Several organizations responded to an IRS request for comment on filing obligations of tax-exempt entities to say that three forms relating to foreign activity are overly complex, even though those forms were out of scope of the agency’s solicitation.
Request for comments. On September 11, 2024, the IRS Office of Management and Budget (OMB) issued a notice and request for comment concerning forms used by tax-exempt organizations, or EOs.
Relevant forms include Form 990, Return of Organization Exempt from Income Tax, and related forms, schedules, and attachments that are used to determine whether EOs are operating within the limitations of their exempt status.
Public comments were necessary, according to the request, because of changes to guidance and regs on various forms, as well as the addition of new forms. The IRS anticipated that “these changes will have an impact on the overall burden and cost estimates” of the package of required EO filings.
At the time, the IRS estimated that the total monetized burden for the Form 990 series in fiscal year 2025 would be about $5.77 billion.
Comments were due November 12, but on December 19 the IRS reopened the comment window through January 21, 2025. In the updated comment request, the fiscal year 2025 compliance burden estimate was revised upwards to $5.85 billion.
A supporting document compiled by the IRS estimated that the combined government cost for labor, operating and maintenance, and distribution of all EO forms and instructions is a little over $7.29 million.
Out of scope forms. Although the comment requests encompassed many forms, the IRS received comments on a trio of forms relating to foreign corporations and partnerships. These are:
- Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
- Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
In the same document, the IRS summarized comments it received during the first comment period and its responses. Multiple responses pertained to those three forms, but the IRS declined to consider them.
“Comments regarding Forms 926, 8865, and 5471 are not applicable to OMB’s request for comments on forms under OMB number 1545-0047,” the IRS told respondents. “They will not be addressed here.”
Nonetheless, that did not stop the American Institute of Certified Public Accountants (AICPA) from commenting on the three forms in its response to the second request.
“The administrative and compliance burden — both in terms of time spent and costs incurred — placed upon EOs related to gathering the relevant information, determining whether a filing is required, and then preparing and filing the forms, arguably outweighs any informational or tax dollar benefit the IRS and Treasury likely receive,” read the AICPA’s comment letter, dated January 27.
Comments. Form 926 generally applies to transfers of cash over $100,000 during a 12-month period, as well as transfers of amounts to foreign corporations where the transferer owns at least 10% and noncash transfers.
The AICPA suggested the IRS provide filing exceptions to certain EOs for Form 926, including those “that do not own (directly or indirectly) more than 50% of a foreign corporation or otherwise control the foreign corporation.”
Comments submitted by the Robert Wood Johnson Foundation (RWJF), like the AICPA’s, argued that EOs “take a conservative approach” to filing Form 926, and that “guidance clarifying whether and under what circumstances organizations are required to file Form 926 could provide significant time and cost savings.”
The RWJF also suggested a 50% foreign corporation ownership threshold to reduce the amount of Forms 926. “The IRS could also consider making an exception to the filing requirement for indirect transfers to foreign corporations made through a U.S. partnership that files Form 926 and properly reports all the required information,” the letter added.
The AICPA extended this 50% threshold recommendation to Forms 8865 and 5471.
Comments from the MacArthur Foundation suggested changing the 10% ownership trigger for Forms 926 and 8865 to “require both 10% ownership and a $100,000 cash transfer would reduce unnecessary filings for transactions that lack material significance.”
Regarding Form 5471, the MacArthur Foundation suggested that EOs should only file “when there is a Subpart F income inclusion for private foundations. Alternatively, a Subpart F disclosure line could be added to Form 990-PF to report the necessary information without requiring a separate, lengthy Form 5471.”
The Kresge Foundation also commented on the three forms, agreeing with the Subpart F income inclusion idea floated by the MacArthur Foundation.
In lieu of requiring members of domestic partnerships file Forms 926 and 8865, the IRS should only “require the domestic partnership that holds the foreign investments to file these forms on behalf of all domestic partners with enough detail reported on the Schedule K-1,” the Kresge Foundation told the IRS.
For more on reporting requirements for exempt organizations, see Checkpoint’s Federal Tax Coordinator ¶S-2801.
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