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U.S Taxation of an Australian Superannuation Fund (2018 Update)

U.S Taxation of an Australian Superannuation Fund (2018 Update) Golding & Golding, Certified Tax Specialist

U.S Taxation of an Australian Superannuation Fund (2018 Update) Golding & Golding, Certified Tax Specialist

U.S Taxation of an Australian Superannuation Fund (2018 Update)

A common question we receive at Golding & Golding, A PLC is “What is the U.S Tax Treatment of an Australian Superannuation Fund?

U.S Taxation of an Australian Superannuation

The purpose of this summary is for our readers to get a better (basic) understanding of the general rules involving U.S. Taxation of Australian Superannuation Funds.

Superannuation Tax Basics

When it comes to Australian Superannuations and U.S. tax, there is no concrete answer as to how the IRS will address the issue (as of the writing of this article).

The most important issues involving a Superannuation and U.S. Tax are:

  1. What is an Australian Superannuation Fund? 
  2. How is a Superannuation Taxed in the U.S.?
  3. What Does the U.S. – Australian Treaty Say about Supers?
  4. Is Australia Superannuation Social Security or Pension for U.S. Tax?
  5. Isn’t a Superannuation just like U.S. Social Security?
  6. SSA Says Superannuation is Privatized Social Security?
  7. Is a Super considered a Private Social Security under U.S. Tax Laws?
  8. Let’s Compare a Super to Foreign Retirement which the IRS has Issued Memoranda
  9. Superannuation vs. CPF 

Sean M. Golding, JD, LL.M., EA – Board Certified Tax Law Specialist

Our Managing Partner, Sean M. Golding, JD, LLM, EA is the only Attorney nationwide who has earned the Certified Tax Law Specialist credential and specializes in IRS Offshore Voluntary Disclosure and closely related matters.

In addition to earning the Certified Tax Law Certification, Sean also holds an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS and authorizes Sean to represent clients nationwide before the IRS.) 

He is frequently called upon to lecture and write on issues involving International Tax.

*Click Here to Learn about how Attorneys falsely market their services as “specialists.”

Australia Superannuation Funds – In General

We work with many clients from Australia who various issues involving their Superannuation Fund. For some of our clients, they may be self-employed or highly compensated employees (HCE) with millions of dollars in their Australian superannuation fund, and getting close to retirement – only to realize they have not been properly reporting or disclosing the information properly on a U.S. Income Tax Return, FBAR, etc.

It can be a very scary ordeal to think you may only be a few years away from retirement, only to learn that the IRS wants to penalize you a significant portion of the value of your superannuation fund — solely because you did not know you were required to report it.

Therefore, we want to provide a summary on the Australian superannuation fund with respect to US tax law.

*Please note, each case is different and this is not legal advice you can rely upon for making a decision about how to act in your particular case – it is a summary for you to have an idea of what the issue should be and where you fall on the spectrum of reporting.

**In hopes to provide a general understanding of the laws, we are purposefully keeping it less technical and more informative – we hope.

1. What is an Australian Superannuation Fund? 

A Superannuation is a retirement fund. As provided by the Australian Securities and Investment Commission:

It’s similar to a managed fund where your money is pooled with other members’ money and invested on your behalf by professional investment managers.


Generally you will not be able to access this money until you retire. Your employer will make contributions to your super fund and you can top it up with your own money.


The government may also make contributions if you are a low income earner. Most people can choose which super fund they’d like their super contributions paid into. For most people, your employer must pay an amount equal to 9.5% of your salary into your super fund account.


This is on top of your salary or wages. Over the course of your working life, these contributions from your employer add up, or ‘accumulate’, which is why they are known as accumulation funds. Your super money is invested by your super fund so you will earn investment returns on the money. There are several different types of superannuation funds.


The mains ones are; Employer/corporate/staff funds – these are funds established by an employer for the benefit of their staff. Personal funds – as the name implies, you personally join as an individual through a super provider. There are many available and most will offer a wide range of investment choices and other features. Industry funds – these were originally set up for people working in a particular industry, e.g. builders or health care workers.


Many are now available to the public. Self-managed super funds (SMSF’s) – these can have up to five members and are generally used by people with larger amounts in super who want more control and flexibility. If you would like more information about the different types of super funds, speak to your financial adviser.

