Internal Revenue Service and International Information Return Reporting
For the past few years the Internal Revenue Service has increased their emphasis to ensure the reporting of foreign holdings and income earned abroad on international information returns.
Generally, international information reporting penalties are imposed when a form is filed late, or not filed correctly, or with the correct information. Returns that are filed but that are not substantially complete and accurate are considered “un-filed” and may result in penalty assessments. Penalties began at $10,000 per form per year but some penalties have recently been increased to $25,000 per form per year, even if the violation was considered to be non-wilful.
Imposition of the penalties is generally automatic, and the Taxpayer is routinely not offered an opportunity to provide additional information or otherwise defend the penalty before it moves to collections.
Increasing numbers of U.S. taxpayers (U.S. citizen, green card holder, or lawful permanent resident of the U.S, or an entity established within the U.S., or which is owned by U.S. persons, or which conducts business within the United States) have investments in bank and other financial and security accounts in foreign countries. Although it is not illegal to have foreign accounts, the accounts must be disclosed to the IRS on Form 114, Report of Foreign Bank and Financial Accounts (FBAR) and the related income reported on US income tax return. In recent years, the Internal Revenue Service has been aggressively pursuing taxpayers that use undisclosed foreign accounts and foreign entities to avoid or evade tax.
Taxpayers must be aware of their filing deadlines, keep accurate records, and disclose all of their foreign assets and accounts annually.
Filing Compliance Relief
The IRS offer amnesty programs that are designed to allow Taxpayers to voluntarily come into compliance by filing/amending their prior 3 years returns and 6 years of foreign bank filing (FBAR's).
The Streamlined Filing Procedure varies depending on your residency and requires that you include all the international information returns that are applicable to your situation.
You must assert, in a written statement, under penalties of perjury, that your previous non-compliance was not willful, report your world income as well as disclose all your foreign financial assets. If you are accepted into the IRS Streamlined Procedure, participants may avoid a number of potential penalties, including: Failure to file penalty, failure to pay penalty, accuracy-related penalty, international return civil penalties and FBAR penalties.
Common International Reporting Form Violations
There are several types of international information reporting forms in which international penalties are assessed for noncompliance.
The most common offenders that attract penalties are:
Form 3520-A - (Annual Information Return of Foreign Trust with a U.S. Owner) Filed annually by the trustee or owner of the TFSA account to report information about the trust.
From the IRS's perspective, a Canadian Tax-Free Savings Account (TFSA) is a foreign grantor trust
- This form is due the 15th day of the 3rd month after the end of the trust's tax year, generally March 15th
- An automatic 6 month extension of time to file may be granted by filing Form 7004- Application for Automatic Extension of Time to File Certain Business Income Tax Information by March 15th
- The entity must have a valid foreign trust EIN (Employer Identification Number)
- Generally, the initial penalty for not filing a timely, complete and accurate Form 3520-A is $10,000 or 35% of the “gross reportable amount,” whichever is larger.
- Penalty Code Section - IRC 6677(b)
Form 3520 - (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts) An information return, filed annually by the Taxpayer to report:
i. Certain transactions with a foreign trust,
ii. Ownership of a foreign trust, or
iii. You received a large gift or inheritance from a foreign source or person.
- This form is due April 15th or if you live outside of the United States, June 15th.
- If a U.S. person is granted an extension via Form 4868-Extension of Time to File an Income Tax Return, the due date for filing Form 3520 is October 15th
- Generally, the initial penalty for not filing a timely, complete and accurate Form 3520 is $10,000 or 35% of the “gross reportable amount,” whichever is larger.
- Penalty Code Section - IRC 6677(a)
- FinCEN Form 114 - (Report of Foreign Bank and Financial Accounts (FBAR's))
- You may find it helpful to use the attached PDF template to provide us with the information required to report your foreign financial accounts.
- FinCEN Form 114 is submitted annually with the U.S Treasury Department's Financial Crimes and Enforcement Network., not the IRS.
- The FBAR filing due date generally coincides with the federal income tax filing deadlines (including extensions)
- U.S. foreign bank reporting is required by a person or business if, at any time during a calendar year, the aggregate value of all foreign financial accounts (non-US) exceeds $10,000.
- This includes accounts that you have financial interest in or signature authority over. (i.e RRSP's, TFSA's, RESP, security and or mutual fund accounts).
- If you do not report your foreign accounts, the penalties is up to $10,000 per violation per account.
- If you are aware of the filing requirement and do not file on time, the penalty can be $100,000 per violation.
Form 8938 - (Statement of Specified Foreign Assets.) Is used to report specified foreign financial assets, and is filed annually, if you meet the reporting thresholds.
- This form is attached to your annual income tax return (Form 1040) and must be filed by the due date (including extension) for that return.
- Late filing penalty is $10,000 per year
- Penalty Code Section - IRC 6038D(d)
Form 5471 - (Information Return of U.S Persons With Respect to Certain Foreign Corporations) Used by certain U.S persons with an interest in Foreign Corporations.
- This form is not a tax return but rather a report to inform the IRS who has ownership in foreign corporations
- Form 5471 is attached to your annual income tax return (Form 1040) and must be filed by the due date (including extension) for that return.
- U.S. citizens, residents, corporations, partnerships or trust who have a least 10% ownership in a foreign corporations, may need to file Form 5471
- Late filing penalty is $10,000 for each annual accounting period of the corporation. If you get a notice from the IRS and do not file within 90 days, you could be penalized a maximum of $60,00
- Penalty Code Section - IRC 6038(b)
- Form 5471 schedules you may need to complete:
- Schedule A – Stock of the Foreign Corporation
- Schedule B – U.S. Shareholders of Foreign Corporations
- Schedule C – Income Statement
- Schedule E - Income, War Profits, and Excess Profits Taxes Paid or Accrued
- Schedule F – Balance Sheet
- Schedule G – Other information
- Schedule H – Current earnings and profits
- Schedule I – Summary of Shareholder’s Income from Foreign Corporation
- Schedule J – Accumulated earnings and profits of Controlled Foreign Corporations
- Schedule M – Transactions between controlled foreign corporation and shareholders or other related persons
- Schedule O – Organization or reorganization of foreign corporation, and acquisitions and dispositions of its stock (Part I to be completed by U.S. officers and directors, Part II to be completed by U.S. shareholders)
Form 8865 - (Return of U.S. Persons With Respect to Certain Foreign Partnerships) Used by certain U.S. person with interests in Foreign Partnerships
- This form is attached to your annual income tax return (Form 1040) or if applicable your Partnership Return (Form 1065) or Corporation Return (Form 1120) and must be filed by the due date (including extension) for that return.
- Late filing penalty begins at $10,000 per year
- Penalty Code Section - IRC 6038(b)
Form 5472 - (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S Trade of Business)
- A U.S corporation with 25% or more foreign ownership or a foreign corporation that does business in the U.S. must file this form.
- This form is included with your corporate tax return.
- Late or incomplete filing penalty begins at $25,000.
- Penalty code section - IRC 6038(a)
Form 8621 - (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund) Used to report income from foreign mutual funds holdings