TurboTax is probably a fine program for certain types of simple tax returns. For those who are W-2 employees and receive any other income with a 1099, TurboTax may be something that you can use to prepare a reasonably decent 1040.
Where TurboTax gets dangerous
When it comes to foreign income or assets, we are not saying that it is impossible to get the correct result using TurboTax, we are just saying it is unlikely. First, TurboTax does not support the filling of the following forms:
- 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner
- Form 5471: Information Return of U.S. Persons With Respect To Certain Foreign Corporations
- Form 8858: Information Return of U.S. Persons With Respect To Foreign Disregarded Entities
- FBAR: Report of Foreign Bank and Financial Accounts
Second, TurboTax is a software program. It cannot do what an actual person can do. That is, it can not explain the intricacies of the tax code into actionable advice to you. For instance: Did you know that Foreign Life Insurance might not really be "life insurance" for IRS tax purposes? Rather, it may be considered an investment vehicle that you have to pay taxes on. You may even have onerous PFIC (Passive Foreign Investment Company) accounting to do along with filling out Form 8621. Did you know that foreign retirements plans may actually be considered foreign trusts — meaning Form 3520 and/or Form 3520-A may apply?
Failure to file the other noted forms, 3520, 3520-A, 5471, 8858, has a $10,000 penalty for each occurrence for every form. If you fail to file Form 5471 or Form 8938 it also leaves the statute of limitations open forever, or until the form is filed. This is also known as the CSED – Collection Statute Expiration Date.
Taxes can't be that complicated…right?
Dealing with foreign income and assets is completely unlike a domestic tax return if you make an error. With a regular return, the IRS would simply contact you to alert you to the error. With the above forms, they can penalize you and take your money even if no taxes are due.
If you need assistance with your return, or if you area concerned because you just realized you have filing requirements you didn't know about, contact us. We can help. Call us at 888-727-8796 or email info@irsmedic.com.
