International Tax Compliance Panelists John Hinding, Director, Cross Border Activities Practice Area, IRS * Zhanna A. Ziering, Caplin & Drysdale, Chartered Peter Farrell, Baker Botts Victor A. Jaramillo, Caplin & Drysdale, Chartered Daniel J. Bell, McDermott Will & Emery LLP Moderator Clay Collins, PwC LLP * The views expressed herein are not necessarily those of the IRS.
Common International Forms Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation 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 Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Corporation Form 1116, Foreign Tax Credit (Individual, Estate or Trust) Form 8833, Treaty Based Return Position Disclosure Form 8938, Statement of Specified Foreign Financial Assets FinCEN Form 114, FBAR 2
Threshold Questions Is there an entity? If there is an entity, is it a business entity or a trust? If it is a business entity, is it an eligible entity? If it is an eligible entity, what is its default classification? Has it properly elected a classification other than the default? 3
Entity Classification Rules Found in Treas. Reg. 301.7701-1 to -4 with respect to entities. Treas. Reg. 301.7701-5 can be used to determine whether a business entity is foreign or domestic place of organization controls. Using these rules, you can determine whether an entity is an association (corporation), partnership, or disregarded entity for U.S. federal income tax purposes. 4
Entity Classification Rules Important Take-Aways for This Presentation Contractual arrangements can crate entities - Treas. Reg. 301.7701-1 Business entities with two or more members are classified as either partnerships or a corporation, if one owner then either corporation or disregarded - Treas. Reg. 301.7701-2 Per Se Corporations found in Treas. Reg. 301.77(b)(8) List of foreign entities treated as per se corporations means cannot check the box and not an eligible entity Eligible Entities can elect their status for U.S. tax purposes under Treas. Reg. 301.7701-3 5
Entity Classification Rules Important Take-Aways for This Presentation Treas. Reg. 301.7701-3(b) provides certain default classifications. Foreign eligible entities will be classified as: A Partnership: If it has two or more members and at least one member does not have limited liability An Association (Corporation): If all members have limited liability. A Disregarded Entity: If it has a single owner that does not have limited liability. NOTE: Need to look to local law and governing instruments to determine liability, and compare to Treas. Reg. 301.7701-3(b)(2)(ii) Treas. Reg. 301.7701-4 assists in determining if an entity is a trust for U.S. tax purposes, which generally occurs when trustees take title to property for the purpose of protecting or conserving it for the beneficiaries instead of operating the trust as a business to make a profit. 6
Form 926 Who Must File U.S. persons acquiring a more than 10% ownership interest in a foreign corporation or transfer more than $100,000 to a foreign corporation during the tax year. Also may be required to file Form 5471 or Form 8621 for the same foreign entity in the same year. Penalty- IRC 6038B 10% of the fair market value of the property at the time of the exchange or transfer, capped at $100,000, unless failure to comply was due to intentional disregard 40% accuracy related penalty can apply (IRC 6662(j)) Exam Procedures IRM 20.1.9.7 Suspension of period of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, period of limitations is suspended only with respect to items related to the form. IRC 6038B(a)(1)(A) Treas. Reg. 1.6038B-1(b) 7
Form 5471 Who Must File A US citizen or resident officer or director who has either: Acquired stock which meets the 10% ownership requirement (vote or value), or Increased his or her holdings by 10% during the year. A US citizen or resident who has: Acquired stock during the year resulting in 10% or more ownership, or Become a citizen or resident during the year while holding 10% or more ownership, or Disposed of a sufficient amount of stock to fall under the 10% ownership during the year (IRC 6046 file Schedule O) A US citizen or resident who had control (more than 50% of vote or value) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the corporation. A US citizen or resident who owns stock in an entity that was a CFC for an uninterrupted period of at least 30 days during any tax year of the foreign corporation and who owned that stock on the last day of that year. 8
