What Are The Partnership Reporting of Contributions to Foreign Entities And What You Need to Know

The Internal Revenue Code § 6038B, a provision that significantly expands reporting obligations for U.S. persons—especially domestic partnerships—when property is contributed to foreign corporations or partnerships. What was once a niche requirement for major shareholders is now a potentially wide-reaching trap for the unwary.

This post unpacks the new landscape: what’s required, who’s responsible, where the risks lie, and how partnerships and their advisors can stay compliant.

1. What’s New Under § 6038B?

Section 6038B mandates reporting for any U.S. person who transfers property to a foreign entity, with no requirement to hold significant ownership. The key trigger is whether the total value of contributions exceeds $100,000 within a 12-month period. Once that threshold is crossed, the reporting obligation kicks in—regardless of whether the person owns a substantial share of the foreign partnership or corporation.

This marks a shift from previous rules, which mostly targeted those with controlling interests. Now, even passive contributors can find themselves in noncompliance if they’re not careful.

2. Who Has to Report—and When?

Both domestic partnerships and their U.S. partners can be responsible for reporting under § 6038B, but the obligations vary depending on the type of foreign entity receiving the contribution.

For contributions to foreign partnerships, a domestic partnership can generally take care of the filing itself—using Form 8865 as a Category 3 filer. If filed properly, this relieves individual partners from having to file their own forms.

However, when the contribution is made to a foreign corporation, things change dramatically. In that case, the domestic partnership cannot file on behalf of its partners. Instead, each partner is individually responsible for determining whether their share of the contribution meets the $100,000 threshold or results in them owning 10% or more of the corporation. If so, they must file Form 926 themselves.

This distinction—based solely on the type of foreign entity—is a critical one for taxpayers and advisors to grasp.

3. Reporting Requirements: Form 8865 vs. Form 926

Form 8865 and Form 926 serve similar ends, but apply in different contexts. Form 8865 is used to report contributions to foreign partnerships, while Form 926 is reserved for transfers to foreign corporations.

Form 8865 is versatile, with multiple filer categories. Category 3, in particular, is relevant for reporting substantial contributions—even when no controlling interest is acquired. For foreign corporations, Form 926 is the go-to vehicle, but it must be filed individually by each partner, since a domestic partnership cannot fulfill this obligation on their behalf.

It’s worth noting that domestic partnerships are still required to report foreign transactions on their annual Schedule K-2, which is included with their Form 1065. These disclosures then flow through to each partner’s Schedule K-3. These schedules act as a compliance roadmap, alerting partners to potential foreign reporting obligations—even if the partnership itself has filed what it can.

4. What Happens If You Don’t Comply?

Noncompliance with filing obligations can lead to significant consequences. If Forms 8865 or 926 are not submitted when required, the IRS may impose a penalty amounting to 10% of the property’s fair market value at the time of transfer. Although this penalty is generally capped at $100,000 per violation, that limitation does not apply if the failure to file is deemed willful.

An even more critical issue is the impact on the statute of limitations. Under typical circumstances, the IRS has three years to audit a tax return. However, when these international forms are not filed, the audit window remains open indefinitely—meaning the IRS can initiate a review many years later, simply because the required documentation was never submitted.

5. How Do Schedules K-2 and K-3 Fit In

Since their introduction in 2022, Schedules K-2 and K-3 have become essential tools for reporting international tax matters within partnerships. K-2 is filed by the partnership and K-3 is issued to each partner.

In the context of § 6038B, these schedules serve two important purposes: they help the IRS identify cross-border transactions, and they provide partners with the information they need to determine whether they have their own reporting obligations. A K-3 that shows a partner’s share of a contribution to a foreign entity is a red flag that additional forms—such as 8865 or 926—may be required.

As these schedules become increasingly complex, advisors should take a proactive role in helping clients understand and navigate their yearly impact.

A Few Examples to Bring It Together

Let’s begin with a scenario: John, a U.S. resident and passive investor in a domestic partnership, transfers intellectual property valued at $120,000 to a foreign partnership. Even though he acquires just a 5% ownership interest, he must still file Form 8865 under Category 3 due to the significant value of the contributed asset.

In a different case, consider a domestic entity named ABC LLC that contributes $400,000 in cash to a foreign partnership. ABC LLC prepares and files Form 8865 on behalf of the partnership. In this case, the individual U.S. partners are not required to file anything themselves, as long as the form is filed completely and accurately.

Contrast that with a final case: XYZ Partnership transfers $200,000 in machinery to a foreign corporation. Each partner’s share of that contribution appears on their K-3. Any partner whose share exceeds $100,000—or who ends up owning at least 10% of the foreign corporation—must file Form 926 individually. The partnership cannot do it for them.

What Should Partnerships and Advisors Do?

Domestic partnerships need to take a proactive approach. Start by tracking all contributions to foreign entities carefully, and be sure to differentiate between contributions to partnerships and corporations. It’s also essential to aggregate contributions over a rolling 12-month period to determine whether the $100,000 threshold has been crossed. If the conditions for a Category 3 filing are met, prepare and file Form 8865 in a timely manner. Regardless, always issue complete Schedules K-2 and K-3 to your partners.

U.S. partners, on the other hand, should carefully review their K-3 statements each year. Even if they didn’t make any contributions personally, their share of a partnership-level transaction could create a reporting obligation. If their share of a transfer to a foreign partnership exceeds the threshold, they may need to file Form 8865. If it involves a foreign corporation, and the conditions are met, then Form 926 must be submitted.

A tax advisor’s expertise helps prevent important tax matters from being overlooked. That means educating clients, establishing internal systems to flag reportable events, and conducting annual reviews of K-3s to catch any items that could trigger a filing requirement. A well-organized compliance strategy can protect both partnerships and partners from costly and embarrassing penalties.

Related Compliance Considerations

6038B reporting often exists alongside other international filing requirements. Based on how the foreign entity is structured and the extent of a U.S. individual’s participation, certain reporting forms may be required—such as Form 5471 for foreign corporations, Form 8938 under FATCA, or FinCEN Form 114 (FBAR).

In some cases, the Bureau of Economic Analysis (BEA) may require Form BE-10 or related filings. This overlapping landscape reinforces the need for a comprehensive review of all foreign activity—especially in years involving cross-border investments, restructurings, or capital contributions.

Why This Matters More Than Ever

This broadened interpretation of § 6038B represents a significant compliance burden for U.S. taxpayers, particularly in private equity, real estate, and international joint ventures. Many of those affected may not even realize they have a reporting obligation until it’s too late—especially when their only notification comes via a brief line item in a dense K-3 statement.

With penalties that can reach $100,000 and indefinite audit exposure hanging over unfiled forms, the stakes are too high to ignore. Proactive compliance isn’t just advisable—it’s essential.

Section 6038B has evolved into a powerful enforcement tool for the IRS, and the onus is now squarely on domestic partnerships and their U.S. partners to comply. By understanding the nuances of Form 8865 and Form 926, reviewing K-2/K-3 statements carefully, and coordinating with knowledgeable advisors, taxpayers can avoid harsh penalties and stay on the right side of the law.

In today’s cross-border economy, it’s not just about whether you control a foreign entity—it’s about whether your financial activity touches one at all.