Is a Streamlined Domestic Offshore Procedures Penalty Increase Due?
- 0.1 Streamlined Domestic Offshore Procedures
- 0.2 Non-Streamlined Penalties are Much Worse
- 0.3 Will the Streamlined Program Penalty Increase?
- 0.4 Want to Learn More about the Streamlined Program?
- 0.5 Streamlined Disclosure Program – FAQ
- 0.5.1 How do I know if I Was Willful?
- 0.5.2 I Knew I Should have Filed Tax Returns, but Did not Know About FATCA or FBAR?
- 0.5.3 What if the IRS disagrees with Me and Believes I was Willful?
- 0.5.4 Is there an Attorney-Client Privilege with a Non-Attorney?
- 0.5.5 My CPA told me there is a Privilege?
- 0.5.6 Which Three (3) Years of Tax Returns do I have to Amend?
- 0.5.7 Is it True I can still be Audited for the Prior 3 years of Tax Returns?
- 0.5.8 On my Original Schedule B I Indicated I had no Foreign Accounts?
- 0.5.9 So if I marked No on Schedule B, I may still Qualify for Streamlined?
- 0.5.10 I received a FATCA Letter, now what?
- 0.5.11 What if I Do Not Respond to the FATCA Letter?
- 0.5.12 What if I have an Unreported Foreign Gift (Form 3520)?
- 0.5.13 What if I Failed to Report a Foreign Trust (Form 3520-A)?
- 0.5.14 What if I Never Reported my Foreign Business Interest (Form 5471)
- 0.5.15 I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
- 0.5.16 I Cannot Locate All of my Account Information
- 0.5.17 I do not Have to Pay Tax on These Accounts Overseas?
- 0.5.18 I already Paid Taxes on These Earnings Overseas?
- 0.5.19 Are There Penalties on the Outstanding Tax Liability?
- 0.5.20 How is the 5% Penalty Calculated?
- 0.5.21 I live Overseas, Do I Qualify for the IRS Penalty Waiver?
- 0.5.22 Is my Foreign Real Estate Calculated into the Equation?
- 0.5.23 What Type of Accounts Must be Reported?
- 0.5.24 Must Foreign Insurance Policies be Reported?
- 0.5.25 What if I am Under IRS Audit or Examination?
- 0.5.26 What is a Reasonable Cause Statement?
- 0.5.27 But I have no tax liability?
- 0.5.28 What is Quiet Disclosure/Silent Disclosure
- 0.5.29 Does my Foreign Inheritance Count Toward the Penalty?
- 0.5.30 Do I Receive Criminal Protection under the Streamlined Program?
- 1 STREAMLINED PROGRAM – SUMMARY
- 2 Streamlined Domestic Offshore Procedures
- 2.1 What does Non-Willful Mean?
- 2.2 If you are Non-Willful…
- 2.3 Domestic Streamlined Basic Requirements
- 2.4 What Forms Must be Reported?
- 2.5 Reporting Foreign Accounts (FBAR)
- 2.6 FATCA Form (8938)
- 2.7 Foreign Gift Form (3520)
- 2.8 Foreign Corporation or Foreign Partnership (5471 or 8865)
- 2.9 Passive Foreign Investment Company (PFIC)
- 2.10 Foreign Trust (3520-A)
- 2.11 Foreign Real Estate Income
- 2.12 How do I Fix this Mess?
In accordance with the Streamlined Domestic Offshore Procedures, a non-willful U.S. person can get into tax compliance for their unreported foreign accounts, unreported foreign income, unreported foreign specified assets, and unreported foreign business holdings by filing the necessary paperwork and paying a small penalty.
This can help avoid a future International Tax Audit or International Tax Law Investigation.
Streamlined Domestic Offshore Procedures
Generally, under the Streamlined Domestic Offshore Procedures, the applicant pays the outstanding tax liability for three (3) years, along with a 5% penalty on the highest, year-end value of the aggregate annual unreported foreign account balances involving their FBAR and FATCA Form 8938s.
