Understanding U.S. Foreign Entity Reporting: Forms 5471, 8865, and 3520

U.S. taxpayers who own or control certain foreign entities — such as corporations, partnerships, or trusts — face some of the most complex and demanding informational reporting requirements in the U.S. tax system.

These rules are designed to ensure transparency of offshore activities and combat tax avoidance. Importantly, many of these reporting forms carry heavy penalties for noncompliance, even if no additional U.S. tax is owed.

Let’s break down the main foreign entity reporting obligations.

Form 5471 — Foreign Corporations

Form 5471 is filed by certain U.S. persons who are officers, directors, or shareholders in certain foreign corporations.

• Who must file?
  U.S. persons (individuals or entities) who meet specific ownership or control thresholds, including:

  • U.S. shareholders owning at least 10% of the foreign corporation.

  • U.S. persons who acquire or dispose of a 10% interest.

  • U.S. persons who control the foreign corporation (more than 50% ownership).

• What’s reported?
  Corporate structure, shareholder information, financial statements, earnings, related-party transactions, and U.S. tax attributes (like Subpart F income or GILTI).

• Why it matters:
  Even inactive or small foreign companies can trigger filing, and penalties for failing to file start at $10,000 per form, per year, with additional penalties if the failure continues.

Form 8865 — Foreign Partnerships

Form 8865 is used to report certain interests in foreign partnerships.

• Who must file?
  U.S. persons who:

  • Own at least 10% of a foreign partnership.

  • Control the foreign partnership.

  • Contribute property to a foreign partnership in certain transactions.

• What’s reported?
  Partnership ownership, activities, financial information, income allocations, and transfers.

• Why it matters:
  Like Form 5471, Form 8865 has significant penalties for failure to file, typically $10,000 per failure, plus additional amounts if the failure continues after IRS notification.

Form 3520 and 3520-A — Foreign Trusts and Gifts

Form 3520 and Form 3520-A apply when U.S. persons are involved with foreign trusts or receive large gifts or inheritances from foreign persons.

• Who must file?

  • U.S. persons who create, transfer assets to, or receive distributions from foreign trusts.

  • U.S. persons who receive foreign gifts or inheritances over certain thresholds (generally over $100,000 from individuals or over $16,649 from foreign entities for 2024, indexed annually).

• What’s reported?
  Trust ownership, transactions, distributions, and detailed trust financials.

• Why it matters:
  Penalties can reach 35% of the gross reportable amount for certain failures, making this one of the most severe areas of informational noncompliance.

Why Foreign Entity Reporting Matters

• Even if no U.S. tax is owed, these informational reports serve the government’s interest in monitoring offshore entities and financial flows.

• Failure to file or incomplete reporting can trigger steep penalties.

• These forms are often complex and require detailed foreign financial data, sometimes in formats that differ from U.S. standards.

• Correct reporting is essential to avoid issues in IRS audits and to preserve access to tax elections or credits.

• Key Takeaways

• Form 5471 → U.S. persons involved in foreign corporations.

• Form 8865 → U.S. persons involved in foreign partnerships.

• Form 3520 / 3520-A → U.S. persons involved with foreign trusts or receiving large foreign gifts/inheritances.

• Penalties for noncompliance can be severe, even without any U.S. tax due.

• If you own or have interests in foreign entities, it’s crucial to:
  

  • Understand your filing obligations.

  • Gather necessary financial data early.

  • Work with a tax professional experienced in international reporting.

    For detailed filing thresholds, ownership tests, and examples, consult IRS instructions for each form or click Contact to schedule a call with a cross-border tax specialist.