Form 926: Reporting Property Transfers to a Foreign Corporation for NRIs

What if I tell you that, as a green card holder or citizen, if you engage in foreign transactions such as investing money in a foreign business or transferring property to a foreign corporation, you may trigger IRS reporting? Wondering why it is so? This is because the US government wants a record of when a US taxpayer moves valuable property outside the country, and that is IRS Form 926 for you.

The form does not calculate your taxes; it only provides information about your involvement in a foreign corporation. If you do not fill out this form, you can face a penalty of up to 10% of the transferred value. This is capped at $100,000 per transfer unless the failure was not willful.

Still confused and want to know more about IRS Form 926? This blog provides you with complete information about this form. So read on and clear all your doubts.

What is IRS Form 926?

As its name states, IRS Form 926 is the Return by a US Transferor of Property to a Foreign Corporation. Considering this, US persons, including citizens, green card holders, and resident aliens, use this form to report specific types of property transfers to foreign corporations under section 6038B of the Internal Revenue Code (IRC).

In simple terms, when you move your equipment, stock, intellectual property, or any other asset to a foreign company, the IRS wants to have complete information about it. For instance, when you moved the asset, what was its market value, and how much you own in the foreign corporation after your contribution.

The key purpose of filling out this form is to prevent tax evasion and ensure that US taxpayers correctly report and pay taxes on their transferred property. Additionally, this form does not calculate your tax obligation; it only provides information about transferred assets, when it happened, and what you own after the transfer. Further, the IRS uses this information to monitor compliance with U.S. international tax reporting requirements and identify transfers that may require additional review under the tax law.

Further, reportable property includes:

• Cash
• Inventory
• Business equipment
• Corporate stock
• Shares and securities
• Patents
• Trademarks
• Copyrights
• Other tangible and non-tangible assets

This was all about IRS Form 926. Moving ahead, let's know who needs to fill out this form.

Who Must File Form 926?

Here are the six categories of filers that need to fill out IRS Form 926:

• U.S. citizens (including those living abroad)
• Resident aliens (including green card holders and individuals meeting the substantial presence test)
• Domestic corporations
• Domestic trusts
• Domestic estates
• Domestic partnerships

Considering this, if you are a US person and you have engaged in a property transfer to a foreign or Indian corporation, you need to fill out this form regardless of where you currently reside. To provide you with a better idea of it, here are some situations where you need to fill out this form:

• Set up a company or business outside the US
• Transfer intellectual property or assets to a foreign corporation
• Invest capital into an existing foreign company
• Reorganize a business structure including a foreign entity in it.

So this was all about who should file IRS Form 926. Moving further, let's know what transfers need to be reported in this form.

What Transfers Must Be Reported?

Under the IRS Form 926, the property moves from a U.S. person to a foreign entity is defined broadly. It includes both tangible and non-tangible assets, and because of this, many US taxpayers get confused about what should be reported on the form. To provide you with an overview, the table below showcases the types of property covered in the IRS Form 926.

These are the property transfers that you need to report in IRS Form 926. Moving forward, let's know about the exceptions to this form.

Exceptions to Form 926 Filing

Not every foreign transaction needs to be reported in IRS Form 926. Considering this, common exceptions to filing Form 926 include:

• Having foreign business ownership of less than 5% by both value and vote. However, it only applies when you meet other conditions as well:
• The total transferred value was $100,000 or less
• You paid tax on the transferred asset
• You are a part of tax-exempt organizations, like charities. This may exempt you from filing out IRS Form 926 if your transferred income was not associated with a tax-exempt purpose.
• If your transfer asset resulted in a taxable capital gain and you paid it correctly on your tax return, then an exemption may apply to you.

The above situations are fact-specific. Considering this, the filing exception completely depends on your foreign ownership percentage and how your transactions were reported. Now, moving ahead, let's know how to file IRS Form 926.

How to File IRS Form 926?

Here is how you should fill out IRS Form 926:

• Step 1: Gather All the Required Information
• Your information, like name, address, SSN/EIN/ ITIN
• Information of foreign corporation (name, address, country of incorporation)
• Transfer date
• Transferred item (cash, shares, property, equipment, etc.)
• Fair market value of your transferred asset on the date of transfer
• What you get in Return
• Your foreign ownership percentage after the asset transfer
• Step 2: Download the IRS Form 926
• Fill out the downloaded Form 926 and attach it with other forms according to your situation, such as:
• Form 5471: If you own 10% or more of a foreign corporation.
• Form 8938: If your foreign financial assets under the FATCA rules meet the applicable reporting threshold.
• FBAR (FinCEN Form 114): If the aggregate value of your foreign financial accounts exceeds $10,000 at any time during the calendar year.
• Step 3: File Form 926 Before Due Date
• The Form 926 filing deadline is the same as your US federal income tax return date, i.e., April 15. This also includes an approved tax filing extension. Additionally, the form is attached and submitted along with your Form 1040/ Form 1120.

So, this is how you should file IRS Form 926. Moving further, let's know the penalties of not filing the form.

Penalties for Not Filing Form 926

The penalties for not filing out IRS Form 926 are as follows:

Here, the statute of limitations is important to consider, as at any time the IRS can audit your tax return for the year you did not file Form 926. In case you non-willfully missed filing Form 926, you can opt for Streamlined Filing Procedures offered by the IRS. Through this, you can fulfill your missed filing obligations without paying the standard IRS penalties, provided it was non-willful and you file it before getting the notice from the IRS.

These are the penalties for not filing Form 926. Moving forward, let's know the common filing mistakes you should avoid when filing this form.

Common Filing Mistakes to Avoid When Filing IRS Form 926

Common filing mistakes to avoid when filing IRS Form 926 include:

• Know that a cash transfer to your personal foreign account does not trigger the need to file this form. Considering this, your personal financial activities are covered in FATCA and FBAR rules.
• Assuming Form 926 is not required simply because your ownership interest is below a certain percentage. Depending on the facts, cash transfers above applicable reporting thresholds may still require reporting.
• Not filing out the IRS Form 926 because no tax obligation was involved in it. As mentioned earlier, this form is used for an information return and not for monitoring your tax obligation. Considering this, you need to fill out this form when you transfer assets to a foreign corporation regardless of whether you have a tax obligation or not.
• IRS Form 926 filing is an ongoing obligation. Considering this, every time you make a transfer to a foreign corporation or make multiple contributions over time, you need to fill out this form.

These are the common filing mistakes to avoid when filing IRS Form 926. Further, let's understand this form through an example.

Final Thoughts

Lastly, IRS Form 926 is a form that U.S. taxpayers use to report their contributions to foreign businesses. As this form does not trigger any tax obligation, it is overlooked by many US persons engaged in foreign business. Non-compliance with it results in a penalty of 10% of the fair market value of the transferred property.

Further, if you have transferred property or cash to a foreign company or are planning to invest in an overseas business, filing Form 926 is vital. Additionally, if you need assistance knowing whether this form applies to you or filling it out, connect with Savetaxs. The CAs and EAs in our team help you determine your eligibility and file the form.