Delinquent U.S. foreign reporting forms are a major source of risk and penalty exposure for U.S. taxpayers. The IRS now imposes an automatic $10,000 penalty on any U.S. federal tax returns that are filed late with attachments, including certain U.S. foreign reporting forms such as the Form 5471 or 5472. U.S. taxpayers, including individuals, companies, trusts, and estates, should be aware that having international cross-border activities could lead to additional U.S. federal tax compliance requirements and substantial penalties for not complying.
The Forms 5471, 8865 or 8858 may need to be filed if the U.S. taxpayer acquires a direct or indirect interest in a foreign corporation, foreign partnership or foreign disregarded entity. There is a $10,000 civil penalty for the failure to file or the failure to timely file a complete and accurate Form 5471, 8865 or 8858. The failure to file these forms could result in additional civil penalties of up to $50,000 for the continuing failure to file or other criminal penalties.
The Form 5472 is required to be filed when a U.S. corporation with a 25% foreign direct or indirect shareholder or a foreign corporation engaged in a U.S. trade or business has a reportable transaction with a U.S. or foreign related party during the tax year. There is a $10,000 civil penalty for the failure to file or the failure to timely file a complete and accurate Form 5472. The failure to file the Form 5472 could result in an additional civil penalty of up to $10,000 for the continuing failure to file or other criminal penalties.
The Foreign Bank Account Report (“FBAR”) Form TD F 90-22.1 is required to be filed if a U.S. person has a financial interest in a foreign account and the highest balance or value in the account exceeds $10,000 at any time during the calendar year. Foreign accounts reportable on the FBAR include foreign bank deposit accounts; securities, investment or brokerage accounts; retirement plan accounts; mutual fund, commodity futures or options accounts; and insurance policies with a cash value. There is a $10,000 civil penalty for the failure to file or the failure to timely file a complete and accurate FBAR. The willful failure to file the FBAR could lead to a penalty which is the greater of $100,000 or 50% of the value of the account at the time of the violation. Additional civil and criminal penalties, including a fine of up to $500,000 and imprisonment for up to five years, could also be imposed for the failure to file the FBAR.
A U.S. individual taxpayer may be required to file the Form 8938 Report of Specified Foreign Financial Assets with the U.S. Federal Form 1040 individual income tax return if the value of the foreign assets is within the applicable filing threshold. For U.S. taxpayers who are married filing jointly, the Form 8938 must be filed if the total value of all reportable foreign assets is greater than $100,000 on the last day of the tax year or greater than $150,000 on any day during the tax year. For U.S. taxpayers who are single, the Form 8938 must be filed if the total value of all reportable foreign assets is greater than $50,000 on the last day of the tax year or greater than $75,000 on any day during the tax year. Foreign assets reportable on the Form 8938 include foreign bank accounts, interests owned in foreign companies, retirement plans, trusts, and estates. There is a $10,000 penalty for the failure to file or the failure to timely file a complete and accurate Form 8938. The failure to file Form 8938 could result in additional penalties for the continuing failure to file, the accuracy-related penalty, fraud for underpayments of U.S. federal tax related to undisclosed foreign assets or other criminal penalties.
A U.S. taxpayer that pays certain types of U.S. source income to a foreign person could be required to withhold 30% U.S. federal nonresident tax on the gross payment to the foreign person. The U.S. taxpayer making the payment of U.S. source income to the foreign person also could be required to file the Forms 1042 and 1042-S to report the withholding. Substantial penalties of 50% or greater of the required tax withholding amount could be imposed for the failure to file the Forms 1042 and 1042-S and the failure to pay the withholding.
U.S. taxpayers who receive gifts from foreign persons, inheritances from foreign estates or who have interests in foreign trusts may be required to file the Form 3520 or 3520-A. The failure to file the Forms 3520 and 3520-A could result in substantial penalties based on the value of the gift or the interest in the trust.
For more information, please contact our international tax advisor at 301.231.6200.