2. How is a Superannuation Taxed in the U.S.?

Even though the IRS has not ruled specifically as to the tax treatment of Superannuations and the U.S and Australia Income Tax Treaty is silent as to the specific issue of Superannuations — there are signs that the Superannuation contributions/deferrals may be taxable by the U.S., even if it the growth may not be taxable (except under certain situations).

General U.S. Tax Law – Worldwide Income

The United States is one of the only countries in the world the practices citizen-based taxation. In other words, if you are a U.S. Citizen, Legal Permanent Resident, or you have a work permit or otherwise meet the Substantial Presence Test, you have to file a tax return and report your worldwide income on a regular 1040 return. You may want to take a treaty position and make a closer-connection test submission to the IRS, but the general rule is if you earn income, you pay tax — subject to treaty and approved retirement plan program rules (deferred income)

Undistributed Gains

The big question will be how are non-distributed gains in your superannuation fund taxed in the United States. For most individuals, the accumulated non-distributed growth of a superannuation fund will not be taxed in the United States. Why? Because the individual is not considered to be a Highly Compensated Employee (which is a legal term of art, and generally means the person in the top 20% of earners of the company).

As such, each year while contributions made by the employer or employee will not be deductible on a US tax return as a 401(k) would be, likewise, the accumulated growth of non-distributed income within the superannuation fund will not be taxed. But, if the person is considered a Highly Compensated Employee (HCE), then the US will tax the individual on the accumulated non-distributed growth within the Superannuation – which will increase the basis in order to reduce the tax at a later date.

**Example: (excluding more complex basis/amortization issues) Jane has a Super worth $100,000. In 2017, the Super gains $5,000 of accrued, non-distributed income. If Jane was an HCE, she may have to pay U.S. Tax on the $5,000 gain. But, if in next year the full $105,000 was withdrawn, she would not have any tax on it, because she already paid tax on the $5,000 gain in the prior year, before it was distributed (presuming she met all her U.S. Tax reporting/payment for the first $100K as well) so her basis is $105,000, and not $100,000 – and she would not be taxed on any distribution below the basis of $105,000.

3. What Does the U.S. – Australian Treaty Say about Supers?

The United States has entered into tax treaties with upwards of 60 different countries, including Australia. The tax treaties are used to determine certain benefits for individuals with income, investments, assets, etc between the two countries so that citizens/residents of each country will have an idea of their tax liability – as well as receive some additional benefits such (as no double taxation, and reduced tax rates for investments between the two countries).

In other words, the U.S. enters into tax treaties (typically) with countries it “likes,” and wants to foster an ongoing positive relationship with.

Superannuation and U.S. Tax Treaty Language

In order to keep it nice and confusing, the Australian Tax treaty does not make any specific reference to superannuation funds. Even though the superannuation fund scheme has been in place for many years, the treaty simply does not directly reference superannuation funds.

*For example, some treaties have a very expansive description of retirement, pension, and/or Social Security – such as the tax treaty with the UK.

Nevertheless, in accordance with the Australian treaty, it would seem that the United States has the right to tax pension payments received by an individual residing in the United States (even from an Australian Employer) unless it is a government or public pension issued for service performed in Australia (in which Australia would have the right to tax the public/government pension).

4. Is Australia Superannuation Social Security or Pension for U.S. Tax?

Until the IRS rules on this issue, there are two main comparisons:

  • Is a Superannuation similar to U.S. Social Security; or
  • Is a Superannuation similar to a Foreign Retirement Pension?

U.S. Social Security

U.S. social security contribution is relatively simple, and a way of life for U.S. Persons (subject to any applicable totalization agreement). We all pay (subject to a totalization agreement) 6.2 percent and your employer pays 6.2 percent. If you’re self-employed, you pay 12.4 percent. You don’t pay Social Security taxes on earnings greater than the annual cap. You and your employer each pay 1.45 percent.

When a person reaches a certain age, they begin receiving social security payments and the age in which a person begins taking social security can vary.. A person can typically elect to begin receiving U.S. Social Security at different ages, and then based on the total income received by the person, that will determine whether a portion or all of their social security is taxed (when a person earns less additional income, then less of the social security is taxed, and vice versa).

Foreign Retirement Pension

See below under Article 8 for discussion regarding CPFs (a foreign retirement pension).

5. Isn’t a Superannuation just like U.S. Social Security?

No, and here’s why:

– Australia already has its own form of Social Assistance (aka Social Security)

– Social Security is a defined benefit, a Superannuation ROI (Distributions) will vary

– You can withdraw the entire Superannuation balance in one withdrawal.

