U.S. Taxpayers, including individuals, companies, trusts, and estates that have delinquent, incomplete or late-filed foreign information returns have significant penalty exposure.

Forms 5471, 8865, or 8858 may need to be filed if the U.S. taxpayer has a direct or indirect interest in a foreign corporation, foreign partnership, or foreign disregarded entity. Criminal penalties for failure to file the required information may also be imposed in certain situations in addition to the civil penalties summarized below.

Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign Corporations

  • A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the prescribed time. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. taxpayer, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period – to a maximum of $50,000.
  • A $10,000 penalty is imposed for any person that fails to report information relating to reportable transactions including but not limited to acquisitions, dispositions, and reorganizations. (Form 5471 Schedule O) . If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. taxpayer, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period – to a maximum of $50,000
  • Any person that fails to file or report all of the information required within the prescribed time will be subject to a 10% reduction of the foreign taxes available for credit under sections 901, 902, and 960.

Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships

  • A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the prescribed time. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. taxpayer, an additional $10,000 penalty (per foreign partnership) is charged for each 30-day period – to a maximum of $50,000.
  • An additional penalty is imposed for any person that fails to report a contribution to a foreign partnership (Form 8865, Schedule O). The penalty is equal to 10% of the fair market value (FMV) of the property at the time of the contribution.  This penalty is limited to $100,000 unless the failure was due to intentional disregard.  In addition, the transferor must recognize gain on the contribution as if the property had been sold for its FMV.

Form 8858 – Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)

  • A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the prescribed time. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. taxpayer, an additional $10,000 penalty (per foreign partnership) is charged for each 30-day period – to a maximum of $50,000.

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

  • A $25,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the prescribed time . If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. taxpayer, an additional $25,000 penalty is charged for each 30-day period.

Foreign Trust and Gift Transactions

The IRS has specific reporting requirements for “foreign trusts.” A foreign trust is any trust over which a court in the United States can exercise primary jurisdiction for its administration or that has one or more U.S. persons with the authority to control all, or substantially all, of the decisions of the trust.  As a general rule, U.S. persons who own foreign trusts must file Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner (the owner of the trust is usually the trust grantor). Form 3520-A collects information about income, expenses, distributions, trust assets, trust owners, and beneficiaries. Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Foreign Gifts may also be applicable. Forms 3520 and/or 3520-A must be filed when one of the following apply:

  • A U.S. person is a grantor of a newly created foreign trust.
  • A U.S. person makes a gratuitous transfer (or a transfer in exchange for an obligation) to a foreign trust.
  • A U.S. person owns a foreign trust.
  • A foreign trust made distributions, constructive distributions, or a loan to a U.S. person.
  • A U.S. person receives foreign gifts in excess of $100,000 from individuals or in excess of $16,388 from a foreign corporation or foreign partnership (adjusted annually for inflation).

Penalties

The penalty for failing to file a Form 3520 and/or 3520-A is the greater of $10,000 or 5% of the value of the corpus of the trust attributable to the U.S. owner. There is no statute of limitations for the IRS to impose penalties, and the agency can impose multiple 5% penalties. The IRS may also impose large penalties if a Form 3520 is not timely filed, is incomplete, or is incorrect. The penalty is the greater of $10,000 or:

  • 35% of the gross value of any property transferred to a foreign trust if a U.S. person fails to report the creation of, or transfer to, a foreign trust.
  • 35% of the gross value of the distributions received from a foreign trust by a U.S. person who fails to report the receipt of the distribution.
  • 5% of the gross value of all a foreign trust’s assets treated as owned by the U.S. person if the U.S. owner fails to report required information (in addition to the 5% penalty imposed for failing to file a Form 3520-A).

If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. taxpayer, an additional $10,000 penalty is charged for each 30-day period. The penalty for failing to file a Form 3520 that should have reported a foreign gift or bequest, or for filing an incorrect or incomplete form with respect to a gift or bequest, is 5% of the gift or bequest for each month during which the failure continues, up to a maximum of 25% of the gift.

FinCEN 114 Report of Foreign Bank and Financial Accounts (FBAR)

A United States person, including a citizen, resident, corporation, partnership, limited liability company, trust and estate, must file an FBAR to report:

  • A financial interest in or signature or other authority over at least one financial account located outside the United States.
  • The aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported.

Penalties

  • If failure to file of FBAR is due to non-willful conduct, you may be subject to a penalty of $10,000 per violation.
  • If a personal willfully fails to file FBAR or files an incomplete or incorrect FBAR, then they may be subject to a $100,000 or 50% of the balance in the account at the time of the violation, whichever is greater.
  • Statute of limitation is six years. Though there is some difference of opinion and little authority on the matter. Some argue that covering something up can be a continuing criminal violation, and that could conceivably mean the statute of limitations never expires.

Questions? Let’s Talk

As you can see from the significant penalties above, mishaps on reporting or no reporting at all can be very costly. If you have any inclination that you may have any foreign compliance, you should reach out to your CPA to discuss your situation, and if you may or may not have any filing requirements, past or present.

Connect with a Barnes Dennig tax expert  or call (513) 241-8313 for answers to questions you have regarding your specific tax situation. We’re here to help.