For example, if Denise complies with the Streamlined Domestic Offshore Procedures and during her compliance period (six years), she had one year in which the unreported balances reached $600,000 on December 31 during one of those years, her penalty would be $30,000 (presuming the money was her money and did not belong to someone else)
Non-Streamlined Penalties are Much Worse
While that penalty is high, it is significantly lower than any penalty she would almost always otherwise suffer if she was audited and/or if she was found to be willful. When a person makes a proactive representation using the Streamlined Domestic Offshore Procedures, it will generally place them in an overall better position than if they were audited, put on the defensive, and penalized.
If during an IRS Audit, the IRS believes a person was willful — those penalties can reach as high as 50% value of the account value. Moreover, since audits are generally multi-year audits, the 50% ceiling can quickly reach 100% and drain the accounts of all the money; if the money was already spent, the IRS may issue, Liens, Levies, Seizures, Fines, and/or other penalties to recover the money from other sources (Domestic or Foreign).
Moreover, the IRS Agent may refer the matter to the IRS Special Agents for Criminal Investigation.
Will the Streamlined Program Penalty Increase?
The traditional program for offshore disclosure is called the Offshore Voluntary Disclosure Program (OVDP). It came into existence back in 2009 under the name OVDI or the Offshore Voluntary Disclosure Initiative. In the beginning, the OVDI penalty was only 20% and even less if you had limited offshore income and asset reporting requirements (they did away with this when the modified Streamlined Disclosure Program came into existence)
Fast-forward to today (2016), and the penalty is at a minimum of 27.5% (absent an opt-out) and reaches high as 50% situations in which a person is willful and has any of their money in a foreign bad bank. Since the IRS generally increases the offshore voluntary disclosure program penalty every few years, the streamlined program may be due for a penalty increase soon as well.
The modified streamlined program was enacted in July 2014 and has been in existence for over two years. Chances are that – presuming the program remains in existence – the IRS will increase the penalty to coordinate with the traditional OVDP program. Even if the penalty was increased the 10%, that would double any penalty a person would have had to pay under the original terms of the streamlined program.
Want to Learn More about the Streamlined Program?
If you are out of compliance and want to get into compliance, the path of least resistance is usually the streamlined program (presuming you are non-willful). Due to the nature of reporting information to the Internal Revenue Service you are advised that you should speak with an experienced offshore disclosure attorney first before making any representation to the IRS.
The following is a summary of the streamlined disclosure program:
Streamlined Disclosure Program – FAQ
For many individuals who are considering whether or not they should “come clean” and enter one of the IRS offshore disclosure programs, they have several questions which are not explained or detailed by the IRS.
In addition, it is hard for individuals without a tax background to distinguish what is reality, and what is just overly-aggressive sales and fear tactics used by many unscrupulous Law Firms, CPAs, and Enrolled Agents.
The following is a list of FAQs (Frequently Asked Questions), Pitfalls, and Tips from the experienced Voluntary Disclosure Lawyers at Golding & Golding.
Our firm is one of the only boutique tax law firms worldwide that is focused exclusively on International Offshore Disclosure Tax Law. We have handled a diverse range of streamlined program applications ranging from under $100,000 to nearly $40,000,000 in a single disclosure.
This is a summary of common Streamlined Program Questions we receive often. It does NOT constitute legal advice that can be relied upon as legal advice for your particular situation, since each person’s circumstances are unique and may impact the determination of whether he/she qualifies for the program.
How do I know if I Was Willful?
In reality, there is no concrete definition of the term Willful or Non-Willful. It is essentially a ‘Totality of the Circumstances’ Test based on whether or not your specific facts and circumstances reflect that you knew, or should have known that you were required to disclose and report your foreign accounts and offshore income — and made the decision not to disclose.
It is really that simple and for most people, if they were unaware that there was a foreign account/foreign income/foreign asset reporting requirement, they could not have possibly known that they were required to report the accounts/income — and would therefore fall into the “non-willful” category.
I Knew I Should have Filed Tax Returns, but Did not Know About FATCA or FBAR?
The IRS is not one for mincing words or arguing semantics. In other words, if you knew you were supposed to file a tax return (or “do something”) to meet the obligation of reporting your foreign accounts and/or foreign income, then the mere fact that you were not fully informed of every measure you needed to take in order to get into compliance…is probably a situation in which the IRS would find you willful.