– A Superannuation is only mandatory to the Employer. Meanwhile U.S. Social Security is mandatory to the Employer and Employee.

– A Superannuation has a set amount of money per person that can be withdrawn in full, U.S. Social Security does not; it is a continued benefit.

– A superannuation has an account number, specific to the individual, social security does not.

– You cannot choose the fund for investments or investment strategy for Social Security, but you can for a Superannuation (many different types of Supers to invest in, with different investment strategies and risks).

Australian Has Separate Social Assistance (aka Social Security)

Social Security is called social assistance and is provided by the government in Australia. 

Social Assistance in Australia is different than a superannuation. In other words, Australia has public social assistance distinct from Superannuations.

6. SSA Says Superannuation is Privatized Social Security?

Yes, that is true, BUT, the SSA (Social Security Administration) also treats a CPF as “Privatized Social Security,” and the IRS has ruled that both the deferrals and the CPF growth within the fund is taxable (even if it is not distributed).

Result: The mere fact that the SSA designates something for Social Security and Totalization Agreement purposes is not binding on the IRS.

7. Is a Super considered a Private Social Security under U.S. Tax Laws?

it is impossible to say with any degree of certainty that the Superannuation is a Private Social Security and therefore will receive tax treatment under Article 18 instead of Article 22.

And, it is a pretty bold statement to presume it will be accepted by the IRS as privatized social security by referring on the SSA instead of an IRS ruling…especially when the IRS has ruled against deferred tax for contributions and growth of similar types of foreign retirement funds.

Even though there is no tax treaty with Singapore, that is not the sole reason why the deferred contributions are taxable at the time of deferral/contribution.

Since there is a treaty with Australia, that may presume that the growth within the fund should not be taxed prior to distributions, but each specific case should be analyzed by its own set of facts and circumstance…it is not one size fits all, and employer contributions from salary is probably “presently” taxable (as opposed to the growth)

8. Let’s Compare a Super to Foreign Retirement which the IRS has Issued Memoranda

At Golding & Golding, we handle many cases involving CPF and Australian Superannuation Funds. Therefore, we thought it be a good idea to try to compare the two and developed our following analysis.

This comparison analysis was prepared exclusively by Golding & Golding:

What is a Singapore CPF?

A CPF is a mandated retirement scheme in Singapore. Both the employer deferrals and employee contributions are required. A CPF has multiple components to it, and the funds are broken down into different categories.

While the rules will vary depending on whether the portion of the contribution is mandatory or not, and whether it exceeds certain thresholds or not, typically the portion of the Employers Contribution that is compulsory or “mandatory” is not taxable, while the portion that is voluntary is taxable.

The employer contributes to the CPF, and then the employer can seek to recoup the money contributed for the employee’s share of the contribution.

Why is U.S. Tax of a CPF Important?

Because unlike a Superannuation, the IRS has issued memorandum regarding the taxation of CPFs…and it is not good.

If you are a U.S. Person, the CPF is taxed twofold by the IRS:

First, the amount of income that is deferred from your salary and deposited directly into the CPF is taxed by the IRS (even if tax deferred in Singapore).

Second, the growth within the fund is also taxed. The IRS has issued memoranda on each of these issues.

9. Superannuation vs. CPF 

While a Superannuation and CPF are not identical, they are very similar. Both are mandated retirement funds by their respective governments, and both are classified as privatized social security by the SSA (Social Security Administration).

But, while the IRS has ruled on taxation of a CPF, the IRS has not ruled on Superannuations.

Therefore, the CPF will serve as good comparison. And, for all you tax geeks (like us) out there, we know they are not identical, but the CPF serves as a solid base for comparison purposes.

A Superannuation is very similar to a CPF

  • Both are deferred from salary.
  • Both have their own identifier number (aka “assigned account number”)
  • Neither is required if it is not a local employer
  • Both can be depleted in full by the employee/owner 
  • Both offer periodic distributions but they are not mandatory (a person can take the full deduction)

Conclusion 

As to the Superannuation, it is probably safe to:

  • Pay U.S. Tax on any income you earned from an employer that was diverted to a Superannuation – while you were a U.S. Person
  • Pay U.S. Tax on Distributions, if you are a U.S. Resident
  • Report the Super (see below)
  • Consider the pros and cons of paying tax on the growth (especially HCE, Highly Compensated Employee)

Reporting your Superannuation Fund – FBAR & FATCA

This is where it starts to get a bit tricky.

