OVDP – IRS Form 3520, 5471, 8621, 8865, 8938, & FBAR Penalties
Contents
- 1 OVDP Program
- 2 OVDP – Not Just Foreign Accounts
- 3 What Must be Reported?
- 4 What if I do not get into IRS Offshore Compliance?
- 5 10 Key Reporting Requirements
- 6 Reporting Foreign Accounts (FBAR)
- 7 FATCA Form (8938)
- 8 Foreign Gift Form (3520)
- 9 Foreign Corporation or Foreign Partnership (5471 or 8865)
- 10 Passive Foreign Investment Company (PFIC) or Form 8621
- 11 Foreign Trust (3520-A)
- 12 Foreign Real Estate Income
- 13 Worldwide Income
- 14 Foreign Tax Credit
- 15 Foreign Earned Income Exclusion
- 16 What if I am Out of Compliance?
OVDP – IRS Form 3520, 5471, 8621, 8865, 8938, & FBAR Penalties by Golding & Golding
OVDP Program
OVDP is the Offshore Voluntary Disclosure Program. It is an IRS program designed to bring taxpayers into compliance who have not properly filed taxes and/or properly reported their offshore or foreign income, accounts, investments, pensions, corporate interests, etc.
OVDP – Not Just Foreign Accounts
There seems to be an overall misunderstanding about what the actual reporting requirements are for individuals with foreign money. While the FBAR (Report of Foreign Bank and Financial Account form) is the most most common that is required to be filed, there are numerous other forms that a person may have to file in order to get compliant.
The nice thing about the traditional OVDP program is that it provides an individual (including estates and businesses) the opportunity to get into compliance properly by going back, reporting all the necessary information, paying all outstanding taxes — and giving them a clean slate with the IRS.
What Must be Reported?
There are a number of different forms that an individual may have to file, depending on the specific facts and circumstances of their situation – no two disclosures are identical. The biggest problem with offshore voluntary disclosure is that many inexperienced “international tax professionals” are not well-versed in all the different types of forms, requirements and responsibilities.
Likewise, the IRS has not done a great job in providing information to the general population so that they have an understanding of what needs to be reported.
What if I do not get into IRS Offshore Compliance?
If you do not get into IRS tax compliance, the IRS has the right to issue excessive fines and penalties against you. These penalties can include penalties for the failure to report offshore accounts, the failure to report business interests and investments, as well as the reality having to pay all of the unpaid tax and accrued interest on the unpaid monies.
Moreover, the IRS can also issue various liens, levies and seizures of your property both in the United States and abroad. Therefore, if you have the opportunity and the wherewithal, it is probably in your best interest to get into compliance sooner as opposed to later.
10 Key Reporting Requirements
The following are a list of 10 important forms that are relatively common depending on the level of intricacy of your disclosure. While this is not an exhaustive list, if you were to speak with most other very experienced offshore disclosure lawyers they would probably tell you that these issues pop up relatively often:
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.
Golding & Golding Resources: FBAR FAQ; FBAR Penalties
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.
Golding & Golding Resources: Form 8938 FAQ; Form 8938 Penalties
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) or Form 8621
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).
Golding & Golding Resources: Form 8621 Penalties; PFIC Form 8621 Excess Distribution Calculation; PFIC MTM Election
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
Worldwide Income
The United States is one of only a handful of countries on the planet that taxes individuals on their worldwide income. What does that mean? It means that whether or not you reside in the United States or in a foreign country, you are required to report all of your US income as well as foreign source income on your US tax return.
It also does not matter if the income you earn is tax exempt in a foreign country, or whether the income you earn in a foreign country was already taxed (see below). While you may be able to obtain a credit or exemption for the taxes you paid or income you earned in a foreign country – you are still required to report the income on your US tax return.
Foreign Tax Credit
If you are required to file a U.S. tax return, then you are required to include your worldwide income. With that said, you may be eligible for a Foreign Tax Credit for taxes you already paid in a foreign country. For example, if you earn $100,000 in Hong Kong and paid 20% tax on those earnings ($20,000) when you report the $100,000 of income on your U.S. tax return, you may also be able to claim a foreign tax credit for the $20,000 you already paid.
If $20,000 is less than you would have had to pay in the United States, then you will pay the difference; if $20,000 is more than you would have had to pay in the United States then you can apply the overpayment (aka Carryover) to future years but only to offset foreign tax.
Foreign Earned Income Exclusion
If you have earned income from overseas (such as employment) and do not work for the US government, you may be entitled to an exemption/exclusion of the first hundred thousand dollars worth of foreign income you earn – along with the possibility of excluding roughly $15,000 worth of housing costs. There are two methods for obtaining this exclusion:
Physical Presence Test
The first (and easiest) methods is by meeting the Physical Presence Test, which is essentially met when you live overseas for 330 days in any 365 day period.
Bona-Fide Resident Test
This test is much more difficult to meet, because unlike the Physical Presence Test which is essentially a “counting days test,” a Bona-Fide resident must show that they are true residents of the foreign country. Therefore, working as a government contractor nine months out of the year, while living in your company sponsored housing and not obtaining a local Driver’s License, Membership in Community Clubs, etc. will not be sufficient. You have to essentially immerse yourself into the local community.
What if I am Out of Compliance?
If you are out of compliance for failing to report foreign assets to the IRS, IRS Offshore Voluntary Disclosure is one of the best and safest methods for getting back into compliance (and the only area of law we handle at Golding & Golding, APLC)
International Tax Lawyers - Golding & Golding, A PLC
Sean holds a Master's in Tax Law from one of the top Tax LL.M. programs in the country at the University of Denver, and has also earned the prestigious Enrolled Agent credential. Mr. Golding is also a Board Certified Tax Law Specialist Attorney (A designation earned by Less than 1% of Attorneys nationwide.)