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International Informational Filings – Penalties and Programs to Remedy Noncompliance

For U.S. tax reporting, the IRS provides over 800 different forms and schedules for taxpayers to file. With the vast amount of forms available to be filed by taxpayers, required filings may easily be overlooked.

Where required filings are overlooked, the IRS will impose penalties and/or interest on the taxpayer for noncompliance. Often overlooked filings include the foreign informational reporting forms which carry substantial penalties of $10K or more per delinquent form. Fortunately, the IRS provides a number of programs for taxpayers to come into compliance and to avoid some or all of the penalties and interest that could be imposed otherwise.

Foreign Informational Reporting Forms and Associated Penalties for Non-compliance

FinCen 114, Report of Foreign Bank and Financial Accounts (FBAR)

  • Form FinCen 114 is due on April 15 each year. The IRS provides an automatic extension to file the form until October 15 each year.
  • The penalty for a non-willful violation is $10,000.
  • For willful violations the penalty will be the greater of $100,000 or 50% of the account balance at the time of the violation.

Form 8938, Statement of Specified Foreign Financial Assets

  • Form 8938 is due with the taxpayer’s income tax return.
  • The penalty for noncompliance is $10,000.

Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations

  • Form 5471 is due with the taxpayer’s income tax return.
  • The penalty for noncompliance is $10,000.

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

  • Form 5472 is due with the taxpayer’s income tax return.
  • The penalty for noncompliance is $25,000.
  • Note: Form 5472 is only required to be filed where the taxpayer has reportable transactions. Where the form is filed without reporting any reportable transactions, the taxpayer will receive a notice of noncompliance.

Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships

  • Form 8865 is due with the taxpayer’s income tax return.
  • The penalty for noncompliance is $10,000 or 10% of the fair market value of a contribution that should have been reported with the form.

Form 8858, Information Return of U.S. persons with Respect to Foreign Disregarded Entities and Foreign Branches

  • Form 8858 is due with the taxpayer’s income tax return.
  • The penalty for noncompliance is $10,000.

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

  • Form 926 is due with the transferor’s income tax return.
  • The penalty for noncompliance is 10% of the fair market value of the transferred property, not to exceed $100,000 unless the failure with respect to such transfer was due to intentional disregard.

Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

  • Form 8621 is due with the shareholder’s income tax return.
  • There are no stated penalties for noncompliance for Form 8621.

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

  • Form 3520 is generally due on April 15th each year. However, where the taxpayer resides and maintains a place of business outside of the United States and Puerto Rico or serves in the military on duty outside of the United States or Puerto Rico, Form 3520 will be due on June 15th.
  • The penalty for Form 3520 noncompliance is the greater of $10,000 or up to 35% of the gross reportable amount.
  • Additionally, for noncompliance related to Part IV on form 3520, a penalty of 5% per month (25% maximum) of the gift or bequest for each month for failure to report.

Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

  • Form 3520-A is due on the 15th day of the third month after the close of their trust’s tax year.
  • The penalty for noncompliance is the greater of $10,000 or 5% of the gross reportable amount.

Programs Available to Remedy Delinquent Filings

Streamlined Foreign Offshore Procedure (“SFOP”)

  • Eligible taxpayers generally include individual U.S. persons that reside outside of the United States (determined under the physical presence test rules) where noncompliance was the result of non-willful conduct.
  • Under this program, taxpayers are required to file returns and informational forms for the prior three tax periods. However, FBARS must be filed for the prior six years.
  • No penalties are imposed and the taxpayer is only required to pay all tax liabilities and interest resulting from their back tax returns.

Streamlined Domestic Offshore Procedure (“SDOP”)

  • Where taxpayers meet the physical presence test and are considered to be U.S. residents they will not be eligible for the SFOP, but will be eligible for the SDOP. In addition, taxpayers must have timely filed their returns and informational forms to be eligible for the SDOP.
  • If a taxpayer is accepted into the SDOP program, they must file amended returns for the prior six tax years to report all worldwide income and enclose all required informational forms.
  • The IRS will impose a penalty of 5% of the highest total vale of all non-compliant assets during the in scope period.

Delinquent International Information Returns Submission Procedure

  • Taxpayers with reasonable cause may file delinquent international informational returns under the Delinquent International Information Return Submission Procedures and avoid noncompliance penalties.

Delinquent FBAR Submission Procedure

  • Taxpayers who overlooked their FBAR filings may use this procedure to come into compliance with delinquent FBAR filings and avoid any noncompliance penalties.

Updated Voluntary Disclosure Practice (“UVDP”)

  • Similar to the Offshore Voluntary Disclosure Program (“OVDP”) that ended in September 2018, the UVDP provides a procedure for taxpayers who are concerned that their conduct is willful or fraudulent to come into compliance with the law and potentially avoid criminal penalties.
  • Taxpayers must request preclearance with the IRS Criminal Investigation Division in order to enter into the program. Once preclearance and preliminary acceptance into the program are granted, the period in scope will generally include the past six tax years.
  • The IRS will generally apply a civil fraud penalty of 75% the highest tax liability (in a tax year) for the period in scope. In certain circumstances, the IRS may assert a civil fraud penalty for more than one year.
  • The normal FBAR penalties will generally still be asserted by the IRS. However, taxpayers may request an accuracy related penalty of 20% of the tax liability rather than the 75% civil fraud penalty or non-willful FBAR penalties rather than penalties for willful noncompliance.
For more information on this topic, contact a member of Withum’s International Services Group by filling out the form below.

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