Foreign Information Return Penalties and FBAR's

Question 1

What are the two categories of reporting?

Answer 1

1. Income Tax Reporting
   - ALL Income must be reported by U.S. Taxpayers.
   - U.S. tax system is a world-wide taxing system.
   - Income earned in any manner on any asset must be reported.
2. Information Reporting
   - Certain financial activities must be reported on “Information Returns”.
   - These reports must be filed regardless of whether the asset or transaction generated income

Question 2

What is form 8938?

What’s the initial penalty for failure to file?

What’s the additional penalty and when is the additional penalty imposed?

What’s the maximum penalty for the additional penalty imposed?

Is reasonable cause a defense?

Can the IRS ask you to file?

Answer 2

It’s a summary form that reports all of your specified foreign financial assets if you meet monetary threshold:

1. $10,000 for failure to file (every year for not filing form)
2. Additional $10,000 for each 30-days after IRS notice (additional 10k every month you’re late after 90 days passes after IRS gives you notice for failure to file)
3. Maximum penalty for continuing failure to file is $60,000.

Reasonable cause is a defense. Must show failure is due to reasonable cause and not to willful neglect.

Yes, IRS could ask you to file.

Question 3

What is form 5471?

What is the initial penalty?

What is the additional penalty?

Is reasonable cause a defense?

What other form do you need to file?

Answer 3

It’s a form reporting ownership and certain relationships relating to certain foreign corporations.

1. 10,000 for failure to file (every year for not filing form)
2. Additional 10,000 for each 30-days after IRS notice (additional 10k every month you’re late after 90 days passes after IRS gives you notice for failure to file)

Reasonable cause is a defense. Must show failure is due to reasonable cause and not to willful neglect.

Since 8938 is a catch all, must file both form 8938 AND form 5471.

Question 4

What is form 3520?

What are the thresholds?

Must you aggregate to meet the thresholds?

Answer 4

Form 3520 requires you to report:

1. Receipt of a Foreign Gift or Bequest; OR
2. Transactions w/ a Foreign Trust

Receipt of a Foreign Gift or Bequest:

• Receipt from a foreign individual or estate (threshold of $100,000)
• Receipt from a foreign business (threshold of $15,797 (inflation adjusted))

Yes, you must aggregate gifts from related persons.

Transactions w/ a Foreign Trust:

• Receipt of Distribution
• Transfer to a Foreign Trust
• Certain Other Transactions

Question 5

What are the form 3520 penalties?

What is the initial penalty?

What is the additional penalty?

Is reasonable cause a defense?

Answer 5

• Greater of $10,000 or 35% of Reportable Amount (transfer or receipt).
• Additional 10,000 for each 30-days after IRS notice (additional 10k every month you’re late after 90 days passes after IRS gives you notice for failure to file)
• The “gross reportable amount” is the transfer of any money or property (directly or indirectly) to a foreign trust by a U.S. person, or the aggregate amount of the distributions so received from such trust during such tax year.
• Reasonable Cause is a defense. Must show failure is due to reasonable cause and not to willful neglect. Reasonable cause is exercised ordinary business care and prudence.

Question 6

What are Reports of Foreign Banks and Financial Accounts (“FBAR’s”)?

What is the monetary threshold?

On what form?

What must be reported?

Where are FBAR’s authority from?

Penalties go to who?

Answer 6

• Must report all foreign financial accounts if AGGREGATE BALANCE at any time during the year is $10,000 or more AND SIGNATURE AUTHORITY over any foreign account.
• Currently on Form FinCEN 114 (prior Form TD F 90-22.1)

Must report:

• Bank Accounts, brokerage accounts, insurance accounts (with a cash value), accounts at a foreign branch of a U.S. bank, foreign mutual funds
• Accounts held by a partnership or corporation in which taxpayer has MORE than a 50% interest.
• Some foreign accounts held by a trust in which the taxpayer has an interest.
• FBAR’s not in Internal Revenue Code but in Foreign Secretary Act
• Goes to FinCEN, not the IRS

Question 7

What are the 3 penalty levels for FBAR’s?

What is the statute of limitations?

Why is the statute of limitations unique?

What happens if you don’t pay?

Are there mitigation rules?

Answer 7

1. Failure due to reasonable cause = no penalty
2. Failure due to negligence = $10,000 per account per year
3. Willful failure = the greater of $100,000 or 50% of the balance in the account

Statute of limitations = 6 years for gov to bring criminal action.

This one is unique because SoL runs from the due date of the filing (different from IRC penalties). If you fail to file, the time does run

If you don’t pay = IRS can offset from other income OR department of justice suit against you

Yes, there are mitigation policies = there is relief.