Yes, the superannuation is a retirement fund, and while you generally cannot access the money or receive distributions until you reach retirement age, it is not exempted or excluded from U.S. reporting requirements. In other words, even though you are not receiving distributions from the superannuation fund at the present time – or even contributing to it at the present time – you are still required to report the superannuation fund on your FBAR (Report of Foreign Bank and Financial Accounts) and FATCA Form 8938 Form.

FBAR

If you, your family, your business or your foreign trust and/or PFIC have more than $10,000 overseas in foreign accounts (either directly or indirectly) and either have ownership or signatory authority over the account, it is important that you have an understanding of what you must do to maintain FBAR (Report of Foreign Bank and Financial Accounts) compliance. There are very strict FBAR filing guidelines and requirements in accordance with general IRS tax law, Department of Treasury (DOT) filing initiatives and FATCA (Foreign Account Tax Compliance Act) disclosure requirements.

Technically, and FBAR is a Report of Foreign Bank and Financial Accounts Form (aka FinCEN 114). In accordance with international tax law compliance, taxpayers who meet the threshold requirements identified in the paragraph above are required to file an FBAR.

An FBAR, is a “Report of Foreign Bank and Financial Accounts” form. It is a form that is filed online, directly with the Department of Treasury. Unlike the tax return, the form must be filed when your tax returns are timely filed (or on extension).

Who is Required to File an FBAR?

Not everyone who has foreign accounts is required to file an FBAR. Rather, it is required to be filed by all U.S. Account Holders (whether they reside in the U.S. or overseas) with foreign accounts that have an “annual aggregate total” exceeding $10,000 at any time during the year. Thus, if a U.S. Taxpayer (including Legal Permanent Residents “aka Green Card Holders”) maintains foreign accounts, including banks accounts, financial accounts, or insurance policies that have a combined value of more than $10,000 (or has indirect ownership of the account or signature authority), then that person is required to file an FBAR statement.

                                         

What if None of My Accounts Exceed $10,000?

It does not matter.  It is important to remember that the threshold is the Annual Aggregate Total value at any given time during the year. This means if you have 23 bank accounts that have an annual aggregate total exceeding $10,000 at any given time during the year, you are STILL required to file the FBAR and list all the accounts on it, even if none of the accounts exceed $10,000. In other words, you are required to report the total value of all your foreign accounts located in any foreign country, once you exceed the $10,000 annual aggregate total threshold on any given day during the year.

There are various accounts and other assets (insurance policies) which may or may not be included in your FBAR analysis. Please contact one of our experienced FBAR Lawyers for further assistance regarding specific account disclosures.

FATCA Form 8938

The IRS FATCA Form 8938  is a form that is required to be filed when a taxpayer or taxpayers submit their tax return to the Internal Revenue Service.

Not all taxpayers are required to file IRS form 8938. Rather, FATCA Form 8938 is reserved for individuals who maintain accounts or “Specified Foreign Assets” overseas and meet the threshold requirements for filing the form.

*Even if you reside overseas, if you are a U.S. Citizen, Legal Permanent Resident, or even sometimes a former Legal Permanent Resident you are still required to file an 8938, although the threshold requirements for filing are higher.

Threshold Requirements for Filing an IRS form 8938?

Whether or not the taxpayer has to file a FATCA Form 8938 will depend on the amount of money they have overseas, country of residence and marital status.

For Taxpayers residing in the United States:

Single Taxpayers or Married Filing Separate (MFS)

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $50,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $50,000 on the last day of the year but at any time during the year they had $75,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ)

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $100,000 on the last day of the year or if it anytime during the year they had $150,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

*Taxpayers should be sure they understand that even if they are not required to file IRS form 8938, they may still be required to file an FBAR with the Department of the Treasury, since the threshold requirements for overseas accounts and FBARs are significantly less ($10,000). 

**Unlike the FBAR, a person only has to file an IRS form 8938 when the money is theirs; with an FBAR, a person has to file the FBAR even if the money is not theirs, but they have signatory authority over the accounts.

***The Threshold Requirements for Taxpayers residing overseas to have to file a FATCA Form 8938 are significantly higher.

Single Taxpayers or Married Filing Separate (MFS) – Foreign Residents

If a taxpayer is single, or files married filing separate then they will have to file IRS form 8938 if they have more than $200,000 in aggregate total in Specified Foreign Assets on the last day of the year. Alternatively, if they have less than $200,000 on the last day of the year but at any time during the year they had $300,000 or more in Specified Foreign Assets, then they are also required to file IRS form 8938.

