Remember when international reporting disclosures required on U.S. Federal Form 1065 partnership tax returns were focused on foreign partner tax withholding? In 2017, partnerships that file U.S. federal partnership tax returns for the 2016 tax year using Form 1065, must make more extensive international tax reporting disclosures. Here are some items to pay close attention to on Form 1065.
These new disclosure requirements on U.S. federal Form 1065 partnership tax returns likely resulted from the IRS’s continuing efforts to increase compliance with U.S. international tax reporting requirements. With global expansion and increasing cross-border international activities, these reporting requirements are particularly important to discuss with a qualified U.S. international tax reporting and compliance expert. If your U.S. or foreign partnership files a U.S. federal Form 1065, these reporting requirements should be a top priority to avoid substantial penalties. Under some circumstances, it is possible for U.S. filers, including partnerships, to qualify for certain amnesty relief from penalties for prior year failure to file delinquencies. With proper guidance, a partnership can potentially qualify for certain IRS amnesty procedures that will allow late filing of Forms 5471 and FBARs, etc. without late filing penalties.
Historically, partnerships were required to disclose ownership of foreign corporations and partnerships on U.S. federal Form 1065, and ownership by foreign parties. These disclosures are still required on the 2016 U.S. federal Form 1065.
Avoid this common misunderstanding. U.S. corporate leaders may assume that their U.S. federal Form 1120 corporate income tax return does not need to be filed on time if the company has a loss for the year. If the U.S. corporation owns an interest in a foreign subsidiary corporation, this misunderstanding can cost a U.S. corporation with a net operating loss substantially in penalties.
The applicable penalties are assessed based on failure to file U.S. federal Form 5471 with the tax return on time. There is a $10,000 USD penalty per year, per foreign subsidiary corporation for failing to file the Form, which reports ownership of a foreign subsidiary corporation, on time.
U.S. federal corporate income tax penalties, such as late filing and late payment penalties are typically assessed on the unpaid tax due with the tax return. If the corporation has a net operating loss for the year and zero taxable income, then no tax is due with the tax return so certain penalties would not be assessed.
Late filing penalties are automatically assessed on any U.S. federal corporate income tax return that is filed after the due date with a Form 5471 attached. In some cases, a corporation may incur net operating losses for several years and stop filing U.S. federal corporate tax returns during that time. Resulting in a problem: how to resolve the prior year Form 5471 filing delinquencies when the corporation starts to earn a profit in subsequent years and starts filing tax returns again.
In addition to the prior year Form 5471 filing delinquencies, the U.S. corporation may have been required to file a prior year Foreign Bank Account Report (FBAR) to report foreign accounts owned by the foreign subsidiary corporation. Late FBAR filings can also lead to a minimum penalty of $10,000 USD per year.
It’s vital to speak to a qualified U.S. international tax reporting professional to resolve the prior year filing delinquencies. Form 5471 reporting and FBAR preparation often involve specialized skills in the area of U.S. international tax that many general tax practitioners may not have. A qualified U.S. international tax-reporting specialist can provide guidance on how to navigate certain IRS amnesty filing procedures including Form 5471 and FBAR penalty abatement.
With proper guidance, a corporation may qualify for certain IRS amnesty procedures that will allow late filing of Forms 5471 and FBARs, without any late filing charges. It is advisable for a corporation to catch-up with its prior year filings before filing its current year tax return, Form 5471, and FBAR. This approach will improve the corporation’s chances of qualifying for relief from the penalties.
The U.S. Treasury has issued proposed regulations governing the filing of U.S. Foreign Bank Account Reports (FBAR). The new rules provide several key revisions to the existing FBAR regulations under 31 CFR § 1010.350. The FBAR regulations are issued under the legislative authority of the Bank Secrecy Act. Key points of the proposed regulations include:
1. The requirement would be eliminated for U.S. officers, employees, and agents of U.S. entities to report signature authority over foreign financial accounts owned by the entity if the individual does not have any financial interest in the account. The U.S. officer, employee, and agent of the U.S. entity would not have to report such accounts on their respective individual FBAR, if the accounts are reported on an FBAR filed by their employer or any other entity within the same corporate or business structure. The employer would be required to maintain records for five years to document all U.S. officers, employees, and agents with signature authority over the entity’s accounts.
2. The relief which currently allows limited reporting on the FBAR when a filer has 25 or more reportable accounts would be eliminated. The proposed rule would require U.S. persons with 25 or more reportable accounts to provide the detailed account information for each reportable account on the FBAR in the same manner as filers with less than 25 accounts.
3. The new FBAR filing due date will be April 15, with a six month extension allowed to October 15, beginning with FBARs filed for the calendar year 2016.
For more information, please contact Aronson LLC tax advisor Alison Dougherty at (301) 231-6290 or ADougherty@aronsonllc.com.
Are you in Compliance for 2015? If you are a U.S. person it is important to make sure that you are properly disclosing foreign accounts and offshore assets to avoid substantial penalties. A U.S. person must file the FinCEN Form 114 Report of Foreign Bank and Financial Accounts (“FBAR”) to disclose foreign accounts if the highest aggregate balance or value of all reportable accounts exceeds $10,000 USD during the calendar year. Other accounts such as foreign pension and retirement plan accounts, insurance policies and annuities are considered to be reportable accounts in addition to foreign bank deposit and investment accounts.
