IRS Form 8858 for Foreign Disregarded Entities
The most common example of a disregarded entity is a single-member limited liability company (LLC). By default, a single-member LLC is considered a disregarded entity for federal tax purposes. The means that the IRS does not view the LLC as a separate entity, and the owner reports the income, expenses, and other tax items of the LLC on their personal tax return (Form 1040) rather than filing a separate tax return for the LLC. Similarly, a US taxpayer would be required to report the income etc. of a foreign disregarded entity on his US tax return. In addition, a Form 8858 may be required to be filed as part of Form 1040.
Who’s required to file Form 8858?
Form 8858 (“Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)” is used to report information about foreign disregarded entities to the IRS. A foreign disregarded entity is an entity that is not recognized as a separate entity for US tax purposes. A US taxpayer is required to file Form 8858 if he directly or indirectly owns a foreign disregarded entity.
When is Form 8858 due?
For individual taxpayers, Form 8858 is generally filed as part of their individual income tax return (Form 1040). Therefore, the due date of Form 8858 is April 15th. However, taxpayers who are living abroad on the regular due date (April 15) qualify for an automatic two-month extension, making the due date June 15th. A further extension to October 15 is possible by filing Form 4868.
What are the penalties for failure to file?
If you fail to file Form 8858 by the due date you may be subject to a penalty of $10,000. An additional $10,000 penalty applies if the form isn’t filed within 90 days after the IRS has mailed a notice, with an additional $10,000 for each 30-day period, up to $50,000. In addition, criminal penalties may apply. Sanders US Tax Services has the expertise in international tax matters to help ensure that you comply with the reporting requirements for foreign disregarded entities and accurately report your ownership in a foreign disregarded entity to the IRS on your US tax return.
What if the foreign entity is not disregarded from a foreign tax perspective? The hybrid mismatch.
A hybrid mismatch refers to a situation where there is a discrepancy in the tax treatment or characterization of a legal entity between two jurisdictions. This may be advantageous or disadvantageous. For example, as the shareholder of a Dutch BV, a US taxpayer may elect for the BV to be treated as a disregarded entity. From a Dutch tax perspective, the BV is not a disregarded entity. The BV would be required to file it’s own Dutch corporate tax return. The difference in tax treatment between the US and the Netherlands is a hybrid mismatch.
Connect with us for questions about foreign disregarded entity reporting. We specialize in the preparation of US tax return for US taxpayers that live abroad. We have offices in the Netherlands, Switzerland, Germany, the UK and the US.