In these types of circumstances, it is important to speak with an experienced offshore disclosure lawyer – but keep in mind that the fact that you knew you had a reporting requirement and/or tax filing requirement but intentionally failed to meet that requirement is probably sufficient to place you in the willful category (under IRS standards).
What if the IRS disagrees with Me and Believes I was Willful?
If the IRS disagrees with your representation of the facts, then they will reject your Streamlined Application, and either Audit you and/or refer the case to the IRS Special Agents for Criminal Investigation.
Without sounding like a salesperson, this is why you retain an experienced international tax lawyer to represent you throughout the application process. Yes, CPAs, Enrolled Agents and general practitioners will try to sell you that they can do it for “cheaper” and that you are “low-risk”, but once the IRS starts auditing individuals who are in the program, you will be a much better position (mentally and physically) to know you are being represented by an experienced International Tax Attorney (covered by the attorney-client privilege).
Is there an Attorney-Client Privilege with a Non-Attorney?
No, there is not. If you are being represented by a non-attorney, then there is simply no attorney client privilege. There is a very limited privilege with a CPA or Enrolled Agent, but if it turns out the IRS believes you were willful and wants to pursue a criminal investigation against you, the CPA or enrolled agent can be forced to submit to an examination by the IRS (unless the CPA or Enrolled Agent is also an attorney). Please Click Here for an Article on Attorney-Client privilege.
In other words, the information you tell your CPA may be subject to discovery by the IRS.
My CPA told me there is a Privilege?
There is a limited privilege you maintain with a CPA, but it does not cover more extensive criminal and quasi criminal investigations. In this type of situation (Streamlined Disclosure), in which the IRS does not provide concrete guidelines regarding willful versus non-willful, it is important to understand that the IRS could follow-up with you and/or your representative.
While you may believe the facts and circumstances of your situation are clearly non-willful, the IRS may disagree. To that end, this is not the type of matter in which you want your CPA or other non-attorney tax representative to be subject to having to disclose information you believed you told the representative in confidentiality.
Which Three (3) Years of Tax Returns do I have to Amend?
Generally, it has to be the last three years of tax returns that were filed. So for example, in November of 2016 you decide you want to enter the program, you would amend your tax returns for tax year 2015, tax year 2014, tax year 2013. Please Click Here to Learn More about Amending Tax Returns under the Streamlined Program.
Is it True I can still be Audited for the Prior 3 years of Tax Returns?
Whether or not you enter the Streamlined Program (which requires you to amend the most recent 3 years of tax returns), if you have more than $5000 of unreported foreign income, the IRS can expand the Statute of Limitations to audit you from 3 years to 6 years.
For example, if you enter the Streamlined Program in 2016, and amended 2013, 2014, and 2015, the IRS could still audit you for the three prior years (2010-2012) – but that is true whether or not you enter the streamlined program, and by entering the Streamlined Program you may reduce the chances of having those years audited. Please Click Here for an Article regarding the Streamlined Program and the 6-year foreign income audit.
On my Original Schedule B I Indicated I had no Foreign Accounts?
This is where many people start to “ride the line” between willful and non-willful. The fact of the matter is, there are many reasons that we have come across in our practice as to why a non-willful person would indicate they did not have foreign accounts on the Schedule B when in fact they did have foreign account – and would still be considered non-willful. Thus, if the only reason you believe you were willful is because of how you or your CPA/Accountant responded on schedule B, it may be in your best interest to contact an experienced streamlined disclosure lawyer to discuss the possibilities of qualifying for the Streamlined Program
So if I marked No on Schedule B, I may still Qualify for Streamlined?
Yes. For more information, you can click here to read what the IRS has to say about Schedule B and Non-Willful (See IRS FAQ 13).
I received a FATCA Letter, now what?
When you receive a FATCA Letter (Foreign Account Tax Compliance Act), it is important to realize that the clock has already started ticking. It means that the foreign financial institution/foreign bank is probably going to report your information to the United States, and when the IRS learns that you have outstanding foreign accounts that have not been reported on your tax return, it could lead to an audit or examination which may prevent your ability to enter the program.
What if I Do Not Respond to the FATCA Letter?
If you do not respond to the FATCA Letter, chances are the Foreign Bank will submit your information to the IRS, which in turn may lead to an IRS Audit or Examination — and make you ineligible for the Streamlined Disclosure Program. Click Here to learn about not responding to a FATCA Letter.
