What the form is for

Form 8865 — Return of U.S. Persons With Respect to Certain Foreign Partnerships — is an information return. It lets the IRS track U.S. persons who own or transact with foreign partnerships. It fulfills three reporting regimes:

• §6038: Controlled foreign partnerships (operations, financials, related-party transactions)
• §6038B: Property transfers to foreign partnerships
• §6046A: Acquisitions/dispositions/percentage changes in foreign partnership interests

You don’t compute a tax on Form 8865, but what you report can affect your U.S. tax return (e.g., basis, sourcing, anti-deferral rules).

Who must file (2011) — the 4 categories

Identify every category that applies; you may have more than one.

• Category 1 (Control): You owned >50% (capital, profits, deductions, or losses) any time during the partnership’s tax year.
• Category 2 (10% owner when U.S.-controlled): You owned ≥10% while U.S. persons (each ≥10%) collectively controlled the partnership and there was no Category 1 filer.
• Category 3 (Transfers): You contributed property to a foreign partnership and either
  • the aggregate FMV > $100,000 during a 12-month period, or
  • after the contribution you owned ≥10%.
• Category 4 (Reportable events): Your direct interest rose to or fell from 10%, or changed by ≥10 percentage points.

Constructive ownership counts. Add interests owned through family (spouse, parents, children, siblings) and entities you control to your direct ownership.

When and how to file

• Attach Form 8865 to your 2011 U.S. income tax return and file by that return’s due date including extensions.
• If you don’t otherwise file a return, submit Form 8865 by the date you would have filed.
• Separate form for each foreign partnership.

Amending: If incomplete/incorrect, file a CORRECTED Form 8865 with an amended return and a short statement of what changed and why.

What to complete (at a glance)

All filers provide basic info and Schedule A (ownership). Then add schedules by category:

• Category 1: A, A-1, A-2, B, D, K, L, M, M-1, M-2, N, and K-1s to U.S. persons.
• Category 2: Generally A, A-1, A-2, B (lighter than Cat. 1).
• Category 3: Schedule O (transfers of property) plus core ID info.
• Category 4: Schedule P (acquisitions/dispositions/percentage changes) plus core ID info.

If the foreign partnership files a U.S. Form 1065, certain schedules from that return can substitute for equivalent 8865 schedules for Cat. 1 and 2—but you still file Form 8865.

Penalties (2011 rules — high level)

• Base penalty: $10,000 per partnership per year for failing to file, or for a substantially incomplete filing (generally §6038/§6046A).
• Continuing failure: After an IRS notice, + $10,000 per 30 days late (max $50,000 extra).
• Foreign tax credit haircut: For Category 1 & 2 late/incomplete filings, initial 10% reduction in related foreign tax credits, then +5% for each additional 3-month period after 90 days.
• §6038B (transfers): Failure to report property transfers (Schedule O) can trigger a penalty equal to 10% of the fair market value of the property transferred (capped at $100,000, unless due to intentional disregard).
• Penalties apply even if no U.S. tax is due.

Step-by-step (high level)

1. Determine your category(ies). Apply constructive ownership and aggregation rules (including related person contributions for Cat. 3).
2. Gather data. Partnership legal details, partners list, financials (income, balance sheet), transfers, ownership changes, related-party transactions, and exchange rates.
3. Complete Page 1. Your info, partnership info, check category boxes, and core questions (e.g., whether a Form 1065 was filed).
4. Add required schedules per your category.
5. Translate to USD where required (all amounts on the form are in U.S. dollars; keep exchange-rate support in your files).
6. Attach to your return (or file standalone if you otherwise wouldn’t file) by the due date.

Common mistakes (and easy fixes)

1. Missing the filing entirely because the stake “seems small.”
   Fix: Check thresholds. 10% ownership, >$100,000 transfers, or a 10-point change often triggers filing.
2. Wrong category → wrong schedules.
   Fix: Map direct + constructive ownership. Recheck after transfers or family/entity changes.
3. Ignoring constructive ownership.
   Fix: Include family/entity attribution; related person transfers aggregate for the $100,000 test.
4. Leaving amounts in foreign currency.
   Fix: Report in USD; keep exchange-rate workpapers (IRC §§985–989).
5. One form for multiple partnerships.
   Fix: One Form 8865 per foreign partnership.
6. Thin Category 1 package.
   Fix: Use the instructions’ filing requirements chart; don’t skip Schedules M (related-party transactions) and K-1s.

What happens after you file

• The IRS uses your 8865 to match foreign partnership activity with your return, monitor transfers, and flag noncompliance.
• Typically no immediate response unless something’s missing or inconsistent.
• Keep agreements, financials, transfer docs, ownership records, and exchange-rate support for at least 6 years.
• If the IRS later determines you should have filed—or filed substantially incomplete—penalties can be assessed years later.

Quick FAQ

Do passive partners file?
Yes—filing depends on ownership/transactions, not management role.

Partnership filed a U.S. Form 1065—do I still file 8865?
Yes. Certain schedules can substitute, but Form 8865 is still required if you meet a category.

Can U.S. partners combine into one filing?
Sometimes for Category 1—one filer can submit on behalf of all with full info, plus identification statements from others.

We each contributed under $100k, but together it’s over. Do we file Cat. 3?
Likely yes—related persons’ contributions aggregate within 12 months.

I sold my 15% mid-year. File?
Yes—Category 4 (Schedule P) for the disposition reducing you below 10%.

Any exceptions?
There are limited ones (e.g., some constructive owners if the direct owner fully files, certain consolidated groups, certain trusts). Review the Exceptions section and confirm with a professional.

This summary reflects the 2011 rules and is informational only. For case-specific advice, consult a U.S. international tax professional.