What is the IRS Form 8865?
The IRS Form 8865 reports (annually) information about US persons’ partial or total interest in foreign partnerships or foreign partnership-equivalent entities.
The triggers to the Form 8865 foreign partnership reporting obligation are broad and – to be absolutely clear – extremely complex. This is illustrated by the Form’s four different reporting Categories, by the Form’s sixteen different Schedules which may be attached to the Form, and by its 24 pages of Instructions which (in theory) explain and guide compliance with this sprawling reporting regime.
Failing to file the Form 8865 exposes you to enormous penalties. Form 8865 penalties begin at $10,000 per
violation, and can easily reach six figures for those who didn’t file these
Forms for ten or more years continuously.
Rather than recite, at great length, the technical triggers
to each of the Form 8865’s four reporting Categories, we recommend consulting
with a Form 8865 tax attorney if you have any
- A foreign partnership or
- A foreign entity which simply passes the
earnings of its activities through to those invested in the arrangement (what
we could also describe as ‘flow-through’ to the partners).
It’s difficult to understand how to report your foreign assets – or
if you even need to do so. Thankfully, there is a simple way to meet
this challenge. If you have any ownership or beneficial economic relationship with any kind
of foreign entity, take a free consultation with international tax
attorney Andrew L. Jones, who can promptly help you determine whether
you have to file any of the following:
Form 8865 Tax
Attorney and Form 8865 Tax Lawyer
If you failed to file a Form 8865, or filed one that was
incorrect, incomplete, or late/delinquent, you are potentially subject to a $10,000
Form 8865 penalty from the IRS for each year of violation.
We invite you to read
onward, but the surest way of determining if you have a Form 8865 problem is to
actually talk with Form 8865 tax attorney and tax lawyer Andrew L. Jones. Call (415) 745-1924 now to determine:
- Did you actually have a Form 8865 filing
- If you did, has the Form 8865 deadline passed?
- If you filed before the deadline, was your Form 8865
filing incorrect or incomplete?
- And, whether you filed an incorrect or
incomplete Form 8865, or didn’t file one at all, are you subject to Form 8865
- Reasonable cause is a total defense to Form 8865
penalties, and a Form 8865 tax lawyer is best equipped to gather the relevant
facts to that determination, and then write the explanatory attachment arguing
against Form 8865 penalties.
Additionally, if the IRS imposes a Form 8865 penalty, the Form 8865 tax
attorney can represent you in the Form 8865 audit and negotiations with the IRS
to remove the Form 8865 penalty assessment.
- If your specific facts and circumstances prevent you from making
an effective Form 8865 reasonable cause argument to avoid penalties,
you still have options. Your Form 8865 tax lawyer can advise you about
making an IRS voluntary disclosure of your Form 8865 noncompliance
through the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures.
- Finally, Form 8865 tax attorney Andrew L. Jones
can also work with you to consider a final, critical question: should you file
a delinquent/late or amended Form 8865 – or should you simply begin complying
on a ‘go-forward’ basis, doing nothing about prior noncompliance?
In working with a Form 8865 tax expert, all options are on
the table, and your discussions with tax attorney Andrew L. Jones – who will be
your direct point of contact – are protected by the robust attorney-client
Call (415) 745-1924 for an immediate,
free and completely confidential conversation with experienced Form 8865 tax
lawyer Andrew L. Jones.
What Is a Foreign Partnership?
Foreign partnerships are often not actually titled as a partnership
(either that English word or the foreign language equivalent). This
creates a problem: if you don’t know that the foreign entity you have an
interest in actually is a partnership, you’ll fail to file a Form 8865.
How then to solve this problem? Our recommendation is to ask
yourself one fundamental question. That question: are you conducting
business or seeking profit, either alone or with others, through some type of foreign entity or non-human format?
Often, but not always, this profit-seeking arrangement will
be recognized in the native (non-US) country through some manner of registration
with a state or national authority. Again,
though, the local country may not recognize your arrangement as a partnership (under
its laws), and may in fact have a name (for the local entity type) which seems
to be completely different from a partnership.