What if I have an Unreported Foreign Gift (Form 3520)?
If you failed to report a gift from a foreign person, foreign business or trust distribution, it may be subject to a penalty unless you properly disclose it in accordance with amending your tax returns under OVDP. For more information about Foreign Gifts, please Click Here.
What if I Failed to Report a Foreign Trust (Form 3520-A)?
The U.S. Tax Code is stacked against Foreign Trusts. In other words, the failure to properly report your foreign trust on a form 3520-A can lead to significant fines and penalties (as the U.S. Government may see it as your attempt to shelter money offshore in a Foreign Trust). To learn more about Foreign Trust Reporting, Please Click Here.
What if I Never Reported my Foreign Business Interest (Form 5471)
In order to avoid the problem of U.S. Taxpayers sheltering money offshore in a foreign business (and not reporting the earnings), the IRS takes a hardline against individuals with unreported Foreign Business Interest. For individuals required to file form 5471, the failure to filing the form can lead to penalties upwards of $50,000+ and the returns are due annually. To learn more about reporting your Interest in a Foreign Business, please Click Here.
I have a PFIC and/or Foreign Mutual Fund that I never Reported (Form 8621)?
The IRS reserves the most complicated and complex tax computation for the infamous “PFIC aka Passive Foreign Investment Company.” Moreover, the IRS has essentially deemed that all Foreign Mutual Funds fall under the PFIC umbrella. Therefore, that Foreign Mutual Fund you purchased offshore that is accruing and/or distributing Interest or Dividends may be subject to a monster tax analysis — especially if it qualifies as issuing an “Excess Distribution.” For a comprehensive analysis of PFIC 8621 reporting, please Click Here.
I Cannot Locate All of my Account Information
If you are unable to find all of your account information, the most important information to obtain is the year-end balances. That is because it is the year-end balances that are utilized by the IRS to determine what your penalty will be (unless you qualify for a penalty abatement). Thus, while many foreign countries do not hold account information for more than three years and/or charge ridiculous fees for you to obtain the information — you can usually obtain the year-end information.
I do not Have to Pay Tax on These Accounts Overseas?
Welcome to the United States. If you are entering the streamlined program it is because you learned you are required to file your taxes as if you were a US citizen and the IRS taxes you on your Worldwide Income.
Thus, as a US citizen, Legal Permanent Resident, or Foreign National otherwise subject to US income tax on a 1040 you are required to file a US tax return and report all of your foreign earnings. Just because you are not taxed on passive income in the country in which the accounts were held does not mean the income is tax-free in the United States.
In fact, foreign income (paid or accrued) is usually taxable under IRS Tax Law — but if you have already paid foreign tax you may qualify for the foreign tax credit. Click Here to learn more about the Foreign Tax Credit.
I already Paid Taxes on These Earnings Overseas?
Even if you have already paid tax on the foreign earnings overseas you still must report the information and disclose the earnings on your US tax return. But, when you disclose the account information you also claim what is referred to as an FTC (Foreign Tax Credit). In other words, while you are required to disclose the information regarding your foreign taxes, it does not mean you are subject to double taxation – you get a ‘Foreign Tax Credit’ for taxes you already paid.
Are There Penalties on the Outstanding Tax Liability?
No. Unlike the Offshore Voluntary Disclosure Program (OVDP) in which you have to amend your tax returns for eight (8) years as well as pay a 20% penalty on the total outstanding tax liability, under the streamlined program there is no additional penalty for the taxes; rather, there is a 5% penalty on the year-end account balances.
How is the 5% Penalty Calculated?
The penalties calculated as follows: a person will total their year-end balances for unreported accounts, for each year going back six years. If you are in the streamlined program this does not include the value of unreported foreign real estate which generates real estate income.
Once you have totaled the annual aggregate total of your foreign accounts for each year in the last six years, you pick ONY the highest year-end total, multiply it by .05 (5%) and that will be your penalty. In addition to this penalty, you also have to pay any additional tax liability for the last three years (if you have taxes due for unreported income) which result from amending the tax return (if there is any taxes due) as well as interest on the taxes.