The filing threshold for the FBAR is substantially lower than the U.S. Federal Form 8938 Statement of Specified Foreign Financial Assets. Unlike the FBAR which is filed electronically with the FinCEN, Form 8938 is filed with a U.S. individual’s U.S. Federal Form 1040 individual income tax return. For the year 2015 and prior years beginning with the year 2011, the Form 8938 filing requirement applies only to individuals. New U.S. Treasury Regulations were issued on February 22, 2016, which implement the requirement for U.S. companies to file the Form 8938 for tax years beginning after December 31, 2015.
The civil penalty is $10,000 USD for the non-willful failure to file the FBAR and the Form 8938 on time. There are even more substantial penalties including the possibility of criminal prosecution for the intentional or willful failure to file the FBAR. The 2015 FBAR is due on June 30, 2016. The 2015 Form 8938 is due with the U.S. Federal Form 1040 individual income tax return on April 18, 2016, or on the extended due date of October 15, 2016, if an extension is filed timely.
There are many other U.S. international tax reporting and compliance requirements that apply to U.S. persons. If a U.S. person owns an interest in a foreign company, there could be a filing requirement each year or for the year in which the U.S. person acquires or disposes of the ownership interest. Depending on the classification of a foreign company for U.S. Federal tax purposes as a foreign corporation, foreign partnership or foreign disregarded entity, the Form 5471, 8865 or 8858 may need to be filed with the U.S. owner’s U.S. tax return. There is a $10,000 USD civil penalty for the failure to file any of these forms on time. Certain U.S. international tax reporting and compliance requirements regarding passive foreign investment companies (PFICs) apply to U.S. persons with ownership of an interest in a foreign investment fund such as a foreign mutual fund.
The IRS has certain amnesty programs and procedures available for U.S. taxpayers who did not file the required forms in prior years to report foreign accounts and offshore assets.
For more information, please contact Aronson LLC Tax Advisor, Alison Dougherty at (301) 231-6290 or ADougherty@aronsonllc.com.
Are you a U.S. taxpayer with foreign accounts or offshore assets? Have you reported all of the income from the foreign accounts or offshore assets on your U.S. federal tax return? Have you filed all required Foreign Bank Account Reports (FBARs) and other foreign reporting information returns, such as the Form 5471 to report ownership of a foreign corporation or the Form 8865 to report ownership of a foreign partnership? Are you in compliance with the FBAR filings and foreign reporting for prior years? Are you aware of the substantial penalty risk and exposure that could apply if you are not in compliance with FBAR filings and foreign reporting for prior years? The late filing penalty is $10,000 USD per form per year for the FBAR and certain foreign reporting information returns such as the Forms 5471 and 8865. The penalty for the willful failure to file the FBAR is the greater of $100,000 USD or 50% of the highest account balance or value per year.
The IRS currently has several amnesty programs available for U.S. taxpayers with unreported foreign accounts and offshore assets. The best available option typically depends on whether the U.S. taxpayer has unreported income from the foreign accounts or offshore assets in addition to delinquent FBARs or other foreign reporting information returns.
Delinquent FBAR Submission Procedures
The IRS will allow U.S. taxpayers to file delinquent FinCEN Forms 114 Report of Foreign Bank and Financial Accounts (FBARs) for prior years without imposing any penalties if all taxable income from the reportable foreign accounts was properly reported on the U.S. federal tax return. To qualify, the U.S. taxpayer cannot be under a current civil or criminal examination by the IRS. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquent FBARs prior to being submitted. The reason for filing the FBAR late should be included when the delinquent FBARs are filed. FBARs are not automatically subject to audit under these procedures but they may be subject to audit under the existing audit selection processes that are in place for tax and information returns.
Delinquent Information Return Submission Procedures
The IRS will allow U.S. taxpayers to file delinquent information returns without imposing the $10,000 late filing penalty for Forms 5471 and 8865, etc. if reasonable cause is demonstrated. To qualify, the U.S. taxpayer cannot be under a current civil or criminal examination by the IRS. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquent information returns prior to being submitted. The delinquent information returns should be filed with an amended U.S. federal tax return including a reasonable cause statement.
Streamlined Domestic/Foreign Offshore Filing Compliance Procedures
The IRS will allow U.S. individual taxpayers to file six years of delinquent FBARs and three years of amended U.S. federal tax returns with delinquent foreign reporting information returns attached. All of the applicable FBAR and information return late filing penalties and accuracy-related penalties will not be imposed unless the amended returns are selected for audit through the regular audit selection process and the IRS is able to detect fraud on the original U.S. federal tax return and/or the FBAR delinquency was willful. There is a 5% Streamlined Domestic Offshore filing penalty that is based on the highest year’s aggregate balance or value of unreported foreign financial assets as determined at the year end for each year. To qualify, the U.S. individual taxpayer must be able to certify under penalties of perjury that the delinquencies resulted from non-willful conduct. The U.S. individual taxpayer cannot be under a current IRS civil or criminal examination. This option is not available if the IRS has contacted the U.S. taxpayer regarding the delinquencies prior to filing the Streamlined disclosure.
Offshore Voluntary Disclosure Program (OVDP)
The IRS OVDP is designed for U.S. individual taxpayers with foreign reporting delinquencies that involve willful or intentional conduct. The OVDP penalty is 27.5% of the highest year’s aggregate balance or value of unreported foreign financial assets. If the U.S. government has identified the foreign financial institution where the unreported foreign accounts are maintained on a publicized list then the OVDP penalty is increased substantially. A significant advantage of the OVDP is that it protects U.S. individual taxpayers from criminal prosecution for willful FBAR delinquencies which otherwise could result in imprisonment.