Large CPAs (Certified Public Accountants) in the United States are very proficient at preparing most income tax returns. However, international tax portions may exceed the capabilities of many of them. Among the parties that may require international tax consulting are:
Forms 5471: must be completed for each controlled foreign company (CFC) of which you are a 10% shareholder or more
Forms 8865: must be completed for each controlled foreign Partnesrship in which you are a partner of 10% or more
Forms 8858: must be submitted for each foreign disregarded entity (Foreign Disregarded Entity) owned 100% by a single owner.
Forms 5472: must be submitted for each 25% or more direct or indirect foreign owner of a U.S. company, as well as each company (domestic or foreign) owned by any owner and with whom the U.S. company has transactions
Penalties for failure to complete or incorrect completion of each of the above forms are US $ 10,000. Additional penalties may apply.
There are also complex calculations that may be applied and forms that may be required to be filed related to these calculations. Form 1116 or Form 1118, Foreign Tax Credit, requires not only the identification and reporting of foreign source income and taxes, but also requires the calculation and disclosure of the allocation and apportionment of expenses (including interest and R&D) and E&P and subsidiary taxes that pay dividends . Failures related to this form can result in loss of credits.
In addition, there are numerous disclosures required for U.S. taxpayers with international transactions, including those related to corporate events (formation, reorganization, liquidation, etc.). Failure to file the appropriate disclosures generally does not result in a monetary penalty, but may result in invalidation of tax planning or conversion of a non-taxable event into a taxable event. International acquisitions, in particular, present significant risks for incorrect filings, including the loss of ability to step up the asset base under IRC section 338.
Individuals are not immune to complexity. Form 8621 must be filed even by fractional shareholders of passive foreign investment companies (such as foreign mutual funds) if the PFIC tax and interest regime is to be avoided.
Forms 3520 and 3520-A, relating to foreign trusts, carry onerous bankruptcy penalties. Significant complexities are possible for non-resident individuals filing the 1040NR, especially with respect to treaty issues requiring disclosure on Form 8833 or changes of residence. If you have questions on any of these international issues contact our office for a consultation to help us properly prepare your international income tax return.
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