Section 6038 of the Internal Revenue Code sets the foreign reporting requirements and penalties for U.S. persons who own or control a foreign corporation or foreign partnership. If you meet the ownership thresholds, you must file an annual information return — Form 5471 for a foreign corporation, Form 8865 for a foreign partnership — attached to your federal income tax return. Missing the filing carries a $10,000 penalty per entity per year to start, and the consequences escalate from there.1Office of the Law Revision Counsel. 26 USC 6038 Information Reporting With Respect to Certain Foreign Corporations and Partnerships The reporting is purely informational and does not by itself create a tax liability. It is also one of the most aggressively penalized reporting requirements in the international tax system.
Who Has to File
A “U.S. person” for these purposes means individuals who are U.S. citizens or residents, and domestic corporations, partnerships, trusts, and estates. If you fall into any of those categories, measure your foreign holdings against two thresholds: a 10-percent ownership test and a more-than-50-percent control test.2Office of the Law Revision Counsel. 26 US Code 6038 – Information Reporting With Respect to Certain Foreign Corporations and Partnerships
For a foreign corporation, control means owning stock with more than 50 percent of the total combined voting power or more than 50 percent of the total value. For a foreign partnership, control means owning more than 50 percent of the capital, profits, or deductions. Cross either line and you have a filing obligation.
A collective trigger applies to partnerships. Even if no single U.S. person owns more than 50 percent, each U.S. person who holds at least a 10-percent interest must report if U.S. persons collectively control the partnership.
Constructive Ownership
These tests reach beyond what you hold directly. Constructive ownership rules attribute stock or partnership interests owned by family members and by related entities to you. A spouse’s shares, a parent’s shares, or shares held by an entity you control can all count toward the threshold.
The rules got more aggressive after 2017. The Tax Cuts and Jobs Act repealed Section 958(b)(4), which had prevented stock owned by a foreign person from being attributed downward to a U.S. person. Effective for tax years of foreign corporations beginning after December 31, 2017, that limitation is gone.3Internal Revenue Service. IRC 958 Rules for Determining Stock Ownership If a foreign parent owns both a U.S. subsidiary and foreign subsidiaries, a U.S. person who holds a 10-percent interest in the foreign parent can now be treated as a constructive owner of those foreign subsidiaries — which may qualify them as controlled foreign corporations for the first time and trigger a Form 5471 filing that didn’t exist before.
The IRS has provided targeted relief in Rev. Proc. 2019-40 for filers caught only by this downward attribution, particularly where no U.S. shareholder owns stock directly or indirectly under Section 958(a).4Internal Revenue Service. Rev. Proc. 2019-40 If you think that describes your situation, the specific relief category matters — some filers are excused entirely, others get reduced schedules.
Form 5471: Foreign Corporations
Section 6038 compliance for foreign corporations runs through Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The form sorts filers into categories based on their relationship to the corporation, and your category determines which schedules you complete.5Internal Revenue Service. Instructions for Form 5471
- Category 1 covers a U.S. shareholder owning 10 percent or more (by vote or value) of a Section 965 specified foreign corporation, with three sub-types (1a, 1b, 1c).
- Category 2 covers a U.S. citizen or resident serving as an officer or director of a foreign corporation in which any U.S. person has acquired a 10-percent or greater stock interest.
- Category 3 covers a U.S. person who acquires enough stock to cross the 10-percent threshold, acquires stock that independently meets it, or disposes of enough stock to fall below it.
- Category 4 covers a U.S. person who controlled the corporation (more than 50 percent) for an uninterrupted period of at least 30 days during the annual accounting period.
- Category 5 covers a U.S. shareholder owning stock in a controlled foreign corporation on the last day of any tax year in which it qualifies as a CFC.
A CFC is any foreign corporation in which U.S. shareholders together own more than 50 percent of voting power or total value. Category 4 and 5 filers face the heaviest reporting burden and typically complete nearly every schedule on the form.
Form 8865: Foreign Partnerships
Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, uses its own category system.6Internal Revenue Service. About Form 8865, Return of US Persons With Respect to Certain Foreign Partnerships
- Category 1 is a U.S. person who controlled the foreign partnership at any time during the tax year (more than 50 percent of capital, profits, or deductions).
