The (New) Form 8858 Reporting Requirements Explained 2024

Form 8858: Reporting a Foreign Disregarded Entity

Form 8588 (Foreign Disregarded Entity)

When a US Taxpayer wants to disregard a foreign entity — even if it is already deemed a disregarded entity overseas — there is a process they have to go through in the United States in order to make that happen under the US Tax Code. Form 8858 is one of the lesser-known international IRS reporting forms, but a very important form nonetheless. The IRS 8858 form is used to report Foreign Disregarded Entities (FDE) and Branches. In the United States, when a person has a single-member LLC, they typically do not have to do anything to obtain “Disregarded Entity” status. When there is a Foreign Disregarded Entity, the rules are different. This is especially true because there are certain per se corporations in which a person is not authorized under U.S. tax law to disregard the entity.

Foreign Disregard Entity (What is it?)

What is a disregarded entity?

A disregarded entity is an entity such as an LLC, that is disregarded for U.S. Tax purposes but not for state Legal purposes. Here’s a common example: David purchases a rental real estate property in California.  He wants to protect himself in case there is any damage or injury on the property that could result in him being sued. Therefore, David forms an LLC and places the rental property into the LLC. If done properly, it will be much more difficult for a renter to sue David. Rather, the tenant would sue the LLC — which would be limited in scope, as opposed to suing David personally — which could lead to all of his personal assets being placed at risk.

Single Member LLC

In the U.S., if it is a single-member LLC, or a “spouses LLC” in a Community property state – usually nothing more needs to be filed with the IRS to obtain disregarded entity status.

Conversely, if a single-member LLC wants to be treated as a corporation or partnership, the owners would usually have to take proactive steps to get there.

Foreign Disregarded Entities

When a person has a foreign disregarded entity, they typically have to file a form 8858.

Who has to File Form 8858?

As provided by the IRS:

• • •  U.S. persons that are tax owners of FDEs or operate an FB at any time during the U.S. person’s tax year or annual accounting period. Complete the entire Form 8858, including the separate Schedule M (Form 8858), Transactions Between Foreign Disregarded Entity (FDE) or Foreign Branch (FB) and the Filer or Other Related Entities.

    • U.S. persons that directly (or indirectly through a tier of FDEs or partnerships) are tax owners of FDEs or operates an FB. Complete the entire Form 8858, including the separate Schedule M (Form 8858).

    • Certain U.S. persons that are required to file Form 5471 with respect to a CFC that is a tax owner of an FDE or operates an FB at any time during the CFC’s annual accounting period. Category 4 filers of Form 5471. Complete the entire Form 8858 and the separate Schedule M (Form 8858). Category 5 filers of Form 5471. Complete only the identifying information on page 1 of Form 8858 (for example, everything before Schedule C) and Schedules G, H, and J.

    • Certain U.S. persons that are required to file Form 8865 with respect to a CFP that is a tax owner of an FDE or operates an FB at any time during the CFP’s annual accounting period. Category 1 filers of Form 8865. Complete the entire Form 8858 and the separate Schedule M (Form 8858). Category 2 filers of Form 8865. Complete only the identifying information on page 1 of Form 8858 (for example, everything above Schedule C) and Schedules G, H, J, and the separate Schedule M (Form 8858).

    • You are not required to complete Form 8858 if there is a Category 1 filer of Form 8865 that completes the entire Form 8858 and separate Schedule M (Form 8858) with respect to the FDE or FB. Note.

Complete a separate Form 8858 and all applicable schedules for each FDE or FB

When and Where To File Form 8858

As provided by the IRS:

• • • Form 8858 is due when your income tax return or information return is due, including extensions.

    • If you are the tax owner of the FDE or operate an FB, attach Form 8858 and the separate Schedule M (Form 8858), if required, to your income tax return or information return.

    • If you are not the tax owner of the FDE or indirect FB, attach Form 8858 to any Form 5471 or Form 8865 you are filing with respect to the CFC or the CFP that is the tax owner of the FDE or operates the FB.

Form 8858 Penalties (Civil)

As provided by the IRS:

• • • Failure to file information required by section 6038(a) (Form 8858 and Schedule M (Form 8858)).

    • A $10,000 penalty is imposed for each annual accounting period of each CFC or CFP for failure to furnish the required information within the time prescribed.

    • If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per CFC or CFP) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.

    • Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901 and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c)(2) for limits on the amount of this penalty.

Criminal Form 8858 Penalties

As provided by the IRS:

• • • Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by section 6038. Note. Any person required to file Form 8858 and Schedule M (Form 8858) who agrees to have another person file the form and schedules for him or her may be subject to the above penalties if the other person does not file a correct and proper form and schedule.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.