Reporting to Partners

When making a payment of withholding tax to the IRS under section 1446, a partnership must notify all foreign partners of their allocable shares of any section 1446 tax paid to the IRS by the partnership. The partners use this information to adjust the amount of estimated tax that they must otherwise pay to the IRS.

A partnership must annually provide foreign partners with a copy of Form 8805 even if no section 1446 withholding tax is paid. Send Form 8805 to the foreign partner by the due date of the partnership return (including extensions).

Interest and Penalties

Interest and penalties are described below. If the partnership files Form 8804 or Forms 8805 late, fails to furnish correct Forms 8805, or fails to pay the tax when due, it may be liable for penalties and interest unless it can show that failure to file or pay was due to reasonable cause and not willful neglect.

Interest

Interest is charged on taxes not paid by the due date, even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late Filing of Form 8804

A partnership that fails to file Form 8804 when due (including extensions of time to file) generally may be subject to a penalty of 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The penalty will not apply if the partnership can show reasonable cause for filing late. If the failure to timely file is due to reasonable cause, attach an explanation to Form 8804.

Late Filing of Correct Form 8805

A penalty may be imposed for failure to file each Form 8805 when due (including extensions). The penalty may also be imposed for failure to include all required information on Form 8805 or for furnishing incorrect information. The penalty is based on when a correct Form 8805 is filed. The penalty is:

• $15 per Form 8805 if the partnership correctly files within 30 days; maximum penalty of $75,000 per year ($25,000 for a small business). A small business has average annual gross receipts of $5 million or less for the most recent 3 tax years (or for the period of time the business has existed, if shorter) ending before the calendar year in which the Forms 8805 were due.
• $50 per Form 8805 if the partnership files more than 30 days after the due date or does not file a correct Form 8805; maximum penalty of $250,000 per year ($100,000 for a small business).

If the partnership intentionally disregards the requirement to report correct information, the penalty per Form 8805 is increased to $100 or, if greater, 10% of the aggregate amount of items required to be reported, with no maximum penalty. For more information, see sections 6721 and 6724.

Failure To Furnish Correct Forms 8805 to Recipient

A penalty of $50 may be imposed for each failure to furnish Form 8805 to the recipient when due. The penalty may also be imposed for each failure to give the recipient all required information on each Form 8805 or for furnishing incorrect information. The maximum penalty is $100,000 for all failures to furnish correct Forms 8805 during a calendar year.

If the partnership intentionally disregards the requirement to report correct information, the penalty is increased to $100 or, if greater, 10% of the aggregate amount of items required to be reported and the $100,000 maximum penalty does not apply. For more information, see sections 6722 and 6724.

Late Payment of Tax

The penalty for not paying tax when due is usually ½ of 1% of the unpaid tax for each month or part of a month the tax is unpaid. The penalty cannot exceed 25% of the unpaid tax.

Failure To Withhold and Pay Over Tax

Any person required to withhold, account for, and pay over the withholding tax under section 1446, but who fails to do so, may be subject to a civil penalty under section 6672. The civil penalty is equal to the amount that should have been withheld and paid over.

Other Penalties

Penalties can also be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

Treatment of Partners

A partnership's payment of section 1446 withholding tax on effectively connected taxable income allocable to a foreign partner relates to the partner's U.S. income tax liability for the partner's tax year in which the partner is subject to U.S. tax on that income.

Amounts paid by the partnership under section 1446 on effectively connected taxable income allocable to a partner are allowed to the partner as a credit under section 33. The partner may not claim an early refund of withholding tax paid under section 1446.

Amounts paid by a partnership under section 1446 for a partner are to be treated as distributions made to that partner on the earliest of the following:

1. The day on which this tax was paid by the partnership.
2. The last day of the partnership's tax year for which the amount was paid.
3. The last day on which the partner owned an interest in the partnership during that year.

A partner that wishes to claim a credit against its U.S. income tax liability for amounts withheld and paid over under section 1446 must attach Copy C of Form 8805 to its U.S. income tax return for the tax year in which it claims the credit.

Publicly Traded Partnerships

A publicly traded partnership is any partnership whose interests are regularly traded on an established securities market (regardless of the number of its partners). However, it does not include a publicly traded partnership treated as a corporation under the general rule of section 7704(a).