Form 5471 (cont.) Penalties : $10,000 initial penalty, plus additional $10,000 penalty per 30-day period, or fraction thereof, after the IRS has mailed a notice of failure, capped at a total of $50,000 (IRC 6038(b)) Reduction of foreign tax credits (IRC 6038(c)) Failure to furnish information and timely file a return required under IRC 6046 (which is Schedule O of Form 5471) (IRC 6679, same penalties as IRC 6038(b)) Criminal penalties (IRC 7203, 7206, and 7207) Accuracy-related penalty increased under IRC 6662(j) to 40% penalty available Exam Procedures -- IRM 20.1.9.3.1 Suspension of period of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, period of limitations is suspended only with respect to items related to the form. 9
Form 5471 (cont.) Different Constructive and Indirect Ownership Rules for Categories of Filers Use rules under IRC 6046 and Treas. Reg. 1.6046-1(i) for Category 2 and Category 3 filers. Attribution from siblings and grandparents, and attribution from non-resident aliens ( NRAs ) Attribution only from foreign entities (i.e., corporations and partnerships), and not from U.S. entities, nongrantor trusts, or estates Use rules under IRC 6038(e)(2), which refer to IRC 318(a), for Category 4 filers. No attribution from siblings or grandparents, but attribution from NRAs Attribution from U.S. and foreign entities, and from trusts and estates Use CFC rules under IRC 958 for Category 5 filers. No attribution from non-resident aliens to family members, entities, trusts, or estates 10
Form 5471 (cont.) Example: Husband (U.S. citizen) and Wife (NRA) own ForCo and acquired their interest in a prior year and are not directors or officers of ForCo. Husband owns 9% and Wife owns the other 91% of ForCo. What are the Form 5471 reporting consequences for the 2017 tax year? ForCo is not a CFC for U.S. tax purposes because Husband is not attributed his NRA Wife s interest under IRC 958(b)(1). No Category 5 filing requirement. However, Husband would be attributed NRA Wife s 91% interest under the Category 4 constructive ownership rules. Because Husband owns a direct interest in ForCo, he would have a Form 5471, Category 4 filing obligation because he would be deemed to own 100% of the stock in ForCo. 11
Form 3520 Required under IRC 6048 (Reporting with respect to certain foreign trusts) & IRC 6039F (Reporting of large gifts/bequests) See also Notice 97-34 Who Must File A U.S. person who during the year: Is considered the owner of all or a portion of a foreign trust Contributes property to a foreign trust Receives a distribution from a foreign trust Makes loans or receives loans from the trust Held outstanding obligation of a related trust, which was reported as qualified obligation Executor of a U.S. estate, where decedent (1) made transfer to a foreign trust by reason of death, (2) was treated as owner of foreign trust at death, or (3) estate includes any portion of the assets of a foreign trust 12
Form 3520 (cont.) Who Must File (cont.) A U.S. person who during the year: Receives certain gifts from non-u.s. persons (more than $100,000 from a nonresident alien individual or a foreign estate and more than $10,000 in the aggregate from foreign corporations and partnerships). Exceptions to Form 3520 reporting: U.S. persons who make transfers to Canadian Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs). See Notice 2003-75 and the instructions to Form 8891. Generally, foreign trusts described in IRC 402(b), IRC 404(a)(4), IRC 404A, or IRC 501(c)(3) are not reportable under these requirements. See IRC 6048(a)(3)(B)(ii) and Notice 97-34. Transfers involving fair market value sales are also not reportable. See IRC 6048(a)(3)(B)(i), Notice 97-34; IRC 679, and the regulations thereunder for additional information. 13
Form 3520 (cont.) Penalties IRC 6039F (Failure to report a large gift (or bequest)) 5% of the amount of such foreign gift (or bequest) for each month for which the failure continues after the due date capped at 25% of such amount. IRC 6677(a) (Failure to File Information with Respect to Certain Foreign Trusts) Greater of $10,000 or : 35% of the gross reportable amount of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of, or transfer to, a foreign trust; 35% of the gross reportable amount of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution; or If any failure continues more than 90 days after notice of failure, additional penalties will apply of $10,000 for each 30-day period (or fraction thereof) during which such failure continues. Maximum penalty (both initial penalty and continuation penalty) for each failure to file Form 3520 is the gross reportable amount each year. 14