I live Overseas, Do I Qualify for the IRS Penalty Waiver?
The IRS Streamlined Program carved out a very small niche for applicants who meet very specific residence requirements. In other words, if you reside overseas for at least 330 days in any one of the last three tax years in which you are filing an amended tax return, then you may qualify to have your 5% penalty abated. It is important to understand that this is not the same as the Foreign Earned Income Exclusion Test and the FEIF Bona-Fide Residence Exception under IRC 2555 does not apply.
Is my Foreign Real Estate Calculated into the Equation?
This can become a very complicated discussion, but keeping it simple it goes like this: if you as an Individual own foreign real estate that generated income and you qualify for the streamlined program, the value of the real estate is not included in the penalty competition. In OVDP the value of foreign real estate that generates income is included in the penalty computation (subject to any outstanding mortgage).
To complicate matters, if you own foreign real estate within an investment such as a foreign mutual fund or possibly a foreign self-directed IRA, then the value of the account will include all the investments held in the mutual fund and if that includes foreign real estate then you may indirectly be subject to a penalty on that foreign real estate.
*If you are in this type of situation, you should consider speaking when experienced international tax lawyer before making any submission.
What Type of Accounts Must be Reported?
Generally, all foreign accounts must be reported. For example, Foreign Account reporting would generally include: Foreign Bank Accounts, Foreign Savings Accounts, Foreign Investment Accounts, Foreign Securities Accounts, Foreign Mutual Funds, Foreign Trusts, Foreign Retirement Plans, Foreign Business and/or Corporate Accounts, Insurance Policies (including some Life Insurance), Foreign Accounts held in a CFC (Controlled Foreign Corporation), and Foreign Accounts held in a PFIC (Passive Foreign Investment Company)
Must Foreign Insurance Policies be Reported?
If there is a surrender value, then generally insurance policy must be reported. Foreign life insurance and life assurance policies generally have an investment mechanism to them, which provides monthly, quarterly or annual interest/bonus payments – as well as a surrender value – and if so, the policy must be reported.
What if I am Under IRS Audit or Examination?
If you are currently under IRS audit or examination, than you generally will be disqualified from the program. The idea is that the streamlined program and OVDP are voluntary programs and once you are under audit you are no longer acting “voluntarily.”
Of course, not every IRS agent is fully aware of the parameters of the program and once you receive the notice of audit letter from the IRS it may not hurt you to try to submit to the program but it can cause a major issue depending on whether the audit has anything to do with for accounts and other very personal and confidential information.
What is a Reasonable Cause Statement?
As an alternative to the streamlined program, some individuals opt to just submitting all of the prior documentation that was not previously disclosed or reported, along with a statement detailing why they have reasonable cause for failing to do so.
This is could be a risky move, because by doing so the person is disclosing all of their financial information to the Internal Revenue Service without any guarantee of non-prosecution. Since the penalties for failing to file and FBAR are exorbitant and even the non-willful person can be subject to a $10,000 per account penalty per year the applicant must be careful.
In other situations, the Reasonable Cause submission is a very viable option – you should discuss the facts in detail with an experienced Offshore Disclosure Lawyer.
But I have no tax liability?
The threshold requirement is not whether you owe tax based on foreign earnings and foreign accounts, but whether you properly disclosed your foreign accounts and income. In other words, if you have foreign income from your bank but there also bank fees and other deductions, which reduces your foreign interest income to zero, that does not mean do not have to report the account and income information.
Moreover, the failure to report the account and the “money” that was generated from the account is the problem and would still require disclosure. It also will not exempt you from tax and account reporting requirements.
What is Quiet Disclosure/Silent Disclosure
Honestly, it is a horrible idea to submit documents to the IRS via a Quiet Disclosure or Silent Disclosure. These types of disclosures occur when a person simply goes back and sneak reports/discloses the accounts without entering any program or submitting a reasonable cause statement. If a person does this, than they may be subject to criminal prosecution.
But if you have already done so (without understanding the ramifications of your actions) you can still get right by the IRS and submit under the streamlined program if your actions were non-willful (there are some people who inadvertently filed a quiet disclosure or silent disclosure because they were did not know they were required to even submit to a program or pay a penalty)
Does my Foreign Inheritance Count Toward the Penalty?
