IRS Form 8832 for Expats – Does It Make Your Tax Return Simple?

IRS Form 8832 – The Key To A Simpler Tax Return?

It seems to me that most Americans don’t really dive into understanding the tax laws, such as with the Form 8832, that impact them until some life event forces them to. And there’s a lot of that going on with the FATCA implementation essentially complete, an IRS working for the political purposes of Congressman and Congresswoman and a lackluster economy.

I remember the mortgage crisis circa 2006 and the short sale frenzy. It quickly became a standardized procedure where the first batch of taxpayers to receive the Form 1099-C (Debt Cancellation Income) were the ones to pay the highest price while subsequent groups were able to take advantage of special debt forgiveness programs for their principal residence. If you received this form, then you had to report the income or explain how you qualified for an exclusion from reporting taxable income.

Basically, it means that after the bitter experience of realizing that you are insolvent and dealing with the failure of being unable to pay your loan debt you then have to explain it to the IRS and potentially pay taxes on top of it.

It’s kind of like the government giving you credit for paying foreign taxes but only if it fits within the box of the statutory defined categories and like having to pay taxes on foreign earned income if you didn’t pay attention to the rules of qualifying for the exclusion by limiting your US visits. It can cost you thousands of dollars in taxes that you didn’t anticipate and plan for…

And so we have an introduction to the Form 8832, Entity Classification Election. An eligible entity uses this form to elect how it will be classified for federal tax purposes, as: a corporation, a partnership, or as an entity disregarded as separate from its owner.”

You would think one advantage of such an election would be to simplify your tax returns by eliminating the need for the Form 5471, Form 8865, etc. and simply reporting your information straight on your personal Schedule C. However, one of the problems with making an election on the Form 8832 is that for a qualified foreign entity that elects to be disregarded as separate from its owner, it is likely that both the Schedule C and Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities would be required. The Form 8858 is required to be filed if a US person owns 100% of a foreign eligible entity that elects to be classified as a foreign disregarded entity.

And of course there is a list of exceptions where identified legal structures in certain countries are not allowed to take advantage of this election. Form 8832 and electing to disregard an entity can certainly be useful in simplifying the information to be reported, some would even point out that avoiding the complexity of a Form 5471 would definitely provide an advantage, but the Form 8858 is not a walk in the park either…

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