Tax Season Reminder: Timely File U.S. Foreign Reporting Forms to Avoid Penalties

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The 2014 tax return preparation season brings the opportunity to make sure that U.S. taxpayers are in compliance with their U.S. foreign reporting obligations. U.S. individuals, corporations, partnerships, trusts and estates are required to file certain U.S. forms to report interests in offshore assets and foreign accounts. Most of the forms are due by the due date of the U.S. taxpayer’s U.S. federal tax return. Substantial penalties, such as $10,000 USD per form per year, generally apply for late filing. The types of U.S. foreign reporting forms that carry these substantial penalties include the following.

  1. Form 5471 to report ownership of stock in a foreign corporation
  2. Form 5472 to report transactions of a U.S. corporation with a 25% foreign shareholder or a foreign corporation engaged in a U.S. trade or business
  3. Form 8865 to report ownership of an interest in a foreign partnership
  4. Form 8858 to report ownership of a foreign disregarded entity
  5. Form 8938 to report ownership of specified foreign financial assets
  6. FinCEN Form 114 to report a financial interest in or signature authority over a foreign financial account
  7. Form 3520 to report a gift or inheritance received from a foreign person or estate and also distributions from and certain transactions with foreign trusts
  8. Form 3520-A tax return of a foreign trust with a U.S. owner
  9. Form 926 to report transfers of cash or property to a foreign corporation
  10. Form 8833 to report a treaty-based tax return position
  11. Form 5713 to report operations in a boycotting country
  12. Forms 1042 and 1042-S to report U.S. federal nonresident tax withholding

A U.S. taxpayer has a couple of options to resolve prior year delinquencies if any of these forms should have been filed for prior years but they were not filed. The options depend on whether there was any unreported taxable income from the offshore assets or foreign accounts and whether the delinquency was non-willful or willful.

If there was not any unreported taxable income and the failure to file the U.S. foreign reporting forms was non-willful, then the U.S. taxpayer can file the delinquent forms with an amended U.S. federal tax return. With this option, a reasonable cause statement is required to abate late filing penalties since Offshore Voluntary Disclosure Program FAQ # 18 was removed in 2014.

If there was some unreported taxable income and the failure to file the U.S. foreign reporting forms was non-willful, then the U.S. taxpayer is allowed to resolve the delinquencies through the Streamlined Offshore Filing Compliance Procedures. For U.S. taxpayers living in the United States, this requires amending three years of U.S. federal tax returns, filing six years of Foreign Bank Account Reports and paying a 5% penalty on the value of the undisclosed offshore assets and foreign accounts. U.S. taxpayers living outside the United States who have not filed their prior year original U.S. federal tax returns may be able to file in accordance with the Streamlined Foreign Offshore Filing Compliance Procedures.

If there was some unreported taxable income and the failure to file the U.S. foreign reporting forms was intentional or willful, then the U.S. taxpayer may apply to the IRS Offshore Voluntary Disclosure Program. A strict penalty framework applies within the OVDP.

Overall, U.S. foreign reporting should not be overlooked. It is the U.S. taxpayer’s primary responsibility and obligation to make sure that all offshore assets and foreign accounts are properly disclosed to a tax return preparer and that the proper forms are filed timely. The cost of compliance to resolve U.S. foreign reporting delinquencies can be considerable. Therefore, it is important to stay ahead of the curve to prevent penalty risk and exposure from non-compliance.

Please contact Aronson LLC tax advisor Alison Dougherty at 301.231.6290 or ADougherty@aronsonllc.com for more information.

About Alison N. Dougherty

Alison N. Dougherty has written 37 post in this blog.

Alison N. Dougherty provides tax services as a Director at Aronson LLC. She specializes in providing outbound international tax guidance to U.S. individuals and companies with activities in other countries. She assists U.S. taxpayers with U.S. tax reporting and compliance for offshore assets and foreign accounts. She also specializes in providing inbound international tax guidance to nonresident individuals and companies with activities in the United States. Her responsibilities include U.S. federal and state tax compliance for corporations, partnerships, and individuals. She also provides transactional tax planning and structuring services.

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