When we blog about offshore voluntary disclosure issues, we typically focus on the FBAR form, because that is the form that has affected the most people. There are a LOT of people who did not file that form simply because they didn’t know about it. But, there are other forms that you also need to file with the IRS if you do business with overseas entities. Here are some of the most common other actions that could cause huge penalties being impose. The good news is that these are also the types of things that can be fixed using the IRS Offshore Voluntary Disclosure Program.
Do you transfer money to a foreign corporation?
Do you provide money to a foreign corporation for items that are typically not subject to tax, like adding capital to a company or engaging in a liquidation or reorganization of a company? If so, you may have to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. This form applies if you transfer more than $100,000 within a 12 month period or if you own, either on your own or through companies you own, 10 percent or more of the foreign corporation.
If you did not file this form, the penalty is 10% of the value of the property transferred. If you intentionally didn’t file the form, there is no cap on the penalty. If you failed to file the form without knowing, the cap is $100,000. If you have reasonable cause for not filing the form, there is no penalty at all. Also, if your tax return for that year is audited and there is an increase in tax related to the transfer of money, that increase in tax can be subject to a 40% accuracy related penalty (rather than the standard 20%). Additionally, failure to file this form can keep the statute of limitations on auditing your entire tax return open until 3 years after the IRS receives the information that was required to be reported on the form.
Are you an Officer, Director, or Shareholder of a foreign corporation?
If so, you may be subject to a lot of different reporting requirements. The most direct requirement is to file Form 5471, Information Return of a US Person with Respect to Certain Foreign Corporations if you fit into one of these categories:
- If you own more than 10% of a foreign corporation in which all U.S. Shareholders (only counting those with more than a 10% interest) own more than 50% of the company.
- If you (A) became an officer or director of a foreign corporation that has a U.S. person who owns 10% or more of that corporation; (B) acquire stock in a foreign corporation of which you own 10% or more of the stock after the purchase; (C) stockholders in certain foreign insurance companies; (D) become a U.S. person (such as by moving to the US, getting a Green Card, etc.) while owning 10% or more of a foreign corporation.
If you do not file this form, the penalty is $10,000. Starting 90 days after the IRS notifies you that you failed to file the firm, an additional penalty of $10,000 per month, up to $50,000, will be imposed. It may also result in you losing your ability to claim foreign tax credits. Failure to file this form can keep the statute of limitations on auditing your entire tax return open until 3 years after the IRS receives the information that was required to be reported on the form.
Are you a partner in a foreign partnership?
If so, you may be required to file Form 8865, Return of a U.S. Person With Respect to Certain Foreign Partnerships. This form is used when a U.S. Person has interests in a foreign partnership, transfers property to a foreign partnership, or acquires, disposes of, or changes ownership in a foreign partnership.
If you do not file this form, the penalty is $10,000. Starting 90 days after the IRS notifies you that you failed to file the firm, an additional penalty of $10,000 per month, up to $50,000, will be imposed. There is also a penalty on any property transferred to the partnership of 10% of the value of the property. If the failure to file the form was intentional, there is no cap on this 10% penalty. If the failure to file the form was unintentional, the penalty is capped at $100,000.
It may also result in you losing your ability to claim foreign tax credits and losing non-recognition treatment of certain transfers to foreign partnerships. If your tax return for that year is audited and there is an increase in tax related to the partnership, that increase in tax can be subject to a 40% accuracy related penalty (rather than the standard 20%). Failure to file this form can keep the statute of limitations on auditing your entire tax return open until 3 years after the IRS receives the information that was required to be reported on the form.
Do you own an interest in a foreign corporation that earns “passive” income, such as from rental real estate?
If you are a shareholder in a foreign corporation, and that corporation earns 75% or more of its income from “passive” sources, most commonly rental real estate, or if at least 50% of its assets produce passive income or are held to produce passive income, you may have to file Form 8621. This Form is the Return by a U.S. Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, to report gain from a disposition of your interest the company, any distributions you receive from the company, and any elections that may be made for the company (such as choosing to be a “qualified electing fund” or making the “mark-to-market” election).
If your tax return for that year is audited and there is an increase in tax related to the foreign corporation, that increase in tax can be subject to a 40% accuracy related penalty (rather than the standard 20%) if you don’t file the form. Failure to file this form can keep the statute of limitations on auditing your entire tax return open until 3 years after the IRS receives the information that was required to be reported on the form.
Did you receive money as a gift or bequest from overseas or are you involved with a foreign trust?
If so, you may have to file Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. This form is required to report (“you” only refers to “U.S. Persons”):
- If you receive a gift or bequest from a foreign person worth more than $100,000. Penalty for failure to file the form is 5% of the amount of the gift or bequest per month, up to 25%.
- If you receive a gift from a foreign corporation or partnership worth more than $14,000. Penalty for failure to file the form is 5% of the amount of the gift per month, up to 25%.
- If you receive a distribution from a foreign trust, including if that trust lets you use its property. Penalty for failure to file the form is either $10,000 or 35% of the gross value of the property distributed, whichever is more.
- If you borrow money from a related foreign trust. Penalty for failure to file the form is either $10,000 or 35% of the gross value of the property borrowed, whichever is more.
- If you are treated as the owner of any part of a foreign trust under the grantor trust rules. Penalty for failure to file the form is either $10,000 or 5% of the trust assets deemed to be owned by you, whichever is more.
- If you create a foreign trust. Penalty for failure to file the form is either $10,000 or 35% of the gross value of the property at issue, whichever is more.
- If you transfer money or property to a foreign trust. Penalty for failure to file the form is either $10,000 or 35% of the gross value of the property at issue, whichever is more.
- If a U.S. person who owns part of a foreign trust under the grantor trust rules dies or if a part of a foreign trust was includable in the deceased U.S. Person’s gross estate. Penalty for failure to file the form is either $10,000 or 35% of the gross value of the property at issue, whichever is more.
- If you think that any of these items above may apply to you and you did not file the indicated form, you should contact your tax advisor right away. The Offshore Voluntary Disclosure program, or one of the numerous streamlined options with limited penalties, may be available to help you mitigate these penalties.
So as you can see, the world of offshore disclosure beyond that "FBAR rainbow" is quite extensive. The good news is that penalties are capped inside the Offshore Voluntary Disclosure Program. If you think you may have unfiled or misfiled foreign reporting requirements, contact us to set up a complimentary, confidential strategy session with our International Department.
*Please note that these explanations are for general application and may not cover all circumstances in which you are required or not required to file one of the forms listed. You should always consult with a tax adviser who is aware of your specific situation for advice about what forms you are and are not required to file.
