Form 926 and What Taxpayers Should Know
Form 926 and transfer of property to a Foreign Corporation: The IRS Form 926 is used by U.S. Persons to report the transfer of certain property to a foreign corporation. There are various exceptions and limitations to the reporting requirement. And, as with any international information reporting form, there are penalties for not reporting the form 926 timely and accurately. We will summarize the basics of the form, when it may be filed and what you need to know to be compliant with the Internal Revenue Service.
What is Form 926?
The Form 926 is used to report certain transfers to foreign corporation.
As provided by the IRS:
“Use Form 926 to report certain transfers of tangible or intangible property to a foreign corporation, as required by section 6038B.”
An important takeaway from the IRS requirements, is that it includes certain tangible or intangible property, with the latter referring to intellectual property — which many taxpayers would not immediately consider to be “property.”
Who Has to File Form 926?
The IRS requires certain U.S. citizens and residents to file the form 926:
“Generally, a U.S. citizen or resident, a domestic corporation, or a domestic estate or trust must complete and file Form 926 to report certain transfers of property to a foreign corporation that are described in section 6038B(a)(1) (A), 367(d), or 367(e). See section 6038B and Regulations sections 1.6038B-1 and 1.6038B-1T for more information.”
(a) In general
Each United States person who—
(1) transfers property to—
(A) a foreign corporation in an exchange described in section 332, 351, 354, 355, 356, or 361, or
(B) a foreign partnership in a contribution described in section 721 or in any other contribution described in regulations prescribed by the Secretary, or
(2) makes a distribution described in section 336 to a person who is not a United States person, shall furnish to the Secretary, at such time and in such manner as the Secretary shall by regulations prescribe, such information with respect to such exchange or distribution as the Secretary may require in such regulations.
(b) Exceptions for certain transfers to foreign partnerships; special rule
Subsection (a)(1)(B) shall apply to a transfer by a United States person to a foreign partnership only if—
(A) the United States person holds (immediately after the transfer) directly or indirectly at least a 10-percent interest (as defined in section 6046A(d)) in the partnership, or
(B ) the value of the property transferred (when added to the value of the property transferred by such person or any related person to such partnership or a related partnership during the 12-month period ending on the date of the transfer) exceeds $100,000. For purposes of the preceding sentence, the value of any transferred property is its fair market value at the time of its transfer.
(2) Special rule
If by reason of an adjustment under section 482 or otherwise, a contribution described in subsection (a)(1) is deemed to have been made, such contribution shall be treated for purposes of this section as having been made not earlier than the date specified by the Secretary.
(c) Penalty for failure to furnish information
(1) In general
If any United States person fails to furnish the information described in subsection (a) at the time and in the manner required by regulations, such person shall pay a penalty equal to 10 percent of the fair market value of the property at the time of the exchange (and, in the case of a contribution described in subsection (a)(1)(B), such person shall recognize gain as if the contributed property had been sold for such value at the time of such contribution).
(2) Reasonable Cause Exception
Paragraph (1) shall not apply to any failure if the United States person shows such failure is due to reasonable cause and not to willful neglect.
(3) Limit on Penalty
The penalty under paragraph (1) with respect to any exchange shall not exceed $100,000 unless the failure with respect to such exchange was due to intentional disregard.
Exceptions to Filing IRS Form 926
The Internal Revenue Service does not require all U.S. persons to file the form in all situation. Instead, the IRS has carved out various exceptions to filing the Form 926.
Exceptions to Filing
1. For exchanges described in section 354 or 356, a U.S. person does not have to file Form 926 if: a. The U.S. person exchanges stock of a foreign corporation in a recapitalization described in section 368(a)(1)(E), or b. The U.S. person exchanges stock of a domestic or foreign corporation for stock of a foreign corporation under an asset reorganization described in section 368(a)(1) that is not treated as an indirect stock transfer under Regulations section 1.367(a)-3(d).
2. Generally, a domestic corporation that distributes stock or securities of a domestic corporation under section 355 is not required to file Form 926. However, this exception does not apply if the distribution is of stock or securities of a foreign controlled corporation to a distributee shareholder who is not a U.S. citizen or resident or a domestic corporation. See specific instructions for Part IV, line 21, later, for more information.
