At the American Bar Association Taxation Section’s annual meeting in Washington, D.C., in May, 2019, IRS representatives said the IRS continues examining evidence of Americans’ foreign financial accounts, and seeking additional such evidence. The import of this cryptic message is clear: Americans should comply with U.S. laws concerning foreign financial accounts as soon as possible, and those who fail to comply do so at their peril.
The Bank Secrecy Act requires Americans to report their interests in foreign financial accounts on FinCEN Form 114, Report of Foreign Bank and Financial Accounts (“FBAR”).
The Internal Revenue Code requires Americans to report their income from foreign financial accounts on their United States income tax return. The Internal Revenue Code also requires Americans to report their interests in foreign financial accounts on various information returns, including Form 8938, Statement of Foreign Financial Assets; Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund; Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations; Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships; Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner; and Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.
The IRS imposes severe penalties for failure to comply with U.S. laws concerning foreign financial accounts. The IRS tends not to impose the penalties where the taxpayer voluntarily complies with the law without the IRS bringing the delinquency to the taxpayer’s attention. Accordingly, Americans should become compliant with U.S. laws concerning foreign financial accounts as soon as possible.
The statute of limitations on assessment of the civil penalty for failure to file an FBAR is six years, and it begins to run when the FBAR is due, whether or not it is filed. Therefore, in our foreign accounts cases, we file delinquent or amended FBARs needed by the taxpayer for the last six years.
The statute of limitations on assessment with respect to an income tax return is three years. It begins running when the tax return is filed. The assessment statute of limitations does not begin running on a tax return which is not filed. Nor does the assessment statute of limitations begin running on a tax for a year for which the taxpayer has failed to file Form 8938, Form 8621, Form 5471, Form 8865, Form 3520, Form 3520-A, or Form 926. There is no assessment statute of limitations on a filed tax return which fraudulently understates the tax liability.
The Internal Revenue Service’s Streamlined Procedures are a good means of bringing the taxpayer into compliance with the Internal Revenue Code with respect to foreign financial accounts. In a Streamlined Procedures filing, the taxpayer files amended U.S. income tax returns, including any delinquent information returns, needed for the last three years. The taxpayer pays any tax and interest due for the last three years. In a Streamlined Procedures submission for a resident of the U.S., the taxpayer pays a “miscellaneous Title 26 offshore” penalty equal to five percent of the taxpayer’s high year-end balance of foreign financial accounts over the preceding six years.
Delinquent (previously unfiled) income tax returns may be filed in a Streamlined Procedures submission by a nonresident of the U.S., but not in a Streamlined Procedures submission by a nonresident of the U.S. The taxpayer does not incur a miscellaneous Title 26 offshore penalty in a Streamlined Procedures submission by a nonresident of the U.S.
The Streamlined Procedures, for residents of the U.S. or nonresidents, are available only for taxpayers whose noncompliance was nonwillful.
In a successful Streamlined Procedures filing, noncompliance by way of understated tax or unfiled information returns for years before the last three years is forgiven.
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