Delinquent International Information Return Tips
If you are like many Americans abroad facing the ugly spectre of a Delinquent International Information Return and the risk of penalties or worse and wondering what to do, here are a few of our tips to keep in mind.
Tip #1: The Open-Ended Statute of Limitations for Taxpayers With Delinquent Foreign Information Returns Will Not Make The Problem Disappear In Time
In 2010, the Hire Act extended the statute of limitations (the period of time that the IRS can audit and assess additional tax and penalties) a tax return that is missing an information return indefinitely – this means that the IRS can go back 5, 10, 20, 30 years, etc. Accordingly, a strategy of filing the foreign information returns going forward is a faulty strategy and puts the taxpayer at an increased risk and no protection with earlier years. Typically, the statute of limitations to assess additional taxes is three years after a taxpayer’s original income tax return was filed.
Some of the delinquent international information returns may include:
- Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
- Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
- Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships
- Form 8858, Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
- Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
- Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation
- Form 8938, Statement of Specified Foreign Financial Assets
- Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
As you can imagine, this can be potentially devastating because not only is the statute to assess open on these delinquent foreign information returns, but the entire individual tax return. In fact, the IRS considers the original return as unfiled as a result of the missing information return.
Thus, the process to get back into compliance must be handled delicately with forethought on the best approach – of which ignoring the problem, digging one’s head in the sand and hoping time will make the problem disappear is not a sane approach. It’s true that the IRS will not assess tax and penalties on every taxpayer that has a delinquent international information return, but unfortunately a taxpayer will remain vulnerable to audit, tax and penalty assessment indefinitely until such returns are filed.
Tip #2: Failure To File Timely Foreign Information Returns Can Lead To Significant Penalties
In addition to the open-ended statute of limitations, failure to file foreign information returns can lead to horrific penalties.
For example, if a taxpayer fails to timely file Form 5471, Form 5472 or Form 8865, the IRS can assess a $10,000 penalty for each failure for each applicable annual accounting period, plus an additional $10,000 for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $60,000 per return (initial penalty of $10,000 plus the continuation penalty maximum of $50,000 per return).
However, the tax code does not provide a maximum penalty with respect to Form 5472. Yikes…
Tip #3: Make Use Of Available Voluntary Disclosure Options For Delinquent Information Return Procedure
The taxpayer’s individual facts and circumstances will determine the best method for coming into compliance. There are several voluntary compliance procedure options currently available and there is relief available for filing a delinquent international information return with these procedures.
At Tax Samaritan, we recommend international taxpayers review their international information return tax filing requirements with an experienced and knowledgeable professional in this area of tax practice to ensure that all required filings are scheduled for completion, or have been completed, for the current and prior years and that the most optimal method for getting back into compliance based on individual facts and circumstances is utilized. Below we discuss briefly three such options.
Offshore Voluntary Disclosure Program (OVDP)
The OVDP is designed for taxpayers with exposure to potential criminal liability and/or substantial civil penalties due to a willful failure to report foreign financial assets and pay all taxes due on those assets. This is an option to be used by individuals concerned that the IRS may view the non-compliance willful or fraudulent and at risk for significant civil and perhaps even criminal penalties. It provides taxpayers with such exposure (1) protection from criminal liability; and (2) terms for resolving their civil tax and penalty obligations. The decision for a taxpayer to enter into the OVDP is not one to be taken lightly. Indeed, we recommend legal consultation with your preferred attorney or our recommended attorney, given the risk of potential criminal prosecution.
Streamlined Filing Compliance Procedures
This option requires that the taxpayer certify that the failure to report all income, pay all tax, and submit all required information returns, including FBARs, was due to non-willful conduct. Taxpayers residing in the United States filing under this option are required to pay a 5% miscellaneous offshore penalty and while those that qualify to file under the Streamlined Foreign Offshore Procedure have no miscellaneous offshore penalties.
Delinquent International Information Return Procedure
If a taxpayer can establish reasonable cause, the statute of limitations period is left open only for the item, or items, related to the failure to disclose when the required international information return is not filed. However, if the taxpayer does not have reasonable cause for the failure to provide the information required by these forms, the statute of limitations period remains open to all issues with respect to the taxpayer’s income tax return.
if the taxpayer can establish reasonable cause for the failure to file a missing international information return and the taxpayer does not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
- Have not filed one or more required international information returns,
- Have reasonable cause for not timely filing the information returns,
- Are not under a civil examination or a criminal investigation by the IRS, and
- Have not already been contacted by the IRS about the delinquent information returns.
should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.
Describe your situation in the reasonable cause statement
As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
- All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return
- All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms
- A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested
Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
Our goal at Tax Samaritan is to provide the best counsel, advocacy and personal service for our clients. We are not only tax preparation and representation experts, but strive to become valued business partners. Tax Samaritan is committed to understanding our client’s unique needs; every tax situation is different and requires a personal approach in providing realistic and effective solutions.
At Tax Samaritan, we can provide assistance in determining the relevant filing requirements and also help to complete any delinquent international information returns. Please feel free to call or email us for a complimentary 30-minute consultation to discuss your situation and download our free Expat Tax Guide that provides more details about information returns and other related matters.
Tax Samaritan is a team of Enrolled Agents with over 25 years of experience focusing on US tax preparation and representation. We maintain this tax blog where all articles are written by Enrolled Agents. Our main objective is to educate US taxpayers on their tax responsibilities and the selection of a tax professional. Our articles are also designed to help taxpayers looking to self prepare, providing specific tips and pitfalls to avoid.
When looking for a tax professional, choose carefully. We recommend that you hire a credentialed tax professional such as Tax Samaritan that is an Enrolled Agent (America’s Tax Experts). If you are a US taxpayer overseas, we further recommend that you seek a professional who is experienced in expat tax preparation, like Tax Samaritan (most tax professionals have limited to no experience with the unique tax issues of expat taxpayers).
Randall Brody is an enrolled agent, licensed by the US Department of the Treasury to represent taxpayers before the IRS for audits, collections and appeals. To attain the enrolled agent designation, candidates must demonstrate expertise in taxation, fulfill continuing education credits and adhere to a stringent code of ethics.
Every effort has been taken to provide the most accurate and honest analysis of the tax information provided in this blog. Please use your discretion before making any decisions based on the information provided. This blog is not intended to be a substitute for seeking professional tax advice based on your individual needs.