Married Filing Jointly Taxpayers (MFJ) – Foreign Residents

When taxpayers file married filing jointly, the threshold requirements are doubled. In other words, when a couple files the US tax return as married filing jointly, they will only have to file IRS form 8938 when you have a combined annual aggregate total of $400,000 on the last day of the year or if it anytime during the year they had $600,000 or more in overseas accounts.

If a person does not meet these threshold requirements then generally they will not have to file IRS form 8938.

Trust Reporting (3520, 3520-A, 8621)

At its most basic level, a superannuation is a foreign trust. There is money that is being deposited and being held by a third-party for the benefit of a beneficiary (you). In addition, because the trust is a foreign trust, there are very significant tax repercussions depending on whether it is considered a grantor trust and/or passive foreign investment company.

Grantor Trusts and PFICs require very significant tax reporting responsibilities, as well as possible penalties for the amount of money that is being gained in the foreign trust/PFIC that was not distributed in prior years. Please click here for more information on Excess Distributions.

From the IRS’ perspective, if the purpose of the trust is to accumulate passive income, and/or a majority of the assets in the trust are being used to generate passive income, it may be a PFIC – which has a very complicated tax penalty associated with it. Moreover, there are also very complicated forms that you may have to file such as form 3520A and/or form 8621 – which are associated with the Foreign Trusts and PFICs.

Foreign Trust or PFIC (Form 8621)

With that said, the majority of superannuation funds are not going to be considered to be a PFIC.

Why? Because even the IRS understands that you are investing into a trust established by the employer or the government for retirement. And, that while you may not receive tax-deferred treatment in all situations (such as deductions for employer contributions) it will not reach the status of a grantor trust.

Therefore, while you would report the superannuation fund on an FBAR as well as form 8938 (statement of specified foreign assets), you will not report it on the alternative form 8621 one 3520-A.

**By deductions, it means that for example in Australia, if a person is self-employed they may deduct the portion of the amount of money contributed to the Super from the gross total of income the business earned. So if a business earned $300,000 but contributed $25,000 to the Super, the business would only be taxed on the $275,000 – not $300,000.

There are some exceptions to the Non-Trust/PFIC Rules.

The reason why a basic superannuation fund will not be considered to be a trust or PFIC is because the majority of the contributions are being made by the employer. Alternatively, if the Super gets to the point were the majority of the contributions are being made by the employee, it will start to more closely resemble a grantor trust owned by the employee.

And, in that type of situation, the taxpayer is required to split the superannuation fund into employer contributions and employee contributions — and for the employee contributions that portion is considered a grantor trust, it may require a 3520-A and/or PFIC treatment, but this is rare.

What Can You Do If You are Out of Compliance?

Presuming the money was from legal sources, your best options are either the Traditional IRS Voluntary Disclosure Program, or one of the Streamlined Offshore Disclosure Programs.

We Specialize in Safely Disclosing Foreign Money

We have successfully handled a diverse range of IRS Voluntary Disclosure and International Tax Investigation/Examination cases involving FBAR, FATCA, and high-stakes matters for clients around the globe (In over 65 countries!)

Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

Examples of areas of tax we handle

Who Decides to Disclose Unreported Money?

What Types of Clients Do we Represent?

We represent Attorneys, CPAs, Doctors, Investors, Engineers, Business Owners, Entrepreneurs, Professors, Athletes, Actors, Entry-Level staff, Students, Former/Current IRS Agents and more.

You are not alone, and you are not the only one to find himself or herself in this situation.

Sean M. Golding, JD, LL.M., EA (Board Certified Tax Law Specialist)

Our Managing Partner, Sean M. Golding, JD, LLM, EA  earned an LL.M. (Master’s in Tax Law) from the University of Denver and is also an Enrolled Agent (the highest credential awarded by the IRS, and authorizes him to represent clients nationwide.)

Mr. Golding and his team have successfully handled several hundred IRS Offshore/Voluntary Disclosure Procedure cases. Whether it is a simple or complex case, safely getting clients into compliance is our passion, and we take it very seriously.

He is frequently called upon to lecture and write on issues involving IRS Voluntary Disclosure.