Yes. A distinction must be made between estate tax, income tax and reporting requirements. When a person has a foreign inheritance there may not be any estate tax on receiving the money, but if the account generates income then there is income tax. In addition, if the account value exceeds $10,000 (or the annual aggregate total of all the foreign accounts exceeds $10,000) the person must still report the information and therefore the value of the account will go towards the penalty.
Do I Receive Criminal Protection under the Streamlined Program?
No. While a person is almost guaranteed protection against prosecution under OVDP, there is no criminal protection under the streamlined program. Although, when a person is non-willful, criminal protection is generally not necessary.
STREAMLINED PROGRAM – SUMMARY
Golding and Golding is one of the premier Offshore Disclosure Law Firms worldwide. We limit our entire practice to Offshore Disclosure. Our International Tax Lawyers represent hundreds of taxpayers annually in Streamlined Domestic Offshore Procedure submissions in over 50 countries.
If you have unreported foreign accounts and are non-willful, you may qualify for the Streamlined Domestic Offshore Procedures.
The Streamlined Domestic Offshore Procedures (SDOP) are a highly cost-effective method of quickly getting you into IRS (Internal Revenue Service) or DOT (Department of Treasury) compliance before it is too late!
Whether it is because you received a FATCA Letter, learned about it from friends or family, or happened upon it by accident — Foreign Account compliance is important.
Under new U.S. Tax and Offshore Reporting Rules and Regulations, it is important to remain in IRS Tax and FBAR reporting compliance. Why? because the penalties for failing to comply can reach as high as $10,000 per account, per year (if your were non-willful) and as high as 100% value of the account if you were willful.
Streamlined Domestic Offshore Procedures
In order to qualify for Streamlined Domestic Offshore Procedures, you must meet two major requirements:
- Qualify as Non-Willful; and
- Filed all Necessary Prior Year Tax Returns.
What does Non-Willful Mean?
Qualifying as Non-Willful is by far the most difficult aspect of Streamlined Offshore Disclosure.
You are willful if you knew you were supposed to report and disclose your foreign income and assets but choose not to — you will be required to submit to OVDP instead of the Streamlined Program. In other words, if you knew you had a duty to report the information on an FBAR (Report of Foreign Bank and Financial Accounts) Form 8938 (Statement of Specified Foreign Assets), or any other number of different IRS forms, but intentionally do not report your accounts, then you act “willfully.”
You are non-willful if you acted unintentionally, and did not know you were required to either report or disclose your foreign income, accounts, or other specified assets.
If you are Non-Willful…
And you filed all necessary prior year tax returns, you should qualify for the Streamlined Domestic Offshore Procedures.
The process for getting into compliance is as follows:
Domestic Streamlined Basic Requirements
The Streamlined Domestic Program requires the applicant to amend and pay outstanding tax liability for the last three (3) years to include unreported foreign income and unreported foreign accounts that were not previously reported on a U.S Tax Return. It also requires the applicant to file six (6) years of FBARs (FinCEN 114) and pay a (relatively) small penalty which equals 5% of the highest year end value for any given year.
To Summarize the Domestic Program
- Amend the last 3 years of Tax Returns
- File required forms such as 3520, 3520-A, 5471, 8621
- File 6 Years of FBAR (FinCEN 114) – Report of Foreign Bank and Financial Accounts
- Take a “snapshot” of the aggregate offshore unreported balances on 12/31
- Pick the highest year’s 12/31 annual aggregate value
- Multiply the value by 5%
- Pay the outstanding Tax, Interest on Taxes due and 5% percent.
What Forms Must be Reported?
The following is a list of common forms which many people were never aware they had to report, but which the failure to report may lead to extensive fines and penalties:
Reporting Foreign Accounts (FBAR)
There is a lot of information online regarding the FBAR (Report of Foreign Bank and Financial Account Form) due to the extremely high penalties involved with this form. We have written countless articles, which you can find in our International Tax Library, by clicking here.
If you are a U.S. Person, it does not matter whether or not you have to file a US tax return to determine if you have to file an FBAR. The threshold question is whether you have an annual aggregate total of foreign/offshore bank accounts, financial accounts, retirement accounts, etc. that when combined, exceed $10,000. If so, you are required to file the FBAR Form and report all of the accounts.
