Looking for Clarity from the IRS Regarding Foreign Activities? Be Careful What You Wish For!

If you own a foreign entity or joint venture, you’re likely familiar with the associated IRS reporting requirements (if not, contact your tax advisor IMMEDIATELY!).

It was about 10 years ago that the IRS started enforcing required reporting for controlled foreign entities. The passing of the TCJA in 2017, meanwhile, resulted in significant changes in the taxation of foreign investments, and the IRS is now catching up with expanded reporting requirements.

Over the years, I’d often thought how helpful it would be to have tracking schedules for Forms 5471, 8865 and foreign tax credit forms. Well, wish granted! For 2020 reporting, the IRS created several new schedules for Form 5471. The current form can now be more than 20 pages of separate schedules and information. Draft forms for foreign partnerships were also released to provide guidance on how to report items on international relevance. These new schedules, K-2 and K-3, are 20 and 22 pages long, respectively. So, thanks.

Foreign-owned companies aren’t spared from information reporting, and the IRS has also expanded the definition of reportable transactions for foreign-owned entities (Form 5472) to include all monetary, nonmonetary and less-than-full consideration transactions between the U.S. entity and the related foreign corporation. 

What does this all mean? That reporting is not the end of the story. The burden on U.S. taxpayers with foreign operations and investments continues to increase, and enforcement actions are sure to follow. Undoubtedly the IRS will use the information provided in future tax audits in determining potential areas of abuse. Because penalties for noncompliance are high, a thorough understanding of the reporting requirements and timely compliance is crucial. Be sure to contact your Schneider Downs tax advisor if you have any questions.

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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.

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