Streamlined Offshore – IRS Amnesty For 5471, 8938, 8865 & 8621 by Golding & Golding

Streamlined Offshore – IRS Amnesty For 5471, 8938, 8865 & 8621 by Golding & Golding

The Streamlined Offshore Disclosure Program can be used to obtain IRS Amnesty for many forms, including 3520, 3520-A,  5471, 5472, 8621, 8865 & 8938. Learn How!

Foreign Account & Asset Reporting

For one reason or another, you have come to learn that you are out of compliance with IRS tax law for your foreign money. It could simply be that you have some unreported foreign bank accounts or minor income that you are unaware you are still required to report.

On the other hand, it could be that you have significant assets abroad including ownership of foreign corporations, interest in foreign partnerships, various stock ownership, investments, and even possibly the dreaded PFIC (Passive Foreign Investment Company).

Despite having not filed numerous forms, you believe you are non-willful. In other words, there is no intent (or reckless disregard) on your part. Maybe you had a CPA who was unaware of the reporting requirement as well, and/or possibly you used TurboTax but was unaware of many of the different forms – because they are not available in TurboTax (only the FBAR and 8938 are available)

Can you fix this mess with IRS streamlined offshore procedures (aka SDOP or SFOP)?

Yes, You Can

The good news is for most people, they will have an opportunity to get into compliance with US tax law by simply entering the IRS Streamlined Offshore Procedures. While the program does require a good amount of tax and legal work on your behalf (Read: hire an attorney), chances are when the process is complete, you will be out of the woods with the IRS, and you can sleep easy again.

Two Main Factors – Non-Willfulness and Tax Return Filings

Non-Willful

In order to qualify as non-willful, a person must show that they did not intentionally fail to report the accounts to the IRS. In other words, it must be the because the applicant was ‘unaware,’ of the requirement to file —  and therefore that is why the person did not file.

If the reason you did not file was because you did not get to it, did not think it was important, or didn’t think it was a big deal – chances are you are willful and would not qualify for the IRS Streamlined Program.

**Willful vs. Non-Willful is a very gray area, and you should definitely speak with an experienced Offshore Disclosure Lawyer before making any representation to the IRS.

Tax Return Filings (SDOP vs. SFOP)

In order to qualify for the Streamlined Domestic Offshore Procedures you have to filed all necessary tax returns. For example, if you are qualifying for the domestic program (which is based on residence, not location of the accounts) then you have to prove that you filed all the necessary tax return.

For example, if you learned in August of 2017 that you should have been reporting your foreign accounts and you either already filed your 2016 return, or received an extension to file your return through October 2017 – you should be fine (presuming you are non-willful).

Alternatively, if you did not file the necessary tax returns to report your US income in current or years past (and are not on extension), you may be disqualified from entering the streamlined domestic program.

**For the Streamlined Foreign Offshore Procedures, you do not have to have filed your tax returns timely and may be able to follow original returns with the submission.

More than Just the FBAR

The Internal Revenue Service has made enforcement of offshore tax reporting a key priority. Likewise, the penalties for not properly reporting the information are steep.

Whether you use the streamlined program, or realize you may have to go OVDP, there are number of different forms you may need to file in order to get into compliance.

The following is a list of common forms along with the different penalty structures:

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 FAQFBAR 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 ResourcesForm 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 ResourcesForm 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 ResourcesForm 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).

Golding & Golding Resources: Form 8621 PenaltiesPFIC Form 8621 Excess Distribution CalculationPFIC 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 ResourcesForm 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.

PenaltyVaries, depending on the Nature and Extent of the non-disclosure.

Golding & Golding ResourcesForeign 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.

Understanding Offshore Disclosure

At Golding & Golding, our entire tax law practice is limited IRS offshore disclosure. We are here to help you get into compliance.