International Informational Returns – Tax Penalties | IRS Amnesty Options
Each year, the National Taxpayer Advocate issues a report to Congress summarizing the biggest issues with the tax code, the IRS enforcement of the tax code and what needs to be done to fix it.
IRS Increases Penalty Enforcement
One of the most disturbing trends detailed in the report is the continual increase in international penalties that are assessed against individuals subject to US tax.
It is important to understand that often times these penalties may also be abated, but whether or not your penalties will be abated is based upon your individual facts and circumstances. And, the trend has been an overall reduction in abatement.
A Brief Summary
The purpose of this article is simply to generalize the issues – not detail specifics. Some of these categories are broken down even further on the taxpayer advocate’s comprehensive analysis, along with a further breakdown of whether a penalty is an initial penalty, or a continuation penalty.
Penalties for IRC 6038 – Foreign Corporations & Businesses
In general, Internal Revenue Code section 6038 involves information reporting with respect to certain foreign corporations and partnerships. Typically, this involves reporting forms 5471 and 8865, respectively.
In 2013, the total amount of penalties assessed was about $41,000,000. With that said, it should be noted that nearly 82% of the penalties assessed were abated – which is good. In other words, even if the penalty was issued, you have the opportunity to get that penalty removed.
Fast-forward 2016, and the amount of penalty being assessed his nearly $56 million with only $36 million being abated. In other words, while total number of people being assessed has presumably increased, the number of people being able to get their penalty reduced or eliminated has decreased.
This is an example of how disturbing this trend has become. In 2013 the penalty being assessed for a continuation penalty was around $5 million with about $1.6 million being abated (31.1%)
2016, the continuation penalty was increased to nearly $50 million, with only 27.7% being abated. In other words, the number of people who have been penalized has jumped up upwards of 1000%, with less people able to reduce or eliminate the penalty.
Penalties for IRC 6677 – Foreign Trusts
The penalties for foreign trusts have skyrocketed.
One of the biggest enforcement priorities has become foreign trusts. This is because the IRS is under the impression that only reason to open a foreign trust is to try to hide money abroad. While for some people this may be accurate, for many people it is not.
In 2013 initial penalty for failing to properly report a foreign trust was about $112 million with $81 million being abated (resulting in a net penalty of around 72%)
Fast-forward to 2016 and the number has skyrocketed to over $700 million with only $7 million being abated. That means that the IRS is only a abating penalties at around 1%. This is a significant and drastic reduction in your ability to reduce penalties involving foreign trusts.
As the continuation penalty, the 2013 assessment is not provided, but in 2016 the continuation penalty abatement percentage was literally…zero (0%)
IRS Offshore Voluntary Disclosure
It’s plain to see, that the IRS is enforcing penalties against individuals who have not met their international reporting requirements – and have significantly reduced the ability to abate the penalties. This is especially true if an individual has a foreign business or foreign trust.
Sometimes, it is better to be proactive. By voluntarily submitting one of the approved offshore disclosure programs that person can usually have their penalty reduced if not eliminated, and bring themselves to compliance so they can sleep again.
Golding & Golding, A PLC
We have successfully represented clients in more than 1000 streamlined and voluntary disclosure submissions nationwide, and in over 70-different countries.
We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe.