Since 2009 I have helped hundreds of individuals and companies become compliant with United States laws concerning foreign income, accounts, and entities, and defended them against penalties for alleged noncompliance. I call this area of practice “foreign accounts compliance.” I represent clients the world over in this practice.
Citizens or residents of the United States (“U.S. persons”) must report their worldwide income on a U.S. income tax return. “Residents” of the U.S. for this purpose includes lawful permanent residents of the U.S. (“green card” holders), as well as individuals who satisfy the “substantial presence” test (essentially, individuals who reside in the U.S., with exceptions).
A U.S. person with interests in foreign financial accounts aggregating more than $10,000 at any time during the year must report the accounts on a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) filed for that year. A U.S person is subject to a $10,000 penalty for filing to file a timely, complete FBAR. If the failure to file an FBAR is determined to be willful, the penalty is 50 percent of the taxpayer’s highest aggregate balance of foreign financial accounts during the year, or $100,000, whichever is higher.
A U.S. person with foreign financial investments above specified thresholds during the year must report the foreign financial investments on a Form 8938, Statement of Specified Foreign Financial Assets, filed for that year. Failure to file a timely Form 8938 is subject to a penalty of $10,000, or more if the noncompliance continues after the IRS notifies the taxpayer of it.
A U.S. person, including a domestic corporation, owning an interest in a foreign corporation during the year must report the interest on a Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, filed for that year. Failure to file a timely Form 5471 is subject to a penalty of $10,000, or more if the noncompliance continues after the IRS notifies the U.S. person of it. A like penalty lies for failure to file a timely Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
A U.S. person who makes a transfer to a foreign corporation must report the transfer on Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Failure to file a Form 926 that is timely and accurate is subject to a penalty equal to 10 percent of the fair market value of the property transferred. The penalty is limited to $100,000, unless the failure results from intentional disregard of the law.
U.S. persons must report their interests in foreign trusts on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. The penalty for failure to file a timely Form 3520 is the greater of $10,000 or (1) 35 percent of the value of property transferred to a foreign trust, (2) 35 percent of the value of property received in distribution from a foreign trust, or (3) 5 percent of the value of property held in a foreign trust. The penalty for failure to file a timely Form 3520-A is 5 percent of the value of property held in a foreign trust.
Keep in mind that a foreign custodial arrangement denominated a “trust” may not be a trust in the eyes of the law. If the “settlor” retains dominion and control of the trust property, for his own benefit, the arrangement is not a trust but an account. The penalty for failure to report an account on Form 8938 is a discreet $10,000, whereas the penalty for failure to report an interest in a foreign trust is potentially much higher—a percentage of the value of the assets held in the trust.
A U.S. person is required to report on Form 3520, Part IV gifts or bequests from foreign persons aggregating more than $100,000 during the calendar year. Valuation principles apply in valuing noncash gifts, such as discounts for minority interest and lack of management control apply in valuing a minority interest in a closely-held corporation’s stock. A U.S. person who fails to timely report gifts or bequests on Form 3520, Part IV is subject to a penalty equal to 25 percent of the gifts or bequests.
The assessment statute of limitations on the penalty for failure to timely file an FBAR is six years, and it begins running when the FBAR is due, regardless of when the FBAR is filed.
An international information return such as Form 8938, Form 5471, Form 8865, or Form 965 is filed with the taxpayer’s U.S. income tax return. Form 3520 and Form 3520-A are stand-alone information returns, filed separately under oath from a U.S. income tax return. The statute of limitations on assessment with respect to a U.S. income tax return or international information return is three years from the date the income tax return or information was filed; the assessment statute of limitations does not begin to run on an income tax return or information return that has not been filed. The assessment statute of limitations is six years with respect to an income tax return which understates gross income (1) by more than 25 percent, or (2) by more than $5,000 and the understatement is attributable to income from a foreign financial asset(s) reportable on Form 8938. There is no assessment statute of limitations with respect to a false or fraudulent tax return filed with intent to evade or defeat tax.
Arguments we assert against penalties for alleged noncompliance include the following:
First time abatement, as provided in Internal Revenue Manual 20.1.1.3.2.1
Reasonable cause, as provided in Treasury Regulation § 301.6651-1(c)
Failure to obtain written, supervisory approval required by Internal Revenue Code § 6751(b)
Denial of the taxpayer’s right to due process of law guaranteed by the Fifth Amendment to the U.S. Constitution
An excessive fine, in violation of the Eighth Amendment to the U.S. Constitution
We make these arguments before the IRS Examination Division or the IRS Independent Office of Appeals, and, if necessary, in the U.S. Tax Court. We can also prosecute refund litigation in the U.S. Court of Federal Claims or the U.S. District Court. Most of our cases are resolved to the client’s satisfaction in the IRS Examination Division or IRS Appeals Office, without the need for litigation.
We avail of IRS voluntary disclosure programs to bring taxpayers into compliance with the law while incurring minimal or no penalties. Where a U.S. person files delinquent FBARs voluntarily, without having been prompted by the URS to do so, it is the practice of the IRS not to penalize the taxpayer.
Under the Streamlined Compliance Procedures for Persons Residing in the United States, a taxpayer can file amended U.S. income tax returns as needed for the last three years, with a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, explaining that the taxpayer’s delinquency was not willful. The taxpayer enclosed with the filing checks in payment of tax reported on the returns, and interest on the tax, and a miscellaneous Title 26 offshore penalty equal to 5 percent of the taxpayer’s high aggregate balance of foreign financial accounts over the preceding six years. The IRS reviews the submission and, if it is in order, accepts it, deeming the taxpayer compliant, and forgiving the taxpayer’s noncompliance for earlier years.
Foreign financial accounts held by a foreign corporation that is not a “disregarded entity” are not reportable on a shareholder’s Form 8938.
An accountant prepares the U.S. person’s U.S. income tax returns or amended tax returns, and the U.S. person’s U.S. international information returns. I review the income tax returns and the international information returns. I prepare the Form 14654. I instruct the client on preparation of checks. I prepare a cover letter and submit the package to the IRS.
Under the Streamlined Compliance Procedures for Persons Residing Outside of the United States, a U.S. person files delinquent or amended U.S. income tax returns, as needed, for the last three years with a Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, explaining that the taxpayer’s delinquency was not willful. The U.S. person pays the income tax reported on the tax returns, and interest, but no penalty. The IRS reviews the submission and, if it is in order, accepts it, deeming the taxpayer compliant, and forgiving the taxpayer’s noncompliance for earlier years.
A taxpayer “resides outside of the United States” for purposes of the Streamlined Procedures for Persons Residing Outside of the United States if he or she was physically outside of the U.S. for at least 330 full days in at least one of the last three years.
An accountant prepares the U.S. person’s U.S. income tax returns or amended tax returns, and the U.S. person’s U.S. international information returns. I review the income tax returns and the international information returns. I prepare the Form 14653. I instruct the client on preparation of checks. I prepare a cover letter and submit the package to the IRS.
Sometimes a U.S. person’s best option may be to file delinquent or amended U.S. income tax returns reporting income from foreign sources, along with a reasonable cause statement explaining that the taxpayer’s delinquency was due to reasonable cause and not willful neglect. If the IRS proceeds with penalties, the U.S. person can file a protest letter asserting the taxpayer’s available defenses. Such defenses may include first time abatement, reasonable cause, failure by the IRS to secure written, supervisory approval for the penalties required under Internal Revenue Code § 6751(b), assessment of penalties in violation of the U.S. person’s right to due process of law guaranteed by the Fifth Amendment to the U.S. Constitution, and that the penalties amount to an excessive fine, in violation of the Eighth Amendment to the U.S. Constitution. The IRS Appeals Office will then take up the case.
Upon acceptance of a foreign accounts compliance case comes in, we prepare delinquent FBARs for the taxpayer. Once the taxpayer has reviewed and approved the FBARs, we file them. We have and accountant prepare delinquent or amended U.S. income tax returns prepared for the taxpayer. We prepare the reasonable cause statement or the Form 14654 or Form 14653 as needed for the taxpayer. Once the taxpayer has reviewed and approved the voluntary disclosure package, we submit it, with the client’s checks in payment of tax and interest due and, if applicable, miscellaneous Title 26 offshore penalty. The IRS then accepts the submission, sending the taxpayer and account statement for each year for which we filed a delinquent or amended income tax return for the taxpayer, usually resulting in a small refund due to the taxpayer for each year. The IRS will also send the taxpayer a notice accepting the taxpayer’s self-imposed miscellaneous Title 26 offshore penalty.
Since 2009 I have helped hundreds of individuals and companies become compliant with United States laws concerning foreign income, accounts, and entities, and defended them against penalties for alleged noncompliance. I call this area of practice “foreign accounts compliance.” I represent clients the world over in this practice.
Citizens or residents of the United States (“U.S. persons”) must report their worldwide income on a U.S. income tax return. “Residents” of the U.S. for this purpose includes lawful permanent residents of the U.S. (“green card” holders), as well as individuals who satisfy the “substantial presence” test (essentially, individuals who reside in the U.S., with exceptions).
A U.S. person with interests in foreign financial accounts aggregating more than $10,000 at any time during the year must report the accounts on a FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”) filed for that year. A U.S person is subject to a $10,000 penalty for filing to file a timely, complete FBAR. If the failure to file an FBAR is determined to be willful, the penalty is 50 percent of the taxpayer’s highest aggregate balance of foreign financial accounts during the year, or $100,000, whichever is higher.
A U.S. person with foreign financial investments above specified thresholds during the year must report the foreign financial investments on a Form 8938, Statement of Specified Foreign Financial Assets, filed for that year. Failure to file a timely Form 8938 is subject to a penalty of $10,000, or more if the noncompliance continues after the IRS notifies the taxpayer of it.
A U.S. person, including a domestic corporation, owning an interest in a foreign corporation during the year must report the interest on a Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, filed for that year. Failure to file a timely Form 5471 is subject to a penalty of $10,000, or more if the noncompliance continues after the IRS notifies the U.S. person of it. A like penalty lies for failure to file a timely Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.
A U.S. person who makes a transfer to a foreign corporation must report the transfer on Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Failure to file a Form 926 that is timely and accurate is subject to a penalty equal to 10 percent of the fair market value of the property transferred. The penalty is limited to $100,000, unless the failure results from intentional disregard of the law.
U.S. persons must report their interests in foreign trusts on Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, and on Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner. The penalty for failure to file a timely Form 3520 is the greater of $10,000 or (1) 35 percent of the value of property transferred to a foreign trust, (2) 35 percent of the value of property received in distribution from a foreign trust, or (3) 5 percent of the value of property held in a foreign trust. The penalty for failure to file a timely Form 3520-A is 5 percent of the value of property held in a foreign trust.
Keep in mind that a foreign custodial arrangement denominated a “trust” may not be a trust in the eyes of the law. If the “settlor” retains dominion and control of the trust property, for his own benefit, the arrangement is not a trust but an account. The penalty for failure to report an account on Form 8938 is a discreet $10,000, whereas the penalty for failure to report an interest in a foreign trust is potentially much higher—a percentage of the value of the assets held in the trust.
A U.S. person is required to report on Form 3520, Part IV gifts or bequests from foreign persons aggregating more than $100,000 during the calendar year. Valuation principles apply in valuing noncash gifts, such as discounts for minority interest and lack of management control apply in valuing a minority interest in a closely-held corporation’s stock. A U.S. person who fails to timely report gifts or bequests on Form 3520, Part IV is subject to a penalty equal to 25 percent of the gifts or bequests.
The assessment statute of limitations on the penalty for failure to timely file an FBAR is six years, and it begins running when the FBAR is due, regardless of when the FBAR is filed.
An international information return such as Form 8938, Form 5471, Form 8865, or Form 965 is filed with the taxpayer’s U.S. income tax return. Form 3520 and Form 3520-A are stand-alone information returns, filed separately under oath from a U.S. income tax return. The statute of limitations on assessment with respect to a U.S. income tax return or international information return is three years from the date the income tax return or information was filed; the assessment statute of limitations does not begin to run on an income tax return or information return that has not been filed. The assessment statute of limitations is six years with respect to an income tax return which understates gross income (1) by more than 25 percent, or (2) by more than $5,000 and the understatement is attributable to income from a foreign financial asset(s) reportable on Form 8938. There is no assessment statute of limitations with respect to a false or fraudulent tax return filed with intent to evade or defeat tax.
