IRS and International Information Return Reporting Penalties
For the past few years the Internal Revenue Service has increased their emphasis on international information returns, and on potential penalties for various types of international information form reporting. Generally, international information reporting penalties are imposed when a form is filed late, or not filed correctly, or with the correct information. Imposition of the penalties is generally automatic, and the Taxpayer is routinely not offered an opportunity to provide additional information or otherwise defend the penalty before it moves to collections.
Returns that are filed but that are not substantially complete and accurate are considered “un-filed” and may result in penalty assessments.
Certain international information returns are also considered un-filed if the taxpayer does not provide required information when requested by the IRS, and penalties may be assessed even if the required return has been submitted.
A U.S. person may have several reporting obligations for a particular tax year and thus may have exposure to multiple penalty assessments. Penalties may apply to each information return that was required to be filed for each year.
Usually, international information form penalties began at $10,000 per form per year but some penalties have recently been increased to $25,000 per form per year, even if the violation was considered to be non-wilful.
Filing Compliance Relief
The IRS offer amnesty programs that are designed to allow Taxpayers to voluntarily come into compliance by filing/amending their prior 3 years returns and 6 years of foreign bank filing (FBAR's).
The Streamlined Filing Procedure varies depending on your residency and requires that you include all the international information returns that are applicable to your situation.
You must assert, in a written statement, under penalties of perjury, that your previous non-compliance was not willful, report your world income as well as disclose all your foreign financial assets. If you are accepted into the IRS Streamlined Procedure, participants may avoid a number of potential penalties, including: Failure to file penalty, failure to pay penalty, accuracy-related penalty, international return civil penalties and FBAR penalties.
Common International Reporting Violations
Form 3520-A - (Annual Information Return of Foreign Trust with a U.S. Owner)
Filed annually by the trustee or owner of the TFSA account to report information about the trust.
From the IRS's perspective, a Canadian Tax-Free Savings Account (TFSA) is a foreign grantor trust
- This form is due the 15th day of the 3rd month after the end of the trust's tax year, generally March 15th
- An automatic 6 month extension of time to file may be granted by filing Form 7004- Application for Automatic Extension of Time to File Certain Business Income Tax Information by March 15th
- The entity must have a valid foreign trust EIN (Employer Identification Number)
- Generally, the initial penalty for not filing a timely, complete and accurate Form 3520-A is $10,000 or 35% of the “gross reportable amount,” whichever is larger.
- Penalty Code Section - IRC 6677(b)
Form 3520 - (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts)
An information return, filed annually by the Taxpayer to report:
i. Certain transactions with a foreign trust,
ii. Ownership of a foreign trust, or
iii. You received a large gift or inheritance from a foreign source or person.
- This form is due April 15th or if you live outside of the United States, June 15th.
- If a U.S. person is granted an extension via Form 4868-Extension of Time to File an Income Tax Return, the due date for filing Form 3520 is October 15th
- Generally, the initial penalty for not filing a timely, complete and accurate Form 3520 is $10,000 or 35% of the “gross reportable amount,” whichever is larger.
- Penalty Code Section - IRC 6677(a)
FinCEN Form 114 - (Report of Foreign Bank and Financial Accounts (FBAR's) filed with the U.S Treasury Department's Financial Crimes and Enforcement Network not the IRS.
This form is filed annually, if you meet the reporting threshold.
- Under current law, the IRS may assert a penalty on any person who fails to file a required FBAR.
- In the case of non-willful violations, the maximum penalty is $10,000 per incident per year.
- Higher penalties come into play where willfulness exists.
Form 8938 - (Statement of Specified Foreign Assets.) Is used to report specified foreign financial assets, and is filed annually, if you meet the reporting thresholds.
- This form is attached to your annual income tax return (Form 1040) and must be filed by the due date (including extension) for that return.
- Late filing penalty is $10,000 per year
- Penalty Code Section - IRC 6038D(d)
Form 5471 - (Information Return of U.S Persons With Respect to Certain Foreign Corporations) Used by certain U.S persons with an interest in Foreign Corporations.
- This form is used by certain U.S persons who are officers, directors or shareholders of certain foreign corporations.
- This form is attached to your annual income tax return (Form 1040) or if applicable your Partnership Return (Form 1065)and must be filed by the due date (including extension) for that return.
- Late filing penalty starts at $10,000 per year, per corporation
- Penalty Code Section - IRC 6038(b)
Form 8621 - (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) Used to report income from foreign mutual funds
Form 8865 - (Return of U.S. Persons With Respect to Certain Foreign Partnerships) -Used by certain U.S. person with interests in Foreign Partnerships
- Used by certain U.S. person with interests in Foreign Partnerships
- This form is attached to your annual income tax return (Form 1040) or if applicable your Partnership Return (Form 1065) or Corporation Return (Form 1120) and must be filed by the due date (including extension) for that return.
- Late filing penalty begins at $10,000 per year
- Penalty Code Section - IRC 6038(b)
Form 5472 - (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S Trade of Business) Used by a U.S corporation with 25% or more foreign ownership or a foreign corporations that does business in the U.S.
- Late or incomplete filing penalty begins at $25,000.
- Penalty code section - IRC 6038(a)