3. A U.S. person that transfers stock or securities under section 367(a) does not have to file Form 926 if either a or b below applies.
a. The U.S. transferor owned less than 5% of both the total voting power and the total value of the transferee foreign corporation immediately after the transfer and:
• The U.S. transferor qualified for nonrecognition treatment with respect to the transfer, or
• The U.S. transferor is a tax-exempt entity and the income was not unrelated business income, or
• The transfer was taxable to the U.S. transferor under Regulations section 1.367(a)-3(c) and such person properly reported the income from the transfer on its timely filed return (including extensions) for the tax year that includes the date of transfer, or
• The transfer is considered to be to a foreign corporation solely by reason of Regulations section 1.83-6(d)(1) and the fair market value of the property transferred did not exceed $100,000.
b. The U.S. transferor owned 5% or more of the total voting power or the total value of the transferee foreign corporation immediately after the transfer and:
• The U.S. transferor is a tax-exempt entity and the income was not unrelated business income, or
• The transfer was taxable to the U.S. transferor and such person properly reported the income from the transfer on its timely filed return, or
• The transfer is considered to be to a foreign corporation solely by reason of Regulations section 1.83-6(d)(1) and the fair market value of the property transferred did not exceed $100,000.”
Special Rules re: Filing Form 926
The Form 926 can be a very complicated form.
In addition to the exceptions that apply, there are also “Special Rules,” that limit reporting in certain situations.
Transfers by a Partnership
If the transferor is a partnership (domestic or foreign), the domestic partners of the partnership, not the partnership itself, are required to comply with section 6038B and file Form 926. Each domestic partner is treated as a transferor of its proportionate share of the property.
Transfers by Spouses
Spouses may file Form 926 jointly, but only if they file a joint income tax return.
Transfers of Cash
A U.S. person that transfers cash to a foreign corporation must report the transfer on Form 926 if
(a) immediately after the transfer, the person holds, directly or indirectly, at least 10% of the total voting power or the total value of the foreign corporation; or
(b) the amount of cash transferred by the person to the foreign corporation during the 12-month period ending on the date of the transfer is more than $100,000.
Transfers of Stock or Securities for which a Gain Recognition Agreement (GRA) is filed.
A U.S. transferor must file a Form 926 with respect to a transfer of stock or securities in all cases in which a GRA is filed under Regulations section 1.367(a)-8. Provided that the initial GRA is timely filed (determined without regard to Regulations section 1.367(a)-8(p)), then, with respect to the transfer of the stock or securities, the U.S. transferor should (1) complete Part I and Part II of Form 926; (2) complete columns (a) through (e) of the “Stock and securities” line in Part III, Section B, of the form, and check the “Yes” box on line 11; and (3) complete the Supplemental Part III Information Required To Be Reported section at the end of Part III of the form using the Line 11 instructions under the Supplemental Part III Information Required To Be Reported section.
We Specialize in Streamlined & Offshore Voluntary Disclosure
Our firm specializes exclusively in international tax, and specifically IRS offshore disclosure.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.
Each case is led by a Board-Certified Tax Law Specialist with 20-years experience, and the entire matter (tax and legal) is handled by our team, in-house.
*Please beware of copycat tax and law firms misleading the public about their credentials and experience.
Less than 1% of Tax Attorneys Nationwide Are Certified Specialists
Our lead attorney is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.
Recent Case Highlights
- We represented a client in an 8-figure disclosure that spanned 7 countries.
- We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
- We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
- We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
- We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.
How to Hire Experienced Offshore Counsel?
Generally, experienced attorneys in this field will have the following credentials/experience:
- 20-years experience as a practicing attorney
- Extensive litigation, high-stakes audit and trial experience
- Board Certified Tax Law Specialist credential
- Master’s of Tax Law (LL.M.)
- Dually Licensed as an EA (Enrolled Agent) or CPA
Interested in Learning More about our Firm?
No matter where in the world you reside, our international tax team can get you IRS offshore compliant.
We specialize in FBAR and FATCA. Contact our firm today for assistance with getting compliant.