A publicly traded partnership that has effectively connected income, gain, or loss, generally must withhold tax on distributions of that income made to its foreign partners. The rate is 38.6% for 2002 and 2003. In this situation, the partnership uses Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding; and Form 1042-T, Annual Summary and Transmittal of Forms 1042-S, to report withholding from distributions instead of following these instructions. It also must comply with the regulations under section 1461 and Regulations section 1.6302-2.

However, such a partnership may elect instead to pay a withholding tax based on effectively connected taxable income allocable to its foreign partners. To do this, the partnership must comply with the payment and reporting requirements of these instructions by the date on which Form 8804 is due for the partnership's first tax year. Also, the partnership must attach a statement to its first Form 8804 indicating that it is a publicly traded partnership that is electing not to withhold on distributions. Once made, the election may be revoked only with IRS consent.

Tiered Partnerships

The term tiered partnership describes the situation in which a partnership owns an interest in another partnership. The latter is a subsidiary partnership. A partnership that directly or indirectly owns a partnership interest in a subsidiary partnership is allowed a credit against its own section 1446 liability for any section 1446 tax paid by the subsidiary partnership for that partnership interest.

A partnership that is a direct or indirect partner in a subsidiary partnership and that has had section 1446 tax payments made on its behalf will receive a copy of Form 1042-S or Form 8805 from the subsidiary partnership. The partnership that is the direct or indirect partner must in turn file these forms with its Form 8804 and treat the amount withheld by the subsidiary partnership as a credit against its own liability to withhold under section 1446. This credit is allowed on line 7b of the Form 8804 filed by the partnership that is the direct or indirect partner. The partnership that is a direct or indirect partner must also provide a copy of the forms it receives to its partners, along with the information described in Reporting to Partners on page 3. These statements and forms will enable those partners to obtain appropriate credit for tax withheld under section 1446.

Specific Instructions

Address

When providing a U.S. address on Form 8804, 8805, or 8813, include the suite, room, or other unit number after the street address. If the Post Office does not deliver mail to the street address and the partnership (or withholding agent) has a P.O. box, show the box number instead of the street address.

When providing a foreign address on Form 8804, 8805, or 8813, enter the number and street, city, province or state, and the name of the country. Follow the foreign country's practice in placing the postal code in the address. Do not abbreviate the country name.

Form 8804

Lines 4a and 5a

Figure the partnership's effectively connected taxable income using the definition on page 2. Enter the effectively connected taxable income allocable to noncorporate foreign partners on line 4a. Enter the effectively connected taxable income allocable to corporate foreign partners on line 5a.

Partnership effectively connected taxable income on which a foreign partner is exempt from U.S. tax by a treaty or other reciprocal agreement is not allocable to that partner and is exempt from withholding under section 1446. However, this exemption from section 1446 withholding must be reported on Form 8805. See instructions for line 8b of Form 8805 on page 6.

Line 7b

Enter on line 7b the amount of section 1446 tax withheld by the subsidiary partnership (see Tiered Partnerships above). The amount withheld will be shown on line 11 of the Form 8805 the partnership receives from the subsidiary partnership. If the partnership receives a Form 1042-S from a subsidiary PTP, the amount withheld will be shown in box 7 of the Form 1042-S. (Box 1 of the Form 1042-S will show income code 27.)

Line 7c

Line 7c applies only to partnerships treated as foreign persons and subject to withholding under section 1445(a) or 1445(e)(1) upon the disposition of a U.S. real property interest.

Enter on line 7c the amount of tax withheld under section 1445(a) and shown on Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests, for the tax year in which the partnership disposed of the U.S. real property interest.

Also enter on line 7c the amount of section 1446(e)(1) tax withheld on a distribution by a domestic trust to the partnership with respect to the disposition of a U.S. real property interest by the trust. The amount withheld will be shown in box 7 of the Form 1042-S the partnership receives from the trust. (Box 1 of the Form 1042-S will show income code 25 or 26.)

For both of the situations described above, do not enter more than the amount allocable to foreign partners (as defined in section 1446(e)). Enter amounts allocable to U.S. partners on line 13 of Schedules K and K-1 (Form 1065). For Form 1065-B, enter amounts on line 16 of Schedule K and in box 9 of Schedule K-1.

Form 8805

Line 2a

A partnership must pay the withholding tax for a foreign partner even if it does not have a U.S. TIN for that partner. See Taxpayer Identifying Number on page 1 for details on obtaining a U.S. TIN.