Form 3520 (cont.) Penalties (cont.) IRC 6677(a) (Failure to File Information with Respect to Certain Foreign Trusts) (cont.) Failure to identify a qualified obligation transfer to a foreign trust for a fair market value in exchange for an obligation as described in Notice 97-34 will result in the obligation being reclassified as a gratuitous transfer to the trust Exam procedures -- IRM 20.1.9.10 & IRM 20.1.9.13 Suspension of period of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, period of limitations is suspended only with respect to items related to the form. IRC 6501(c)(8) applies only with respect to transfers to the foreign trust under IRC 6048 Failure to report large gifts or bequests from foreign persons under IRC 6039F would only keep the statute open for that violation under IRC 6501(c)(3) (failure to file a tax return) 15
Form 3520-A IRC 6048(b) and Notice 97-34 Who Must File U.S. person who is deemed to own a foreign trust under the grantor trust rules Earlier law required trustee of a foreign trust with a U.S. owner to file, but current law indicates U.S. owner files In most cases where a foreign trust has a US grantor, the trust will be considered a foreign grantor trust with a US owner pursuant to IRC 679 Penalty IRC 6677(b)(2). 5% of the gross value of the portion of the trust s assets treated as owned by the US person. If failure to file continues for more than 90 days after the date the notice of the failure is mailed, the penalty is increased by an additional $10,000 for each 30 day period during which such failure continues 16
Form 3520-A (cont.) Penalty (cont.) Maximum penalty (both initial penalty and continuation penalty) for each failure to file Form 3520 is the gross reportable amount each year. Exam procedures IRM 20.1.19.14 Suspension of period of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, period of limitations is suspended only with respect to items related to the form. 17
Form 8833 Who Must File Taxpayer claiming a tax treaty based position on the tax return (IRC 6114) Generally filed with income tax return or on due date of return Code section IRC 6114- Taxpayer must disclose each treaty based return position. IRC 7701(b) dual resident taxpayers make treaty based return position disclosure required for resolution of conflicting claims of residence Penalties IRC 6712 $1,000 for an individual or $10,000 for a C corporation for each failure to report Exam Procedures IRM 20.1.9.20 18
Form 5472 Required under IRC 6038A Who Must File: A reporting corporation 25% foreign-owned U.S. corporation or a foreign corporation engaged in a trade or business in the United States must report transactions it engages in with a related party. Penalties- IRC 6038A(d) The initial penalty is $10,000 for each failure during a taxable year to: Timely file a separate Form 5472 with respect to each related party with which it had a reportable transaction during such taxable year, Maintain the required records relating to a reportable transaction, or In the case of records maintained outside the U.S., meet the non-u.s. record maintenance requirements. 19
Form 5472 (cont.) Penalties- IRC 6038A(d) Continuation penalties: Any failure continues more than 90 days after the notice of failure (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period Exam Procedures--IRM 20.1.9.5 Suspension of statute of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, SOL is suspended only with respect to items related to the form 20
Form 8865 Required under IRC 6038; Treas. Reg. 1.6038-3(a). Who Must File: Certain US persons who own a portion of the partnership or who make contributions to or receive distributions from the partnership (IRC 6038B File Schedule O) A US person who controlled the partnership (more than 50% capital, profits, deductions or losses). A US person who owned at least 10% of the partnership (more than 10% capital, profits, deductions or losses) while US persons owning at least 10% each controlled the partnership. Certain US persons who make contributions to the partnership during the year. Certain US persons who acquires or disposes or has a substantial change in proportional interest of a partnership interest during the year. (IRC 6046A File Schedule P) 21
Form 8865 (cont.) Penalties $10,000 initial penalty, plus additional $10,000 penalty per 30-day period, or fraction thereof, after the IRS has mailed a notice of failure capped at a total of $50,000 (IRC 6038(b)) Reduction of foreign tax credits (IRC 6038(c)) Failure to furnish information and timely file a return required under IRC 6046A regarding acquisitions and dispositions of partnership interests (Schedule P of Form 8865) (IRC 6679, same penalties as IRC 6038(b)) Criminal penalties (IRC 7203, 7206, and 7207) Accuracy-related penalty increase under IRC 6662(j) to 40% penalty available Exam Procedures -- IRM 20.1.9.3.1 Suspension of period of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, period of limitations is suspended only with respect to items related to the form. 22