Arguments we assert against penalties for alleged noncompliance include the following:
First time abatement, as provided in Internal Revenue Manual 20.1.1.3.2.1
Reasonable cause, as provided in Treasury Regulation § 301.6651-1(c)
Failure to obtain written, supervisory approval required by Internal Revenue Code § 6751(b)
Denial of the taxpayer’s right to due process of law guaranteed by the Fifth Amendment to the U.S. Constitution
An excessive fine, in violation of the Eighth Amendment to the U.S. Constitution
We make these arguments before the IRS Examination Division or the IRS Independent Office of Appeals, and, if necessary, in the U.S. Tax Court. We can also prosecute refund litigation in the U.S. Court of Federal Claims or the U.S. District Court. Most of our cases are resolved to the client’s satisfaction in the IRS Examination Division or IRS Appeals Office, without the need for litigation.
We avail of IRS voluntary disclosure programs to bring taxpayers into compliance with the law while incurring minimal or no penalties. Where a U.S. person files delinquent FBARs voluntarily, without having been prompted by the URS to do so, it is the practice of the IRS not to penalize the taxpayer.
Under the Streamlined Compliance Procedures for Persons Residing in the United States, a taxpayer can file amended U.S. income tax returns as needed for the last three years, with a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, explaining that the taxpayer’s delinquency was not willful. The taxpayer enclosed with the filing checks in payment of tax reported on the returns, and interest on the tax, and a miscellaneous Title 26 offshore penalty equal to 5 percent of the taxpayer’s high aggregate balance of foreign financial accounts over the preceding six years. The IRS reviews the submission and, if it is in order, accepts it, deeming the taxpayer compliant, and forgiving the taxpayer’s noncompliance for earlier years.
Foreign financial accounts held by a foreign corporation that is not a “disregarded entity” are not reportable on a shareholder’s Form 8938.
An accountant prepares the U.S. person’s U.S. income tax returns or amended tax returns, and the U.S. person’s U.S. international information returns. I review the income tax returns and the international information returns. I prepare the Form 14654. I instruct the client on preparation of checks. I prepare a cover letter and submit the package to the IRS.
Under the Streamlined Compliance Procedures for Persons Residing Outside of the United States, a U.S. person files delinquent or amended U.S. income tax returns, as needed, for the last three years with a Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, explaining that the taxpayer’s delinquency was not willful. The U.S. person pays the income tax reported on the tax returns, and interest, but no penalty. The IRS reviews the submission and, if it is in order, accepts it, deeming the taxpayer compliant, and forgiving the taxpayer’s noncompliance for earlier years.
A taxpayer “resides outside of the United States” for purposes of the Streamlined Procedures for Persons Residing Outside of the United States if he or she was physically outside of the U.S. for at least 330 full days in at least one of the last three years.
An accountant prepares the U.S. person’s U.S. income tax returns or amended tax returns, and the U.S. person’s U.S. international information returns. I review the income tax returns and the international information returns. I prepare the Form 14653. I instruct the client on preparation of checks. I prepare a cover letter and submit the package to the IRS.
Sometimes a U.S. person’s best option may be to file delinquent or amended U.S. income tax returns reporting income from foreign sources, along with a reasonable cause statement explaining that the taxpayer’s delinquency was due to reasonable cause and not willful neglect. If the IRS proceeds with penalties, the U.S. person can file a protest letter asserting the taxpayer’s available defenses. Such defenses may include first time abatement, reasonable cause, failure by the IRS to secure written, supervisory approval for the penalties required under Internal Revenue Code § 6751(b), assessment of penalties in violation of the U.S. person’s right to due process of law guaranteed by the Fifth Amendment to the U.S. Constitution, and that the penalties amount to an excessive fine, in violation of the Eighth Amendment to the U.S. Constitution. The IRS Appeals Office will then take up the case.
Upon acceptance of a foreign accounts compliance case comes in, we prepare delinquent FBARs for the taxpayer. Once the taxpayer has reviewed and approved the FBARs, we file them. We have and accountant prepare delinquent or amended U.S. income tax returns prepared for the taxpayer. We prepare the reasonable cause statement or the Form 14654 or Form 14653 as needed for the taxpayer. Once the taxpayer has reviewed and approved the voluntary disclosure package, we submit it, with the client’s checks in payment of tax and interest due and, if applicable, miscellaneous Title 26 offshore penalty. The IRS then accepts the submission, sending the taxpayer and account statement for each year for which we filed a delinquent or amended income tax return for the taxpayer, usually resulting in a small refund due to the taxpayer for each year. The IRS will also send the taxpayer a notice accepting the taxpayer’s self-imposed miscellaneous Title 26 offshore penalty.
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