International Information Returns

There are extraordinarily high tax penalties for the late filing of certain international information returns.

If you have assets overseas, you most likely have at least one international information return reporting requirement. Don’t ignore these filings or you could lose a large portion of your investment to tax penalties.

Do you have more than $10,000 in total assets abroad?

If the total value of your overseas accounts is $10,000 or more at any time during the year – even for a single day – you need to file FinCEN Form 114, better known as the FBAR. Failing to file an FBAR currently carries a penalty of $10,000 (adjusted for inflation) for each and every non-willful violation. If you intentionally violate the rules, the government can charge you willful noncompliance penalties of $100,000 (adjusted for inflation) or 50% of the account balance (whichever is higher). This is the case even if no taxes were due on those accounts.

In addition, Form 8938 must be filed by U.S. taxpayers with foreign financial assets that exceed a certain amount:

  • If you live in the U.S., the threshold is $50,000 at the end of the tax year or $75,000 on any other day of the tax year ($100,000 and $150,000 for married taxpayers filing jointly).
  • If you live abroad, the threshold is $200,000 at the end of the tax year or $300,000 on any other day of the tax year ($400,000 and $600,000 for married taxpayers filing jointly).
    The penalty for a late, incomplete, or inaccurate Form 8938 is $10,000. The continued failure to withhold information after an IRS notification can bring the penalty up to $60,000, plus criminal charges.

Do you have an interest in a foreign corporation?

The following information returns apply to U.S. taxpayers who have property or assets invested in a foreign corporation:

  • Form 926 is used to report property transfers and exchanges to foreign corporations. The penalty for failure to file a timely Form 926 is $10,000.
  • U.S. citizens and residents who serve as officers, directors, or shareholders in foreign corporations who meet certain threshold ownership levels and/or voting power requirements must file a Form 5471 and its related schedules. The penalty is 5% of the tax underpayment for each month (or fraction thereof) that the return is not filed, to a maximum of 25%.
  • Form 5472 applies to U.S. corporations that are 25% foreign-owned, and foreign corporations engaged in a U.S. trade or business, when they engage in reportable transactions (such as sales and rents) with foreign or domestic related parties. Failure to file this form (or to maintain proper records) will result in a $25,000 penalty.
  • Any U.S. citizen, resident alien, domestic corporation, domestic partnership, estate or trust that is the owner of an entity not created or organized in the U.S. that is being disregarded as an entity separate from its owners for U.S. income tax purposes must file Form 8858 and its schedules. The penalty for failure to file a timely Form 8858 is $10,000 per year. Once the IRS has mailed a notice to the taxpayer, an additional $10,000 penalty will be assessed for every month if the taxpayer does not comply within 90 days, to a maximum of $50,000 per failure.

Do you have a foreign partnership interest?

If you have a foreign partnership interest, or engaged in a transaction with a foreign partnership during the tax year, you may need to file Form 8865. The penalty for failure to file a timely Form 8865 is $10,000.

Do you have an interest in a foreign trust?

Form 3520-A must be submitted to the IRS to identify a foreign trust, its trustees, and its beneficiaries. You may also need to report money or other property transferred to the foreign trust. The penalty for failure to file a timely Form 3520-A is 5% of the value of the trust assets or $10,000, whichever is greater.

Do you have an interest in a passive foreign investment company?

Form 8621 is for U.S. shareholders of passive foreign investment companies (PFICs) that receive direct or indirect distributions, or that recognize a gain on the direct or indirect disposition of PFIC stock. It also applies to U.S. persons reporting information on a qualified electing fund (QEFs) or a mark-to-market election of marketable stock in a PFIC. Although there is no penalty for failure to file a Form 8621, if you neglect to file it the statute of limitations on all your tax matters for that year will remain open indefinitely.

How long does the IRS have to assess these penalties?

The IRS usually has three (3) years from the date a tax return was filed or was supposed to be filed to assess taxes. However, if an international information return is not filed, per 26 U.S. Code § 6501(c)(3) the statute of limitations period is extended indefinitely!

Do any other tax penalties apply?

Understatements of income tax are subject to the Accuracy-Related Penalty. Per 26 U.S. Code § 6662(j), the enhanced penalty rate of 40% applies to tax understatements attributable to non-disclosed foreign financial assets.

Tax penalty defense attorneys

If you failed to file an international information return and/or are facing IRS penalties, there are defenses that may be available to you. The tax attorneys at Moskowitz, LLP have extensive experience with these matters – contact our San Francisco office today.