Form 8865 (cont.) Same Constructive and Indirect Ownership Rules for Categories of Filers Use rules under IRC 267(c) with certain modifications Family attribution from spouse, siblings, ancestors, and lineal descendants Can have attribution from NRA only if U.S. person holds a direct or indirect (through entity, trust, or estate) in the foreign partnership Proportionate ownership attribution from entities, estates, and trusts No partner-to-partner attribution rule IRC 267(c)(3) 23
Form 8865 (cont.) Example: Father (NRA) gifts Son (U.S. citizen) the remainder interest in his father s foreign partnership interest in 2017. Father owns 95% of a foreign partnership with another unrelated NRA that owns the remaining 5%. Assume that the value of Son s remainder interest in foreign partnership using the IRS Tables is greater than 50% of the value of the partnership. Does Son need to file a Form 8865 for 2017 even though he only holds a reminder property interest? Yes. NRA Father s interest in foreign partnership will be attributed from NRA Father to Son here under the family attribution rules since Son owns a direct interest in the foreign partnership. Even though Son s interest is a remainder interest, Son will have a Form 8865 filing obligation. Does Son also need to file a Form 3520 to report the gift from his NRA father? It depends. Need to know the value of the foreign partnership interest gifted and if NRA Father made ay other gifts to U.S. citizen Son. 24
Form 1116 Who Must File Taxpayers claiming foreign tax credit must include Form 1116 with their income tax return Can take either as a credit or deduction Under IRC 905(c) must notify the IRS of foreign tax authority redetermination of foreign tax Penalty General tax return penalties Penalties for failure to notify the IRS of a foreign tax redetermination with respect to amount of foreign taxes paid, accrued, or deemed paid by taxpayer (IRC 6689) 5% of the deficiency if the failure to file a notice is for not for more than 1 month; An additional 5% of the deficiency for each month (or fraction thereof) during which the failure continues, but not to exceed in the aggregate 25% of the deficiency; and This penalty is in lieu of the accuracy-related penalties under IRC 6662 Exam Procedures IRM 20.1.9.19.1 (Failure to file notice of foreign tax redetermination) 25
Form 8621 IRC 1291-1298; IRC 1298(f) (filing requirement); Treas. Reg. 1.1298-1(b) Who Must File All US owners (direct or indirect) of PFICs are required to file an annual information statement disclosing PFIC ownership, even if no elections, distributions, or sales (required as of 3/18/2010 (HIRE Act), previously, if no distributions, gains, elections, etc, were being made, no requirement to file) Various postponements of annual reporting (Notice 2010-34, Notice 2011-55, Dec 2011 Form 8621 instructions) 2016 Final Regulations provide, among other things, that US persons owning stock of a PFIC through a tax exempt organization or account (as described in Treas. Reg. sec. 1.1298-1(c)(1)) are not attributed ownership of a PFIC for purposes of applying the PFIC rules. Filed with taxpayer s income tax return Separate Form 8621 needed for each PFIC 26
Form 8621 (cont.) Penalty No direct monetary penalty for failing to file Form 8621, although an individual shareholder of a PFIC could be subject to a $10,000 penalty for the failure to report a PFIC investment on Form 8938 (failure to comply with IRC 6038D requirements) Suspension of the period of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, period of limitations is suspended only with respect to items related to the form. 27
Form 8938 Required under IRC 6038D Who Must File A U.S. Citizen, resident alien, or nonresident alien who elects to be treated as resident alien or is a resident of American Samoa or Puerto Rico, whose aggregate value of specified foreign financial assets ( SFFAs ) exceeds reporting threshold: Unmarried or married filing separate returns: $50,000 on last day of tax year or $75,000 at any time during tax year Joint return: $100,000 on last day of tax year or $150,000 at any time during tax year Taxpayer living abroad who s aggregate value of SFFAs exceeds: Unmarried or married filing separate returns: $200,000 on last day of the tax year or $300,000 threshold Joint return: $400,000 on last day of tax year or $600,000 at any time during tax year. 28
Form 8938 (cont.) Who Must File (cont.) SFFA Financial account maintained by foreign financial institution and certain assets not held in an account maintained by a financial institution (e.g., stock or security issued by person other than U.S. person, financial instrument or contract held for investment that has an issuer or counterparty which is other than a U.S. person, interest in foreign entity). (IRC 6038D(b)). Exam Procedures IRM 20.1.9.22 29
