Form 926 – Valuable Info Expats Need To Know When You Own A Foreign Corporation

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

Many U.S. entrepreneurs overseas set-up a foreign corporation for their businesses and there are many good reasons to do so, as long as compliance with U.S. reporting requirements for the foreign corporation with the IRS, etc. are kept current. U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property to a foreign corporation. The most common exchange or transfer is “cash”. Section 6038B sets forth the information reporting requirements concerning certain transfers of property to foreign corporations

Transfers Of Cash To A Foreign Corporation

All corporations need cash to operate and a foreign corporation is no different. While other property may be transferred to the foreign corporation, “cash” is the most common item transferred. However, cash can also be transferred to a foreign corporation in the form of a loan (where a loan contract or agreement hasn’t been made; most owners don’t take this necessary step to formalize the loan and as a result it is considered a capital contribution and not a loan) or other capital contribution, such as a deposit made into the company’s bank account.

The IRS wants full disclosure of cash transfers to a foreign corporation and a U.S. person (U.S. citizen, green card holder, U.S. corporation, etc.) 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.

Other Transfers That Trigger A Form 926 Filing Requirement

While our focus has been on cash contributions that apply to most, if not all, corporations, there are many other transactions that trigger filing of the Form 926 such as:

• Transfers by a partnership
• Transfers by spouses
• Transfers of stock or securities for which a gain recognition agreement is filed
• Distributions by domestic liquidating corporations

When And How To File Form 926

Form 926 must be filed with the U.S. transferor’s income tax return for the tax year that includes the date of the transfer.

Penalties for Failure to File Form 926

The IRS can impose egregious penalties when it relates to transactions and income of an international nature. This treatment is unfair and most of the time unjust, but the viewpoint of the government is that all parties with international interests have unreported income, thus there is enhanced and additional compliance requirements to uncover such situations.

The U.S. government wants to prevent taxpayers from hiding assets offshore or earning unreported income overseas (highlighted by the FBAR and FATCA filing requirements). The IRS has made international tax enforcement a priority and as a result, due to the complexity of reporting requirements, it is not uncommon for taxpayers to fail to comply with international reporting requirements and subject themselves to outrageous penalties.

A person could be subject to a penalty for failure to file equaling 10% of the fair market value of the property at the time of the exchange/transfer if the taxpayer fails to comply with the filing requirement. The penalty will not apply if the failure to comply is due to reasonable cause and not willful neglect.

The penalty is limited to $100,000 unless the failure to comply was due to intentional disregard. Moreover, the period of limitations for assessment of tax upon the exchange/transfer of that property is extended to the date that is 3 years after the date on which the information required to be reported is provided.

Section 6662(j) Penalty

For tax years beginning after March 18, 2010, a 40% penalty may be imposed on any underpayment resulting from an undisclosed foreign financial asset understatement. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment.

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Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities, such as the Form 926, and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.

When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).

Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.

Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.