Summary of potential IRS Reporting requirements and civil penalties.
The following summary of potential reporting requirements and civil penalties is not necessarily all encompassing, and it is unlikely that any one taxpayer would be subject to all of the reporting obligations or penalties listed below.
(1) Penalties for failure to comply with the Bank Secrecy Act requirement that U.S. persons report their financial interests in, or authority over, financial accounts located in a foreign country.
U.S. citizens, residents, and certain other persons, must annually report their financial interest in, or signature authority (or other authority that is comparable to signature authority) over, a financial account (such as a bank or investment account) that is maintained with a financial institution located in a foreign country if, for any calendar year, the aggregate value of all foreign accounts exceeded $10,000 at any time during the year. This reporting requirement is met by filing Form TD F 90-22.1 (Report of Foreign Bank Accounts, commonly known as an “FBAR”). FBAR used to be filed on paper with the Department of the Treasury facility located in Detroit and were not to be filed with the Tax Returns; the filing date for the FBARs is June 30th. The requirement to file FBARs is in the regulations under 31 U.S.C. §5314 (which is a provision of the Bank Secrecy Act). FBAR is now required to be filed online with the BSA E-filing System of the Financial Crimes Enforcement Network before June 30th of the following natural year and its new name is FinCEN Form 114. Generally the Civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50% of the total balance of the foreign account. Criminal penalties may also apply. Refer to IRM 188.8.131.52 for additional FBAR penalty considerations.
(2) Fraud Penalties (Sections 6651(f) and 6663):
Where an underpayment of tax, or failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75% of the unpaid tax.
(3) Failure to File a Tax Return (Section 6651):
When a taxpayer is required to file a Tax return and does not do so on or before the due date of the rerun, Section 6651(a)(1) imposes a penalty of 5% of the net Tax amount required to be shown on the tax return for each month (or fraction of a month)that the return is late. The maximum penalty is 25%. This penalty is increased to 15% with a maximum of 75%, if taxpayer’s failure to file is fraudulent.
(4) Failure to Pay Tax Penalties (Section 6651(a)(2) and 6651(a)(3)):
When a taxpayer fails to timely pay the amount of tax shown on the return, Section 6651(a)(2) imposes a late payment penalty equal to 5% of the late payment for each month (or part of a Month) that the payment is late. The maximum penalty is 25%
When taxpayer fails to pay a tax that is required to be (but was not) shown on a return within 21 days after the date of the Service’s notice and demand for that tax. Section 6651(a)(3) imposes a penalty of 5% for each month (or part thereof) that the assessment remains unpaid. The maximum penalty is 25%.
(5) Accuracy-related Penalty (Section6662):
The accuracy-related penalty for underpayments is imposed at the rate of 20% on the portion of any underpayment of tax required to be shown on a return attributable to negligence, a substantial understatement of tax, a substantial overstatement of pension liabilities or a substantial estate or gift valuation understatement. The accuracy-related penalty with respect to substantial valuation misstatement can be as high as 40%
(6) Penalties for failure to file certain information returns (Sections 6035, 6038, 6038A, 6038B, 6038C, 6039F, 6046, 6046A and 6048):
Form 5471. Information Return of U.S. Persons With Respect To Certain Foreign Corporations. U.S. persons who are officers, directors or shareholders in certain foreign corporations (including, for example, an International Business Corporation used in an offshore scheme) report information required by Sections 6035, 6038, and 6046, and compute in come from controlled foreign corporations under Sections 951-964. The penalties for failing to file each one of these information returns is $10.000, with an additional $10,000 added for each month the failure continues beginning 90 days after taxpayer is notified of the delinquency, up to a maximum of $50,000per return.
Form 8865. Return of U.S. person With Respect of Certain Foreign Partnerships. U.S. persons with certain interest in foreign partnerships use this form to report interests in and transactions of foreign partnerships, transfer of property to the foreign partnership and acquisitions, dispositions and changes in the foreign partnership interests under Sections 6038, 6038B, and 60346A. Penalties include $210.000 for failure to file each return, with an additional $10.000 additional $10.000 added each month the failure continues beginning 90 days after the taxpayer is notify of the delinquency, up to a maximum of $50.000 per return and 10% of the value of any transferred property that is not reported, subject to a $100,000 limit.
Form 5472. Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporations Engaged in a U.S. Trade or Business.Reports transactions between a 25% foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by Sections 6038A and 6038B. The penalties for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, is $10.000 with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notify of the delinquency, up to a maximum of $50,000 per rerun.
Form 926. Return by a U.S. Transferor of Property to a Foreign Corporation. Reports transfer of property to a foreign corporation and to report information under Section 6038B. The penalty for failing to file each one of these information returns is 10% of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was international.
Form 3520. Annual Return to Report Transactions with Foreign Trust and Receipt of Certain Foreign Gifts. Reports various transactions involving foreign trust, including creation of a foreign trust by a U.S. person, transfer of property from a U.S. person to a foreign trust and receipt of distributions from foreign trusts under Section 6048.This return also reports the receipt of gifts from foreign entities under section 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 35% of the gross reportable amount, except for returns reporting gifts, where the penalty is 5% of the gift per month, up to a maximum penalty of 25% of the gift.
Form 3520-A. Annual Information Return of Foreign Trust with a U.S. Owner. Reports ownership interest in foreign trust, by U.S. persons with various interests in and powers over such trust under Section 6048(b). The penalty for failing to file each one of these information returns, or for filing an incomplete return, is 5% of the gross value of trust asset determined to be owned by the U.S. Person.
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