However, as long as you have answered ‘yes’ – that you are
conducting business or seeking profit, alone or with others, through some type of foreign entity or non-human
format – then it is virtually certain that you are involved with either (1) a
foreign corporation, (2) a foreign partnership or (3) a foreign trust.
Once you know this, you can stop your self-research and
simply take a free consultation with US tax lawyer Andrew L. Jones to determine
which of those categories applies to
your entity or activity.
Form 8865 Deadline
and Form 8865 Statute of Limitations
The Form 8865 is filed as an attachment to the US person’s
annual income tax return. It is due,
therefore, on April 15 (or, if properly extended, October 15) of the year
following the reporting year.
The Form 8865 statute of limitations (the period of time in
which the IRS may assess penalties for noncompliance with this reporting
requirement) typically expires 3 years from that April 15th date – or
the later date if the due date of tax return was timely extended.
This means that even
if the IRS later has questions or concerns about the Form 8865, as long as it
was filed timely and correctly, once this three-year statute of limitations has
passed, the IRS cannot assess failure-to-file penalties.
However, from the 2007 reporting year and onward, if the
required Form 8865 was never filed, the statute of limitations for both that
Form 8865 and the entire tax return to
which it is attached will both never expire. The statute for the Form 8865 and the overall
tax return itself, will instead only expire three years after that Form 8865 is filed late or delinquent.
The only defense to this ‘frozen statute of limitations’
provision is that if the failure to file the Form 8865 was due to reasonable
cause, then only the statute of limitations for the Form 8865 (rather than the entire tax return) will be frozen as
In a related matter, if a US person fails to report $5,000
or more of gross income derived from a specified foreign financial asset (like an
interest in a foreign partnership), then the entire tax return’s statute of
limitations is extended to six years, even
if the interest in a foreign partnership did not actually trigger the requirement
to file a Form 8865.
Late Form 8865 and
Delinquent Form 8865
As described above, the Form 8865 is late or delinquent if
it was due but not filed timely. For all
tax years from 2007 forward, it will always be due until filed, and if not
timely filed, a delinquent Form 8865 can always
be assessed the major IRS penalties described below.
However, a late-filed Form 8865 may not be penalized if the
taxpayer can make a showing of reasonable cause. This is a challenge that we will shortly see
is best met by a Form 8865 tax attorney.
Form 8865 Audit and
Form 8865 Examination
A Form 8865 filing may be audited by the IRS at any time within the
statute of limitations. While extremely unlikely, a timely-filed Form
8865 could be found so incomplete or inaccurate that it could be treated
as a failure to file and subject the US person to Form 8865 penalties.
Such a Form 8865 examination can also occur when a person
obligated to file the Form 8865 didn’t file
the Form 8865 when he or she should have.
In all cases (filing or non-filing), the IRS’ focus in a
Form 8865 audit is whether the failure to file a timely, correct and complete
Form 8865 is excused by reasonable cause. If reasonable cause exists, the IRS may not
impose a Form 8865 penalty.
This means, implicitly, that the Form 8865 penalty regime is
indifferent to whether the failure to file the Form 8865 was willful or
negligent. This is in sharp contrast to
the Foreign Bank Account Report penalty regime, in which a negligent failure to
file is treated very differently from
a willful failure to file.
In essence, the
failure to timely file a complete and correct Form 8865 is a penalizable
act/omission unless the taxpayer had
reasonable cause for his noncompliance.
Form 8865 Penalty and
Form 8865 Fine
The failure to timely file a Form 8865 (or timely filing a
Form 8865, but one which was incorrect or incomplete) is subject to a $10,000
penalty for each year of noncompliance.
As an example of the enormous potential size of Form 8865
penalties, consider a US person who had a 70% interest in a foreign partnership
for the last ten reporting years, and failed to file the Form in each of those
years. If this failure to file the
required Form 8865 was negligent, the IRS may impose and collect penalties of $100,000. This enormous penalty is possible, of course,
because while the taxpayer may have filed Form 1040 tax returns in each of the last ten years, he did not file the Form
8865 – and the failure to file the Form 8865 means that from 2007 forward, the
statute has never expired, both as to the Form 8865 and the tax return itself.