- Category 2 is a U.S. person who owned a 10-percent or greater interest while U.S. persons each holding at least 10 percent collectively controlled the partnership. If a Category 1 filer exists for that year, no one files as Category 2.
- Category 3 is a U.S. person who contributed property to the partnership in exchange for an interest, if the contributor owned at least 10 percent immediately afterward or contributions exceeded $100,000 during a 12-month period.
- Category 4 is a U.S. person with a reportable event during the year — an acquisition, disposition, or change in proportional interest under Section 6046A.
Category 1 filers carry the heaviest load, including a K-1 equivalent reporting their share of partnership income, deductions, and credits.7Internal Revenue Service. Instructions for Form 8865
What the Forms Actually Ask For
Both forms demand a detailed financial portrait of the foreign entity. The IRS uses the data to cross-reference the foreign entity’s operations against your U.S. tax return, enforce transfer pricing rules, and compute anti-deferral inclusions like Subpart F income and GILTI.
On Form 5471, that means an income statement and balance sheet translated into U.S. dollars and reconciled to U.S. tax accounting (Schedules C and F), earnings and profits tracking (Schedule J), stock ownership changes (Schedule O), and transactions between the CFC and its U.S. shareholders or other related persons (Schedule M). Schedule M is granular by design; it is the IRS’s primary tool for spotting transfer pricing issues.
Form 8865 mirrors that structure adapted for partnership accounting. Schedule N reports transactions between the foreign partnership and its partners or related entities, playing the same role as Schedule M. Category 3 and 4 filers complete fewer schedules, focused on the triggering event, but the property-contribution reporting for Category 3 still requires fair market value and interest received.
Deadlines and the Dormant Corporation Shortcut
Form 5471 and Form 8865 are attached to your federal income tax return and share its due date, including extensions. For calendar-year individual filers, that generally means April 15, or the extended date if you file an extension. Corporate filers follow their own return due dates.8Internal Revenue Service. Instructions for Form 5471
If you are required to file Form 5471 or Form 8865 but not otherwise required to file a federal income tax return — because your gross income falls below the filing threshold, for example — you must still file the information return separately with the IRS service center where you would normally file. The Section 6038 obligation exists independently of whether you owe tax.
Under Rev. Proc. 92-70, essentially inactive foreign corporations qualify for a simplified filing. The corporation must meet strict criteria throughout its entire annual accounting period: no business conducted, gross income and expenses each no more than $5,000, total assets no more than $100,000, and no distributions. If it qualifies, you complete only the first page of Form 5471, label the top margin “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporation,” and include basic identifying information for you and the corporation. That satisfies the reporting requirements under both Section 6038 and Section 6046.
Penalties
The penalty structure is built to escalate. Failing to timely or accurately file triggers a $10,000 penalty per foreign entity, per annual accounting period. This applies regardless of intent — an honest mistake and deliberate noncompliance produce the same initial penalty.1Office of the Law Revision Counsel. 26 USC 6038 Information Reporting With Respect to Certain Foreign Corporations and Partnerships
If the IRS sends you a notice of failure and you do not file within 90 days, a continuation penalty begins: an additional $10,000 for each 30-day period (or fraction of one) that the failure continues after the 90-day window closes, capped at $50,000 per entity. Combined with the initial penalty, that is $60,000 per entity per year before anything else is added.
On top of the dollar penalties, Section 6038(c) reduces your foreign tax credits. For each annual accounting period during which the failure continues, foreign tax credits attributable to the noncompliant entity are cut by 10 percent. The total credit reduction cannot exceed the greater of $10,000 or the income of the foreign entity for the period. For taxpayers who rely on the foreign tax credit to avoid double taxation, this reduction can hurt more than the flat penalty does.
These Section 6038 penalties operate independently from the 20-percent accuracy-related penalty under Section 6662, which applies to underpayments caused by negligence or a substantial understatement of income.9Office of the Law Revision Counsel. 26 US Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments Willful failure can add criminal exposure. The penalties are cumulative: the $10,000 initial penalty, continuation penalties, foreign tax credit reduction, and an accuracy-related penalty can all attach to the same failure.
