By: Janna Goudarzi, MST | Nonprofit Tax Manager
Exempt organizations (EOs) may be required to provide information on its activities conducted outside the United States on a number of information forms, including Form 990. These reporting requirements don’t just apply to EOs with foreign offices or overseas programs, and penalties for failure to comply can be severe in some cases. Therefore, it is important for EOs to be aware of the potential foreign filing requirements and assess its potential compliance risk.
EOs may conduct many different activities outside the United States. An organization that is required to file Form 990 may be required to disclose information regarding its foreign activities on Schedule F. For schedule F purposes, activities typically reported are:
- program service activities
- grants and other assistance, and
- fundraising activities
However, there are some other activities an EO may conduct outside the U.S. that must also be reported, for example:
- unrelated business income
- investment activities
- membership activities
- administrative costs, and
- maintaining a foreign office or having employees, or agents in regions outside the United States
Information is reported based on geographic regions determined by the IRS. If an organization has aggregate revenue or expenses of more than $10,000 from activities it must report in detail on Form 990, Schedule F, Part I. Schedule F reporting may also be triggered if an EO held investments outside the U.S. that had a book value of $100,000 or more at any time during the year.
Foreign expenditures include salaries and wages and other employment-related costs paid to or for the benefit of employees located in the region; travel expenses to, from, and within the region; rent and other costs relating to offices located in the region; grants to or for recipients located in the region; bank fees and other financial account maintenance fees and costs; and payments to agents located in the region. The following link from the IRS website responds to frequently asked questions on what type of foreign expenditures must be reported on Schedule F.
Additional information regarding grants and assistance are reported on Schedule F, Part II and III. Schedule F, Part II requires an organization to report detailed information for each organization or entity that received more than $5,000 of cash and/or non-cash grants or assistance.
Schedule F, Part III requires an organization with more than $5,000 in aggregate to foreign individuals to provide additional information on these grants. For Schedule F reporting, a grant to a foreign individual includes a person (including a U.S. citizen or resident) who lives or resides outside the U.S. at the time the grant is disbursed.
Schedule F, Part IV contains a list of questions about foreign operations, transfers and ownership interest that may trigger additional filing requirements. A yes answer to these questions does not necessary mean there is a filing requirement.
The forms discussed below are some of the more common reporting issues for exempt organizations.
Form 926 Return by a U.S Transferor of Property to a Foreign Corporation – Form 926 is used to report certain transfers of property to a foreign corporation. Generally, a US person must report a transfer of cash to a foreign corporation if the transfer results in at least a 10% voting power or ownership of the corporation (either directly or indirectly); or the amount of the cash transfers during the 12-month period exceeds $100,000.
Form 5471 Information Return for U.S. Persons with Respect to Certain Foreign Corporations – Form 5471 is used to report an organization’s ownership interest in a foreign corporation. This form is usually required where an organization owns directly or indirectly (e.g. through a partnership) 10% or more of the vote or value of foreign corporation.
Form 8621 – Passive Foreign Investment Company – A U.S. person that is a direct or indirect shareholder of a Passive Foreign Investment Company (PFIC) may be required to file Form 8621 if certain criteria is met. It is not uncommon for a single partnership K-1 to generate these filings for its partners. Exempt organizations should review the K-1 carefully to determine if this filing was required or if it has been filed on its behalf.
Form 5713 International Boycott Report – Form 5713 is used to report operations in or related to boycotting countries. A boycotting country includes any country that is on the list maintained by the Secretary of Treasury under Section 999(a)(3) and is revised quarterly. Currently the list includes: Iraq, Kuwait, Lebanon, Libya, Qatar, Saudi Arabia, Syria, United Arab Emirates and Yemen. The list is available at www.federalregister.gov.
Another form that is often overlooked by exempt organizations that must be filed on an annual basis is the FINCEN Form 114-Report of Foreign Bank and Financial Accounts (FBAR). Unlike the forms referenced above, the FBAR is not included in the Schedule F, Part IV question but rather is triggered by the Form 990 Part V, line 4. Exempt organizations that have a financial interest in or signature authority over foreign financial accounts must file the FBAR if the aggregate value of the foreign account exceeds $10,000 at any time during the calendar year. U.S. persons who have signature authority over those accounts may also have an individual FBAR filing requirement. The FBAR requires the filer to disclose the maximum value of the account during the year, the type of the account, name of the financial institution, account number and address. This form is due April 15th with an automatic six month extension to October 15th of each year.
The Form 990 requires disclosure of foreign activities of an exempt organization on Schedule F and has several questions that may identify other foreign filings that may be required. These foreign filings may arise, not only from conducting program activities outside the U.S. but also from maintaining a foreign bank accounts, having foreign investments or raising money outside the U.S. Exempt organizations need to be aware of all of their foreign activities so they can properly report the on Form 990 and file other required forms if necessary.
For more information about foreign filing requirements for EOs, contact Janna Goudarzi, MST, Manager at email@example.com or 301-951-9090.