It does not matter if the money is all in one account, or in 15 different accounts. It also does not matter if the majority of the money is in one account, with minimal amounts of money in the remaining accounts – rather, once you meet the threshold requirements, you have to report all the accounts.
Penalty: The civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign financial account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation.
FATCA Form (8938)
FATCA is the Foreign Account Tax Compliance Act. For individuals, it requires reporting of financial accounts and certain specified foreign assets (ownership in businesses, life insurance, etc.). There are different threshold requirements, depending on whether a person is Married Filing Jointly (MFJ) or Married Filing Separate (MFS)/Single, and whether a person resides in the United States or outside of the United States.
Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Foreign Gift Form (3520)
If you receive a gift or inheritance from a foreign person that exceeds $100,000 either in a single transaction, or a series of transactions over a year, you are required to report the gift on this form. You have the file this form, even if you are not required to file a tax return (although it is normally filed at the same time as your tax return).
Penalty: The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
Golding & Golding Resources: Form 3520 Penalties
Foreign Corporation or Foreign Partnership (5471 or 8865)
The rules are somewhat different for these two forms, but essentially the same (with the 5471 being much more commonplace for U.S. investors). If you own at least 10% ownership in either type of business, you required to report the information on either a form 5471 or 8865. Both of these forms require comprehensive disclosure requirements, involving balance statements, liabilities, assets, etc. Moreover, the forms need to be filed annually, even if a person does not have to otherwise file a tax return
Penalty: The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.
Golding & Golding Resources: Form 5471 Penalties
Passive Foreign Investment Company (PFIC)
One of the most vilified type of financial assets/investments (from the U.S. Government’s perspective) is the infamous PFIC. A PFIC is a Passive Foreign Investment Company. The reason the United States penalized this type of investment is because it cannot oversee the growth of the investment and income it generates. In other words, if a U.S. person invests overseas in a Foreign Mutual Fund or Foreign Holding Company — the assets grows and generates income outside of IRS and U.S. Government income rules and regulations.
As a result, the IRS requires annual disclosure of anyone with even a fractional interest in a PFIC (unless you meet very strict exclusionary rules)
Penalty: The Penalties for not filing an 8621 run concurrent with the 8938 penalties (see above).
Foreign Trust (3520-A)
A Foreign Trust is another type of Foreign Investment that is frowned upon by the IRS. From the IRS’ perspective, the only purpose behind a Foreign Trust is to illegally avoid US reporting and income tax requirements by moving money offshore. While there are many people who may operate illegally in this fashion, there are various legitimate reasons why you would be a trustee or beneficiary of a Foreign Trust (Your cool grandma really loves you and placed $5 million in trust for you overseas). Form 3520-A is a relatively complex form, which must be filed annually by anybody that owns a foreign trust.
Penalty: The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person.
Golding & Golding Resources: Form 3520-A Foreign Trust Penalties
Foreign Real Estate Income
Even if you are earning rental income from property that is located outside of the United States, you still must report the income on your U.S. taxes (even it is exempt from tax in the foreign country). Remember, United States taxes individuals on their worldwide income. Therefore, the income you are earning from your rental property(s) must also be included on your US tax return.
A few nice benefits of reporting the income is that the United States allows depreciation of the structure – which many foreign countries do not allow. Moreover, you can take the same types of deductions and expenses that you otherwise take the property was located in the United States.
Penalty: Varies, depending on the Nature and Extent of the non-disclosure.
Golding & Golding Resources: Foreign Real Estate Income FAQ
How do I Fix this Mess?
The easiest way to get back into compliance is to qualify for the Streamlined Domestic Offshore Procedures. At Golding & Golding all we do is Offshore Disclosure! As both tax attorneys (with Masters of Tax Law) who are also Enrolled Agents (the highest credential issued by the IRS) we are highly-qualified and well-respected worldwide, with clients in over 50 different countries.
We have successfully handled several hundred streamlined disclosure applications in just the two years in which the program was available — without any issue. Our clients have disclosed foreign accounts with less than $50,000 in total of unreported accounts accounts, and as high as nearly $40 million in unreported accounts in a single disclosure.