Line 8b

Check the box on this line if any of the partnership's effectively connected taxable income is treated as not allocable to the foreign partner identified on line 1a and therefore exempt from section 1446 withholding because the income is exempt from U.S. tax for that foreign partner by a treaty, reciprocal exemption, or a provision of the Internal Revenue Code.

Form 8813

Line 1

A partnership without a U.S. EIN must obtain one and must pay any section 1446 withholding tax due. If the partnership has not received an EIN by the time it files Form 8813, indicate on line 1 of Form 8813 the date the partnership applied for its EIN. On receipt of its EIN, the partnership must immediately send that number to the IRS using the address as shown in Where To File on page 1 of these instructions.

Country Codes

Enter on line 4, Form 8805, the code, from the list below, for the country of which the partner is a resident for tax purposes. These codes are used by the IRS to provide information to all tax treaty countries for purposes of their tax administration.
Country	Code
Abu Dhabi	TC
Afghanistan	AF
Albania	AL
Algeria	AG
American Samoa	AQ
Andorra	AN
Angola	AO
Anguilla	AV
Antarctica	AY
Antigua and Barbuda	AC
Argentina	AR
Armenia	AM
Aruba	AA
Ashmore and Cartier Islands	AT
Australia	AS
Austria	AU
Azerbaijan	AJ
Azores	PO
Bahamas, The	BF
Bahrain	BA
Baker Island	FQ
Balearic Islands (Mallorca, etc.)	SP
Bangladesh	BG
Barbados	BB
Bassas da India	BS
Belarus	BO
Belgium	BE
Belize	BH
Benin (Dahomey)	BN
Bermuda	BD
Bhutan	BT
Bolivia	BL
Bonaire	NT
Bosnia-Herzegovina	BK
Botswana	BC
Bouvet Island	BV
Brazil	BR
British Indian Ocean Territory	IO
Brunei	BX
Bulgaria	BU
Burkina Faso (Upper Volta)	UV
Burma	BM
Burundi	BY
Cambodia (Kampuchea)	CB
Cameroon	CM
Canada	CA
Canary Islands	SP
Cape Verde	CV
Cayman Islands	CJ
Central African Republic	CT
Chad	CD
Chile	CI
China, People's Republic of (including Inner Mongolia, Tibet, and Manchuria)	CH
Christmas Island (Indian Ocean)	KT
Clipperton Island	IP
Cocos (Keeling) Islands	CK
Colombia	CO
Comoros	CN
Congo (Brazzaville)	CF
Congo, Democratic Republic of the (Zaire)	CG
Cook Islands	CW
Coral Sea Islands Territory	CR
Corsica	VP
Costa Rica	CS
Cote D'Ivoire (Ivory Coast)	IV
Croatia	HR
Cuba	CU
Curacao	NT
Cyprus	CY
Czech Republic	EZ
Denmark	DA
Djibouti	DJ
Dominica	DO
Dominican Republic	DR
Dubai	TC
East Timor	TT
Ecuador	EC
Egypt	EG
Eleuthera Island	BF
El Salvador	ES
Equatorial Guinea	EK
Eritrea	ER
Estonia	EN
Ethiopia	ET
Europa Island	EU
Falkland Islands (Islas Malvinas)	FK
Faroe Islands	FO
Fiji	FJ
Finland	FI
France	FR
French Guiana	FG
French Polynesia (Tahiti)	FP
French Southern and Antarctic Lands	FS
Gabon	GB
Gambia, The	GA
Gaza Strip	GZ
Georgia	GG
Germany	GM
Ghana	GH
Gibraltar	GI
Glorioso Islands	GO
Great Britain (United Kingdom)	UK
Greece	GR
Greenland	GL
Grenada (Southern Grenadines)	GJ
Guadeloupe	GP
Guam	GQ
Guatemala	GT
Guernsey	GK
Guinea	GV
Guinea-Bissau	PU
