreign corporations engaged in a U.S. trade or business also disclose reportable transactions with related parties on Form 5472.
Partnerships with U.S. source trade or business income file the U.S. federal Forms 8804 and 8805 to report foreign partner withholding tax with respect to foreign partners. Partnerships with U.S. source income that is not business income also may need to file the U.S. federal Forms 1042 and 1042-S to report U.S. nonresident withholding tax with respect to foreign partners. Partnerships with U.S. source income and foreign partners also file the Schedules K-2 and K-3 with the U.S. federal Form 1065 foreign partnership tax return.
Foreign corporations file the U.S. federal Form 1120-F if they are engaged in a U.S. trade or business, earn U.S. source income, or claim a treaty position that they do not have a taxable presence in the USA. Nonresident individuals file the U.S. federal Form 1040NR to report income earned from U.S. sources. Nonresident individuals also may need to file the Form 8840 or 8843 to claim certain exemptions from U.S. tax resident status.
Nonresident foreign persons that own and sell a U.S. real property interest are subject to reporting on U.S. federal Forms 8288, 8288-A, and 8288-B under the Foreign Investment in Real Property Tax Act (FIRPTA).
Overall, there are many inbound and outbound U.S. international tax reporting forms that could be applicable when taxpayers engage in cross-border activities with respect to the USA. As a note of caution, U.S. international tax is a highly technical and specialized area of the U.S. federal tax system. It is advisable to work with a specialist to minimize risk of errors and penalties. Preventing penalties is preferable to remediating penalties. Noncompliance can impose a significant risk of financial liability. However, there also can be risk of criminal penalties including criminal prosecution and imprisonment that can apply for intentional and willful noncompliance with some types of U.S. international tax reporting requirements. Additional reporting requirements of other U.S. federal government agencies also could apply for U.S. outbound foreign direct investment in other countries and inbound foreign direct investment in the United States.
For more information, please contact Alison Dougherty at info@googolplextax.com or (301) 857-7611.
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