U.S. Taxpayers with Undisclosed Foreign Financial Assets
While we have come across clients who have willfully omitted foreign accounts and income from their U.S. tax returns, most clients that contact us for offshore compliance issues have recently realized that they have foreign income and information reporting requirements (FBAR, FATCA, etc). They’ve never been on the wrong side of the law and have never had the need to hire an attorney. They are terrified of the massive civil penalties that can be assessed for noncompliance, even for non-willful violations.
The IRS allows almost all taxpayers with unreported accounts to come into compliance through various offshore voluntary disclosure and streamlined programs. It can be difficult navigating through the complexities of these programs. Which one is right for you? What kind of penalties will be assessed? Was your non-compliance willful or non-willful? We will complete a factual and legal analysis of your particular situation to determine the best solution for your case. We keep the client involved in the process so they have a better understanding of the various options available to them.
For taxpayers who have undisclosed foreign financial assets and/or income, the IRS provides several options to remedy previous failure to comply with US tax and information reporting obligations. These options include:
- Offshore voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR submission procedures
Foreign Account Reporting Requirements
Individuals with foreign assets or interests may have one or more of the following reporting requirements:
- FinCEN Form 114, also known as FBAR
- Foreign Bank and Financial Accounts Reporting (FBAR). All US persons (which include US Citizens and resident aliens) who have a financial interest or signatory authority over foreign accounts which have an aggregate value of more than $10,000 at any time during the calendar year must report all foreign bank and financial accounts with the Department of Treasury by June 30.
- Form 8938 (FATCA):
- US Citizens, resident aliens, and aliens who meet the substantial presence test must report specified foreign assets on Form 8938 with their Form 1040.
- There is a filing threshhold which varies from $50,000 to $600,000 depending on the filing status of the taxpayer and whether the taxpayer is living in the US or outside the US.
- Form 3520:
- If you are a US Person who receives foreign gifts of money or other property over $100,000 (or $15,601 if received from a foreign corporation or partnership) must report the gift on Form 3520.
- Form 5471 & 5472:
- If you are a US citizen or permanent resident living abroad or a citizen or resident living in the US, you must report your interest in any foreign corporations if you have a specified relationship with the corporation and own or have control over a specified percentage of the total value of the corporation.
- Form 926:
- U.S. persons, domestic corporations or domestic estates or trusts must file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, to report any exchanges or transfers of property (as described in section 6038B(a)(1)(A) of the Internal Revenue Code) to a foreign corporation.
- Form 8865:
- This form is filed with your US tax return if you own 10% or more of a foreign partnership or foreign flow through LLC. This form shows the income and expense statement of the foreign partnership and the yearly balance sheet. It also reports details of the partnership and your allocable share of the partnerships income. It is similar to Form 1065 which is filed for a US based partnership or LLC.
Penalties for Non-Compliance
Taxpayers who are not compliant with the above compliance requirements, are subject to the following penalties.
- FinCEN 114 (FBAR):
- The IRS can impose a $10,000 penalty for each non-willful violation of the FBAR filing requirement.
- Where a person willfully fails to file an FBAR, the IRS may impose a penalty equal to the greater of $100,000 or 50 percent of the account’s highest balance.
- Form 8938 (FATCA):
- If you are required to file Form 8938 but do not file a complete and correct Form 8938 by the due date (including extensions), you may be subject to a penalty of $10,000. See Treas. Reg. 1.6038A-4(a)(1).
- If you do not file a correct and complete Form 8938 within 90 days after the IRS mails you a notice of the failure to file, you may be subject to an additional penalty of $10,000 for each 30-day period (or part of a period) during which you continue to fail to file Form 8938 after the 90-day period has expired. The maximum additional penalty for a continuing failure to file Form 8938 is $50,000. See Treas. Reg. 1.6038A-4(d)
- If you underpay your tax as a result of a transaction involving an undisclosed specified foreign financial asset, you may have to pay a penalty equal to 40 percent of that underpayment.
- If you underpay your tax due to fraud, you must pay a penalty of 75 percent of the underpayment due to fraud.
- In addition to the penalties already discussed, if you fail to file Form 8938, fail to report an asset, or have an underpayment of tax, you may be subject to criminal penalties.
- Form 3520:
- The penalty for failure to report a large gift (or bequest) from a foreign person on a timely, complete, and accurate Form 3520 is 5 percent of the amount of such foreign gift (or bequest) for each month for which the failure continues after the due date of the reporting U.S. person’s income tax return (not to exceed 25% of such amount in the aggregate). IRM 188.8.131.52.4
- Form 5471 & 5472:
- The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information available to the Service. IRC 6038(d)(3).
- Form 926:
- Anyone who fails to any exchanges or transfers of specified foreign properties must pay a penalty equal to 10 percent of the fair market value of the property at the time of the exchange. IRC § 6038B
- Form 8865:
- The initial penalty is $10,000 per failure.
- If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period will apply. The maximum continuation penalty is limited to $50,000 per failure.
- The maximum total penalty under IRC 6679 is $60,000 per failure (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per failure).
In addition to the above foreign asset reporting penalties, if a US citizen or permanent resident living abroad fails to file a US tax return, the various return penalties (failure to pay, failure to file, and interest) are applied in combination with the above penalties.
Why hire us?
Kunal Patel, partner at Mitchell & Patel LLC, comes from a diverse background that includes IRS, Big 4 public accounting, and legal experience. He focuses almost exclusively in offshore compliance matters and has successfully brought numerous taxpayers into compliance with with U.S. tax laws concerning offshore accounts and income.
We take offshore voluntary disclosures seriously and want clients to safely and strategically come into compliance.
Schedule a consultation to see how we can help.