The United States taxes its citizens and residents on their worldwide income. The Internal Revenue Service requires the filing of a series of information returns by U.S. taxpayers to report their foreign transactions and assets. This article concerns one of those 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.
“U.S. person” means a citizen or resident of the U.S., or a U.S.-based corporation, partnership, estate, or trust. Another article examines “U.S. person.”
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 U.S. payer’s U.S. income 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 seeking reasonable cause penalty relief. A previous article reviews reasonable cause.
The Form 926 filing requirement applies to transfers occurring on or after July 20, 1998, with exceptions. The statute of limitations on assessment of the penalty is three years, but it does not begin to run until the IRS is furnished the information required to be reported on Form 926. In other words, there is no statute of limitations on assessment of the penalty for failure to file Form 926.
Significantly, Internal Revenue Code (“IRC”) § 6501(c)(8)(A) provides that the failure to file Form 926 or like information return suspends the assessment statute of limitations, not only as to the penalty for failure to file the information return, but as to the taxpayer’s entire income tax return for that year.
If the IRS proposes or assesses a penalty for failure to file Form 926, the taxpayer should request abatement of the penalty for reasonable cause. Another article reviews reasonable cause.
A taxpayer with one or more delinquent Forms 926 should file them as soon as possible.
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