Guyana	GY
Haiti	HA
Heard Island and McDonald Islands	HM
Honduras	HO
Hong Kong	HK
Howland Island	HQ
Hungary	HU
Iceland	IC
India	IN
Indonesia (including Bali, Belitung, Flores, Java, Moluccas, Sumatra, Timor, etc.)	ID
Iran	IR
Iraq	IZ
Ireland, Republic of (Eire)	EI
Isle of Man	IM
Israel	IS
Italy	IT
Jamaica	JM
Jan Mayen	JN
Japan	JA
Jarvis Island	DQ
Jersey	JE
Johnston Atoll	JQ
Jordan	JO
Juan de Nova Island	JU
Kazakhstan	KZ
Kenya	KE
Kingman Reef	KQ
Kiribati (Gilbert Islands)	KR
Korea, Democratic People's Republic of (North)	KN
Korea, Republic of (South)	KS
Kosovo	YO
Kurile Islands	RS
Kuwait	KU
Kyrgyzstan	KG
Laos	LA
Latvia	LG
Lebanon	LE
Lesotho	LT
Liberia	LI
Libya	LY
Liechtenstein	LS
Lithuania	LH
Luxembourg	LU
Macau	MC
Macedonia, former Yugoslav Republic of	MK
Madagascar (Malagasy Republic)	MA
Malawi	MI
Malaysia	MY
Maldives	MV
Mali	ML
Malta	MT
Marshall Islands	RM
Martinique	MB
Mauritania	MR
Mauritius	MP
Mayotte	MF
Mexico	MX
Micronesia, Federated States of	FM
Midway Islands	MQ
Moldova	MD
Monaco	MN
Mongolia	MG
Montenegro	YO
Montserrat	MH
Morocco	MO
Mozambique	MZ
Namibia	WA
Nauru	NR
Navassa Island	BQ
Nepal	NP
Netherlands	NL
Netherlands Antilles	NT
New Caledonia	NC
New Zealand	NZ
Nicaragua	NU
Niger	NG
Nigeria	NI
Niue	NE
Norfolk Island	NF
Northern Ireland	UK
Northern Mariana Islands	CQ
Norway	NO
Oman	MU
Pakistan	PK
Palau	PS
Palmyra Atoll	LQ
Panama	PM
Papua New Guinea	PP
Paracel Islands	PF
Paraguay	PA
Peru	PE
Philippines	RP
Pitcairn Island	PC
Poland	PL
Portugal	PO
Puerto Rico	RQ
Qatar (Katar)	QA
Redonda	VI
Reunion	RE
Romania	RO
Russia	RS
Rwanda	RW
Ryukyu Islands	JA
St. Helena (Ascension Island and Tristan de Cunha Island Group)	SH
St. Kitts (St. Christopher and Nevis)	SC
St. Lucia	ST
St. Pierre and Miquelon	SB
St. Vincent and the Grenadines (Northern Grenadines)	VC
San Marino	SM
Sao Tome and Principe	TP
Sarawak	MY
Saudi Arabia	SA
Senegal	SG
Serbia	YO
Seychelles	SE
Sierra Leone	SL
Singapore	SN
Slovak Republic (Slovakia)	LO
Slovenia	SI
Solomon Islands	BP
Somalia	SO
South Africa	SF
South Georgia and the South Sandwich Islands	SX
Spain	SP
Spratly Islands	PG
Sri Lanka	CE
Sudan	SU
Suriname	NS
Svalbard (Spitsbergen)	SV
Swaziland	WZ
Sweden	SW
Switzerland	SZ
Syria	SY
Taiwan	TW
Tajikistan	TI
Tanzania	TZ
Thailand	TH
Togo	TO
Tokelau	TL
Tonga	TN
Tortola	VI
Trinidad and Tobago	TD
Tromelin Island	TE
Tunisia	TS
Turkey	TU
Turkmenistan	TX
Turks and Caicos Islands	TK
Tuvalu	TV
Uganda	UG
Ukraine	UP
United Arab Emirates	TC
United Kingdom (England, Wales, Scotland, No. Ireland)	UK
Uruguay	UY
Uzbekistan	UZ
Vanuatu	NH
Vatican City	VT
Venezuela	VE
Vietnam	VM
Virgin Islands (British)	VI
Virgin Islands (U.S.)	VQ
Wake Island	WQ
Wallis and Futuna	WF
West Bank	WE
Western Sahara	WI
Western Samoa	WS
Windward Islands	VC
Yemen (Aden)	YM
Yugoslavia (Kosovo, Montenegro, Serbia)	YO
Zaire (Democratic Republic of the Congo)	CG
Zambia	ZA
Zimbabwe	ZI
Other Countries	OC

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