Less than 1% of Tax Attorneys Nationwide are Board Certified Tax Law Specialists 

The Board Certified Tax Law Specialist exam is offered in many states, and is widely regarded as one of (if not) the hardest tax exam given in the United States for practicing Attorneys. Certification also requires the completion of significant ethics and experience requirements.

In California alone, out of more than 200,000 practicing attorneys (with thousands of attorneys practicing in some area of tax law), less than 350 attorneys are Board Certified Tax Law Specialists.

Beware of Copycat Law Firms

Unlike other attorneys who call themselves specialists or experts in Voluntary Disclosure but are not “Board Certified,” handle 5-10 different areas of tax law, purchase multiple keyword specific domain names, and even practice outside of tax, we are absolutely dedicated to Offshore Voluntary Disclosure.

*Click here to learn the benefits of retaining a Board Certified Tax Law Specialist with advanced tax credentials.

IRS Penalty List

The following is a list of potential IRS penalties for unreported and undisclosed foreign accounts and assets:

Failure to File

If you do not file by the deadline, you might face a failure-to-file penalty. If you do not pay by the due date, you could face a failure-to-pay penalty. The failure-to-file penalty is generally more than the failure-to-pay penalty.

The penalty for filing late is usually 5 percent of the unpaid taxes for each month or part of a month that a return is late. This penalty will not exceed 25 percent of your unpaid taxes. If you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax.

Failure to Pay

f you do not pay your taxes by the due date, you will generally have to pay a failure-to-pay penalty of ½ of 1 percent of your unpaid taxes for each month or part of a month after the due date that the taxes are not paid. This penalty can be as much as 25 percent of your unpaid taxes. If both the failure-to-file penalty and the failure-to-pay penalty apply in any month, the 5 percent failure-to-file penalty is reduced by the failure-to-pay penalty.

However, if you file your return more than 60 days after the due date or extended due date, the minimum penalty is the smaller of $135 or 100 percent of the unpaid tax. You will not have to pay a failure-to-file or failure-to-pay penalty if you can show that you failed to file or pay on time because of reasonable cause and not because of willful neglect.

Civil Tax Fraud

If any part of any underpayment of tax required to be shown on a return is due to fraud, there shall be added to the tax an amount equal to 75 percent of the portion of the underpayment which is attributable to fraud.

A Penalty for failing to file FBARs

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.

A Penalty for failing to file Form 8938

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.

A Penalty for failing to file Form 3520

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.

A Penalty for failing to file Form 3520-A

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.

A Penalty for failing to file Form 5471

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.

A Penalty for failing to file Form 5472

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.

A Penalty for failing to file Form 926

The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

A Penalty for failing to file Form 8865

Penalties include $10,000 for failure to file each return, 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Fraud penalties imposed under IRC §§ 6651(f) or 6663

Where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.

A Penalty for failing to file a tax return imposed under IRC § 6651(a)(1)

Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.

A Penalty for failing to pay the amount of tax shown on the return under IRC § 6651(a)(2)

If a taxpayer fails to pay the amount of tax shown on the return, he or she may be liable for a penalty of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent.

An Accuracy-Related Penalty on underpayments imposed under IRC § 6662

Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty

Possible Criminal Charges related to tax matters include tax evasion (IRC § 7201)

Filing a false return (IRC § 7206(1)) and failure to file an income tax return (IRC § 7203). Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322.  Additional possible criminal charges include conspiracy to defraud the government with respect to claims (18 U.S.C. § 286) and conspiracy to commit offense or to defraud the United States (18 U.S.C. § 371).

A person convicted of tax evasion

Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.  A person convicted of conspiracy to defraud the government with respect to claims is subject to a prison term of up to not more than 10 years or a fine of up to $250,000.  A person convicted of conspiracy to commit offense or to defraud the United States is subject to a prison term of not more than five years and a fine of up to $250,000.

What Should You Do?

Everyone makes mistakes. If at some point that you should have been reporting your foreign income, accounts, assets or investments the prudent and least costly (but most effective) method for getting compliance is through one of the approved IRS offshore voluntary disclosure program.

Be Careful of the IRS

With the introduction and enforcement of FATCA for both Civil and Criminal Penalties, renewed interest in the IRS issuing FBAR Penalties, crackdown on Cryptocurrency (and IRS joining J5), the termination of OVDP, and recent foreign bank settlements with the IRS…there are not many places left to hide.

4 Types of IRS Voluntary Disclosure Programs

There are typically four types of IRS Voluntary Disclosure programs, and they include:

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