I’m a firm believer that information is the key to financial freedom. On the Stilt Blog, I write about the complex topics — like finance, immigration, and technology — to help immigrants make the most of their lives in the U.S. Our content and brand have been featured in Forbes, TechCrunch, VentureBeat, and more.See all posts Frank Gogol
Understanding IRS Form 926: Reporting Transfers to Foreign Corporations
At a Glance
- U.S. persons must file Form 926 if they transfer property to a foreign corporation and meet certain ownership or value thresholds.
- Transactions that require reporting include property or cash transfers for stock or interests when specific conditions are met.
- The filing process involves determining the need to file, obtaining and completing the form with accurate details, attaching supporting documents such as property descriptions, valuations, and financial statements, and then submitting it with the tax return while keeping thorough records.
Navigating the IRS requirements can be challenging, especially when it involves international dealings. IRS Form 926 plays a pivotal role for U.S. persons who transfer property to foreign corporations. Let’s break down what you need to know to handle this form confidently and accurately About Form 926.
Who Must File Form 926?
If you’re a U.S. person and you’ve transferred property to a foreign corporation, you may need to file Form 926. This includes transfers in exchange for stock or interest in the foreign entity, making compliance a crucial step ([Instructions for Form 926](https://www.irs.gov/instructions/i926)).
What Transactions Must Be Reported?
From cash to intellectual property, a wide range of transfers must be reported. If the value you transfer meets or exceeds the reporting threshold set by the IRS, Form 926 becomes a necessary part of your tax filing process. Here’s a overview of what needs to be reported:
Transfers of Property in Exchange for Stock
If a U.S. person transfers property to a foreign corporation and, in exchange, receives stock in the corporation, this transaction must be reported if the U.S. person holds, immediately after the exchange, at least 10% of the total voting power or the total value of the foreign corporation, or if the fair market value of the property transferred exceeds $100,000.
Transfers of Cash
The transfer of cash to a foreign corporation must be reported if, immediately after the transfer, the person holds at least 10% of the total voting power or the total value of the foreign corporation, or if the amount of cash transferred during the 12-month period ending with the transfer exceeds $100,000.
Transfers by U.S. Persons Related to a Foreign Corporation
If a U.S. person is related to a foreign corporation to which property is transferred, and the U.S. person holds at least 10% by vote or value immediately after the transfer, the transfer must be reported regardless of the value of the property transferred.
Transfers Involving Contributions to Capital
Contributions to the capital of a foreign corporation must be reported in certain circumstances, particularly if the contributor owns 10% or more in the foreign corporation, or if certain thresholds are met.
Certain Liquidations and Distributions
If the transfer is part of a liquidation of a U.S. corporation into a foreign corporation, or a distribution from a foreign corporation to a U.S. corporation, under specific tax provisions, this may also need to be reported on Form 926.
Filing Form 926: A Step-by-Step Approach
Filing IRS Form 926 involves several steps. Below is a clear and concise guide:
1. Determine if You Need to File
First, ensure that you are required to file Form 926 based on the criteria for transactions that need to be reported, as previously mentioned.
2. Obtain the Correct Form
Download the latest version of Form 926 from the IRS website. Ensure you’re using the form for the correct tax year.
3. Gather Information
Collect all necessary information about the property transferred, the foreign corporation, the terms of the transfer, and any consideration received.
4. Complete the Form
Fill out Form 926 according to the instructions provided by the IRS. This will include:
- Your personal information or the information of the U.S. transferor (name, address, EIN/SSN).
- Information about the foreign corporation (name, address, country of incorporation).
- Details of the property transferred (description, date of transfer, fair market value, method of valuation).
- Any stock received in exchange for the property.
- Specific tax basis calculations and gains recognized if applicable.
5. Attach the Required Documentation
You may need to attach additional documents, such as a valuation statement for the transferred property or other relevant agreements and financial statements.
6. Review the Form
Before filing, carefully review Form 926 to ensure that all the information is correct and complete.
7. File with Your Tax Return
Form 926 must be filed with the U.S. transferor’s income tax return by the due date (including extensions) for that return.
8. Keep Records
Keep a copy of Form 926 and all supporting documents for your records. The IRS can request additional information, and it’s important to have a well-documented file.
Remember, this form is complex and requires an understanding of the associated tax implications. It is often advisable to seek the assistance of a tax professional when completing this form to ensure compliance with the tax reporting requirements.
Always refer to the specific instructions provided by the IRS for Form 926 for the tax year in which you are filing to ensure accurate compliance with current tax laws and regulations.
When filing Form 926, the IRS may require additional documentation to support the information reported on the form. The exact documentation required can vary depending on the specifics of the transfer. However, generally, you should be prepared to provide the following:
- Description of the Transfer:
- Detailed information about the property transferred, including a legal description if it’s real property.
- The date of the transfer and the method used to transfer the property.
- Valuation of the Property:
- A statement that describes the method used to determine the fair market value of the property transferred.
- Appraisals or other valuation statements that substantiate the value of the property.
- Stock and Ownership Information:
- Information regarding any stock or securities issued in exchange for the property, including the number of shares, the class of stock, and the percentage of ownership in the foreign corporation.
- Documentation showing ownership percentages before and after the transfer, if applicable.
- Foreign Corporation Information:
- Identification of the foreign corporation receiving the property, including its name, address, and country of incorporation.
- A description of the business of the foreign corporation.
- Terms of Transfer:
- Copies of any contracts, agreements, or resolutions that authorized or relate to the transfer.
- U.S. Taxpayer Identification:
- The tax identification number (TIN) of the U.S. transferor.
- Financial Statements:
- Financial statements or other financial information related to the transaction, which could include balance sheets or income statements that reflect the transfer.
- Basis and Gain Information:
- Calculations of the transferor’s basis in the property and the gain, if any, recognized on the transfer.
- Explanation for Contributions to Capital:
- If the transfer is considered a contribution to capital, provide an explanation and the legal basis under U.S. or foreign law for treating the transfer as such.
- Reporting Under Section 367:
- If applicable, documentation for any elections or reporting under Section 367 of the Internal Revenue Code, which governs the treatment of transfers to foreign corporations.
Penalties for Non-Compliance
The filing of Form 926 is also required to comply with the reporting requirements under section 367, which generally deals with the taxation of foreign transfers of property in outbound transactions.
Failing to report a transaction that should be reported on Form 926 can result in significant penalties. The penalty for not filing can be 10% of the fair market value of the property at the time of the transfer, up to $100,000 per transfer, unless the failure to comply was due to reasonable cause and not willful neglect. There is no limit on the penalty if the failure to report the transfer was intentional.
Because tax laws and regulations can change and are subject to varying interpretations, it’s essential for individuals and entities to consult with a tax professional or attorney who is familiar with the latest IRS requirements and can provide personalized advice based on their specific circumstances.
Form 926 is a critical document for reporting international transfers. Handle it with care, and always seek professional advice if you’re unsure about any aspect of the filing process.
FAQs for IRS Form 926
What happens if I forget to file Form 926?
Failing to file can lead to penalties, including fines based on the value of the property transferred. It’s best to file on time to avoid these penalties.
For a complete understanding of IRS Form 926 and to access the form, check the IRS website page for IRS Form 926.