The frozen statute of limitations for the tax return itself
is a major risk. It allows the IRS to
assess any other penalty, and any
amount of unpaid tax, from every tax return year from 2007 forward. The most common financial danger from this
provision is that under US tax law, foreign partnerships are often quite
profitable and would have (if properly reported) been required to report and
pay significant income tax. Under normal
circumstances, the IRS is barred from collecting tax three years (and more
rarely, six years) after the tax return was filed. However, in this scenario, the failure to
file the Form 8865 froze the statute of limitations back to 2007.
Failure to File Form 8865:
Was It Negligence (Non-Willful) or Reasonable Cause?
If you filed a late, incomplete, or incorrect Form 8865 – or
didn’t file one at all – you face penalties.
A reasonable cause argument can help you avoid those penalties – but
that argument is best written by a Form 8865 expert tax attorney who has
gathered relevant facts, analyzed the error, and can make a winning argument to
Involving a Form 8865 tax lawyer will ensure that you have
an expert working for you – an expert who knows what facts matter for
determining whether your Form 8865 filing violation was (1) willful, (2) negligent (also referred to as non-willful), or (3) occurred for reasonable cause.
Remember that whether a Form 8865 violation was willful or
negligent does not change the penalty outcome.
(Although a willful failure to file a Form 8865 may be penalizable under
other general Internal Revenue Code provisions, such as a fraudulent return
filed with the IRS, a false statement to the IRS, etc.)
Instead, the only way
to avoid a $10,000-per-year Form 8865 penalty is making a winning reasonable
Negligent Failure to
File Form 8865
To understand reasonable cause, it will be helpful to
contrast it against the legal concept of negligence. Generally stated, negligence (in missing a
legal obligation) is characterized by:
- ‘Missing’ clues,
- ‘Failing to put two and two together’ or
‘connect the dots’ and/or
- Failing to make reasonable inquiries or
otherwise failure to become aware of generally known facts or law.
Reasonable Cause for
Failure to File Form 8865
By contrast, reasonable
cause can (generally and simplistically) be said to exist where there was no reasonable pathway to become aware of an
obligation. At a bare minimum, it
requires that the taxpayer have missed no
reasonably-apparent clues to his or her obligation, particularly clues that
he or she documentably encountered at any point.
Additionally, the IRS views certain obligations (like the
existence of the annual income tax return Form 1040) as so universally known to
individuals of average sophistication that failure to comply cannot generally
occur for reasonable cause. By contrast,
quality fact-gathering and argumentation can convince the IRS that a taxpayer
who failed to comply with more obscure Form filing obligations (like the Form 8865)
nonetheless did meet the reasonable
cause standard of exercising ‘ordinary business care and prudence.’
Interestingly, we think that the actions of the average US taxpayer would not meet this ‘ordinary business care
and prudence’ standard. In our view, the
average US taxpayer is routinely sloppy and non-diligent and makes errors on
his tax returns (or fails to report or file certain income items
For this reason, we can say (again, generally and
simplistically) that the reasonable cause standard requires the taxpayer behave
in an above-average manner – arguably
in a manner well above that of the
average US taxpayer.
As should be apparent
even from this brief discussion, whether the reasonable cause defense to the
Form 8865 penalty exists, and whether it can be proven to the IRS is a
hyper-technical matter. The
fact-gathering, analysis, and (ultimately) write-up for IRS review is thus best
left to a Form 8865 tax lawyer.
In short, the
reasonable cause defense is beyond the limits of self-advice or self-help – get
a professional involved.
Form 8865 Penalty
Abatement and Form 8865 Amnesty
‘Standard’ IRS penalty abatement is available for three
types of common Form 1040 penalties – the failure-to-file, failure-to-pay, and
failure-to-deposit tax penalties. They are
routinely granted on a ‘just this once’ basis, provided a handful of other
conditions of good tax-related behavior are met.