Form 8938 (cont.) Penalty IRC 6038D(d). Failure to file - $10,000 penalty. If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. The maximum continuation penalty is limited to $50,000 per failure. Accuracy Related Penalty increase to 40% may apply. (IRC 6662(j)(3). Duplicative Reporting Exception an SFFA does not need to be reported on Form 8938 if SFFA reported on a timely-filed Forms 3520, 3520-A, 5471, 8865, 8621. Suspension of statute of limitations on assessment under IRC 6501(c)(8) on all items unless failure to file is due to reasonable cause. If there is reasonable cause, SOL is suspended only with respect to items related to the form 30
International Penalties International Penalties under IRC include: IRC 6038 penalties IRC 6677 penalties IRC 6679 penalties IRC 6662(j) Increase in accuracy related penalty from 20% to 40% if the understatement relates to undisclosed foreign financial assets. Undisclosed foreign financial asset is any asset with respect to which information was required to be provided under IRC 6038, 6038B, 6038D, 6046A, or 6048. 31
Appeal and Litigation Fora International Penalties are not subject to deficiency procedures and must be assessed before coming to Appeals. International penalties generally have post-assessment pre-payment appeal rights. IRM 8.11.5. Such penalties cannot be litigated in the Tax Court (unless by way of CDP hearing). IRC 6702 penalty Youssefzadeh v. Commissioner, No. 14868-14 (Nov. 6, 2015) Callahan v. Commissioner, 130 T.C. 130 44 (2008). Rice v. Commissioner, T.C. Memo. 2009-169. IRC 6707A penalty Yari v. Commissioner, 143 T.C. 157 (2014) IRC 6672 penalty Mason v. Commissioner, 132 T.C. 44 (2009) IRC 6700 penalty Harry v. Commissioner, T.C. Memo. 2009-206 Taxpayer can pay the penalty and bring a refund claim Brian Chivas James v. U.S., No. 8:110cv0271-T-30AEP (M.D. Fla., Au. 14, 2012) (Failure to File Form 3520) 32
Appeals Form Post-assessment, prepayment penalty Appeal? Form 5471 Yes IRM 8.11.5.2 Form 8865 yes IRM Appeals Section Form 5472 Yes IRM 8.11.5.3 & 8.11.5.5 Form 8938 Yes IRM 8.11.5.13 Form 3520 Yes Form 3520-A Yes IRM 8.11.5.9 IRM 8.11.5.6 (IRC 6039F) and IRM 8.11.5.8 Form 926 Yes IRM 8.11.5.4.1 Form 1116 Yes IRM 8.11.5.11 Form 8833 Yes -- 33
Tax Court Jurisdiction (Deficiency Proceedings) Code Description Form Deficiency Proceedings IRC 6038(b) IRC 6038(c) Information Reporting With Respect to Certain Foreign Corporations and Partnerships Penalty for Failure to Furnish Information Penalty of Reducing Foreign Tax Credit Plus Continuation Penalty Form 5471, Form 8858, or Form 8865 Form 5471, Form 8858, or Form 8865 No Yes IRC 6038A(d) Information Reporting for Foreign-Owned Corporations Form 5472 No IRC 6038B(c) Failure to Provide Notice of Transfers to Foreign Persons Form 926 or Form 8865 Schedule O No for penalty. Yes for tax on gain IRC 6038C(c) Information With Respect to Foreign Corporations Engaged in U.S. Business Form 5472 No IRC 6038D Failure to Provide Information With Respect to Specified Foreign Financial Assets Form 8938 No IRC 6039F(c) Gifts from Foreign Persons Form 3520 Yes if IRC 6039F(c)(1)(A). No if IRC 6039F(c)(1)(B). 34
Tax Court Jurisdiction (Deficiency Proceedings) Code Description Form Deficiency Proceedings IRC 6039G Expatriation Reporting Requirements Form 8854, Form W-8CE No IRC 6677(a) Failure to File a Foreign Trust Information Return Form 3520 No IRC 6677(b) Failure to File an Information Return With Respect to U.S. Owners of a Foreign Trust Form 3520-A No IRC 6679 Return of U.S. Persons With Respect to Certain Foreign Corporations and Partnerships Form 5471 Schedule O, Form 8865 Schedule P, or Form 5471 Schedule No N IRC 6688 Reporting for Residents of U.S. Possessions Form 5074, Form 8689 or Form 8898 Yes IRC 6689 Failure to File Notice of Foreign Tax Redetermination Form 1116 or Form 1118 (attach to Form 1040-X or Form 1120-X) No IRC 6712 Failure to Disclose Treaty-Based Return Position Form 8833 No 35
Reasonable Cause Relief Reasonable cause applies to most, but not all, of the international penalties. The IRM provides that taxpayers who conduct business or transactions offshore or in foreign countries have a responsibility to exercise ordinary business care and prudence in determining their filing obligations and other requirements. It is not reasonable or prudent for taxpayers to have no knowledge of, or to solely rely on others for, the tax treatment of international transactions. IRM 20.1.9.1.1 Examiners instructed to consider reasonable cause prior to assessing the penalty Reasonable cause does not apply to penalties assessable after the taxpayer was notified of the requirement to file or was requested to provide specific required information (i.e., continuation penalties) The fact that reasonable cause relief was granted to the related income tax return does not automatically provide relief for the failure to timely file the information returns. 36