Whether the IRS Can Assess These Penalties
Whether the IRS can administratively assess Section 6038(b) penalties, rather than proceeding through a court action, has been litigated. In 2023, the U.S. Tax Court ruled in Farhy v. Commissioner that the IRS lacked assessment authority. The D.C. Circuit reversed, holding that the text and structure of Section 6038 authorize the IRS to assess directly. The Tax Court has continued to disagree in later cases. For practical purposes, assume the IRS will assert and attempt to collect these penalties through its standard assessment process.
The Statute of Limitations Problem
This is where Section 6038 noncompliance does its most underappreciated damage. Under Section 6501(c)(8), the IRS’s normal three-year window to audit your return and assess additional tax does not begin to run until you furnish the required international information. If you never file a required Form 5471 or Form 8865, the statute of limitations on your entire tax return for that year never closes.10Office of the Law Revision Counsel. 26 USC 6501 Limitations on Assessment and Collection
Once you do file the missing return, the IRS gets a fresh three-year period from the date the information is furnished. There is one nuance worth knowing. If the failure was due to reasonable cause rather than willful neglect, the open-ended assessment period applies only to items related to the missing return, not the entire return. Without reasonable cause, the IRS can reopen everything on that year’s return, including items unrelated to the foreign entity. People who discover an unfiled Form 5471 from years back often find the statute-of-limitations exposure is a bigger problem than the flat penalty.
Reasonable Cause and Late Filing
The IRS recognizes a reasonable cause exception to the Section 6038 penalties, but it is a high bar. You must show that you exercised ordinary business care and prudence and still could not comply. The two most common arguments in practice are genuine ignorance of the filing obligation despite reasonable diligence, and reliance on a tax professional who was wrong about whether a filing was required.
Reliance on a professional is not automatic protection. You need to show you gave the preparer enough information — or at least enough clues — that a competent advisor would have identified the obligation. If you told the preparer about your foreign entity and they missed the filing requirement, that can support reasonable cause. If you never mentioned the entity, it generally does not.
For late filings, the IRS runs a formal channel called the Delinquent International Information Return Submission Procedures. If you are not under examination or criminal investigation and the IRS has not already contacted you about the missing returns, you can file delinquent Forms 5471 and 8865 by attaching them to an amended return, along with a reasonable cause statement for each late form explaining why it was not filed on time.11Internal Revenue Service. Delinquent International Information Return Submission Procedures The IRS may still assess penalties during processing even with the statement attached. Expect to respond to correspondence and reassert reasonable cause separately.
Related Regimes Section 6038 Doesn’t Cover
Section 6038 is not the only international reporting obligation on the table, and complying with it does not satisfy the others. Two overlap frequently.
The Report of Foreign Bank and Financial Accounts (FBAR, FinCEN Form 114) is authorized under the Bank Secrecy Act, not the Internal Revenue Code. You must file if the combined value of your foreign financial accounts exceeds $10,000 at any point during the year.12Internal Revenue Service. Report of Foreign Bank and Financial Accounts (FBAR) The FBAR is filed with FinCEN, not the IRS, though the IRS enforces the penalties. Willful violations can result in penalties exceeding 50 percent of the account balance.
Form 8938, Statement of Specified Foreign Financial Assets, is required under FATCA when your foreign financial assets exceed thresholds that vary by filing status and residency.13Internal Revenue Service. Summary of FATCA Reporting for US Taxpayers Form 8938 captures a broader range of assets than the FBAR, including foreign stock and securities not held in a financial account, so your Form 5471 and Form 8938 reporting may overlap. Failure to file Form 8938 carries a $10,000 penalty with continuation penalties of $10,000 per 30-day period after a 90-day notice, capped at $50,000.14Office of the Law Revision Counsel. 26 USC 6038D Information With Respect to Foreign Financial Assets Unlike Section 6038, the Form 8938 penalty does not reduce your foreign tax credits.
Owning a foreign corporation or partnership commonly triggers all three regimes at once: Section 6038 for the entity, the FBAR for its bank accounts, and Form 8938 for the overall asset value. Missing any one carries its own penalties and its own statute-of-limitations consequences.