Penalties for failure to timely and correctly file the Form 8865
are, by contrast, not granted on a similar ‘for the asking’ or ‘just this one
time only’ basis.
Instead, Form 8865 penalties can only be ‘abated’ by a
finding that they are not legally justified.
The grounds for not assessing a
Form 8865 or granting Form 8865 amnesty is a finding by the IRS that the
failure is due to reasonable cause, a legal concept described immediately
In summary, Form 8865 abatement or Form 8865 amnesty are not
truly correct terms to describe the actual law (for defending against Form 8865
penalties). They are also not truly
correct terms for describing defense against penalties on the grounds of
Instead, we mention them here to aid the layman in
understanding that it is possible to
obtain a no-penalty outcome for delinquent or incorrect/incomplete Form
8865 filing. This requires proving
Form 8865 Amendment
While Form 8865 amendments are rare, there are certain
instances in which it might become necessary or at least advisable to amend an
original and timely-filed Form 8865 – perhaps the filer receives corrective
source documents from the foreign partnership, or discovers that his
calculations of income (as originally reported) were incorrect.
Filing a Form 8865 amendment is a problematic act, insofar
as the IRS’ automated systems are generally set up to detect a ‘late’ filing
(here, the amendment itself) and to automatically
assess the Form 8865 penalties outlined here.
For this reason, we typically recommend that when submitting
a Form 8865 amendment, the filer also submit (physically attached to the
amendment) a detailed legal argument for why it is not the filer’s fault that the original filing contained
inaccurate, incomplete, or missing information.
Such a statement should cite to the concepts of reasonable
cause as outlined above – indeed, we can call it, for simplicity, a reasonable cause statement.
This statement is a legal argument with large IRS penalties at stake.
For this reason, the person filing an amended Form 8865 should strongly
consider consulting with and/or hiring a Form 8865tax lawyer. This attorney will first consider the
critical question of whether to file an amendment at all. If this is the best path, the attorney will
also gather facts, apply the law to these facts, and ultimately write the
necessary reasonable cause statement to avoid Form 8865 penalties.
Form 8865 Voluntary
A Form 8865 voluntary disclosure is a filing of an amended
or delinquent/late Form 8865 to the IRS.
Very literally, the person is voluntarily
disclosing a failure to either file a timely Form 8865 by the deadline, or
voluntarily disclosing that an earlier, timely-filed Form 8865 contained substantial
errors or omissions.
Any US person considering
submitting a late/delinquent or amended Form 8865 to the IRS should strongly consider
hiring a Form 8865 voluntary disclosure attorney to draft a reasonable cause
statement as a defense to the penalties the IRS might impose for the late or
Knowing that (1) a Form 8865 voluntary disclosure submitted
late and without a reasonable cause
statement is likely to be met with an automatically-assessed penalty and
knowing that (2) you’ll want to fight back against that penalty by making an
argument of reasonable cause, it makes logical sense to simply submit a
reasonable cause statement at the same
time you submit the late Form 8865.
To do anything else is simply delaying the inevitable confrontation,
and wasting your time and mental bandwidth.
Form 8865 Quiet
Disclosure and Form 8865 Silent Disclosure
In a Form 8865 quiet disclosure or Form 8865 silent
disclosure, the filer submits an amended or late Form 8865, and hopes that the
IRS simply (somehow) doesn’t notice the delinquency or assess a penalty.
The IRS is increasingly aware of late or amended Form 8865
filings and has programmed its data management systems to assess penalties for
late filings which contain no explanation of why the IRS shouldn’t assess the penalty.
Thus, simply stated, Form 8865
quiet disclosure and Form 8865 silent disclosure doesn’t work.
The smart choice is working – from the beginning – with a Form 8865 tax attorney who can make a
winning Form 8865 reasonable cause argument.
Every single client for whom
Andrew Jones has submitted a delinquent or amended return and a reasonable
cause statement has avoided IRS penalty assessments.
Expertise is at a
premium here. Make the call and speak
now – for free – with Form 8865
expert Andrew L. Jones at (415) 745-1924.