Reasonable Cause Relief (cont.) The IRM also provides that reasonable cause should not be granted (due to unique nature and risks associated with international transactions ) merely because: 1) A foreign country would impose penalties on them for disclosing the required information, 2) A foreign trustee refuses to provide them information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, or 3) The taxpayer relied on another person to file returns. It is the taxpayer s responsibility to ensure that all returns are filed timely and accurately. Examiners instructed not to consider reasonable cause until the taxpayer is in full compliance for all open years (not under extension) with the respective provisions of the law. IRM Exhibit 20.1.9-5 Reasonable cause must be set forth in a written statement, signed under penalties of perjury. 37
FBAR Penalties 31 U.S.C. 5314 and 31 C.F.R. 1010.350 Who Must File U.S. Person that has a financial interest in or signature authority over foreign financial accounts, the aggregate value of which exceeds $10,000 at any time during the year U.S. Person includes U.S. Citizens, U.S. residents, trusts, estates, corporations, partnerships, and other entities formed under the laws of the United States Filers must also maintain records for a period of five years (31 C.F.R. 1010.420). 38
FBAR Penalties (cont.) Civil Penalties: 31 USC 5321 Up to $10,000 per non-willful violation For willful violations Greater of $100,000 or 50% of the amount in the account (aggregate total) at the time of the violation. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty. Willfulness is shown by the person s knowledge of the reporting requirements and the person s conscious choice not to comply with the requirements. Reckless disregard or willful blindness was sufficient to sustain a willful penalty Limit under the IRS Interim Guidance, May 2015 Criminal penalties 31 USC 5322 5 years, or $250,000 fine or both If part of illegal activity, can be increased up to 10 years, or $500,000 or both 39
FBAR Penalties (cont.) IRM provisions IRM 4.26.16 (Law, Filing Requirements, and Penalties) IRM 4.26.17 (Exam Procedures) IRM 8.11.6 (Appeals) Reasonable Cause available? Yes to non-willful penalty (31 U.S.C. 5321(a)(5)(B)(ii)) Unclear as to willful penalties Willful penalties are set forth in 31 U.S.C. 5321(a)(5)(C) and reasonable cause defense is set forth in 31 U.S.C. 5321(a)(5)(B) as defense to nonwillful penalties However, if the taxpayer has reasonable cause for failure to file, it may be difficult for the government to prove willfulness 40
FBAR Penalties: Litigation Fora Tax Court does not have jurisdiction Williams v. Commissioner, 131 T.C. 54 (Oct. 2, 2008) Government can file claim in District Court Taxpayer can file for refund in District Court (Little Tucker Act) or Court of Federal Claims (Tucker Act) FBAR penalties not dischargeable in bankruptcy U.S. v. Simonelli, 614 F. Supp. 2d 241 (D. Conn. 2008) Right to a Jury Trial District Court Yes, for claims brought by the government in District Court No, for claims brought by taxpayers unless the government counterclaims (28 U.S.C. 2402) Court of Federal Claim no right to a jury trial 41
FBAR: Penalties Collection The IRS has been delegated the authority to assess FBAR penalties, but it does not have the authority to enforce collection activity. The government has 2 years to sue to collect from the later of the assessment date or the date any judgment becomes final in a criminal action involving the same transaction that resulted in the penalty. Collection Remedies listed in 31 U.S.C. 3711(g)(9) include: administrative offset, tax refund offset, federal salary offset, referral to a private collection contractor, referral to agencies operating a debt collection center, reporting the delinquencies to a credit reporting bureau, garnishing the wages of delinquent debtors, litigation, foreclosure. 42
Offshore Compliance Options Offshore Voluntary Disclosure Program Streamlined Filing Compliance Procedures U.S. Persons Living Outside the United States U.S. Persons Living Inside the United States Delinquent FBAR Procedure Delinquent International Information Return Procedure Who should consider this option Taxpayers whose noncompliance conduct was willful Persons living outside the United States who were not aware of their U.S. tax obligations or whose noncompliance was non-willful Taxpayers whose noncompliance conduct was non-willful Persons not seeking treatment under OVDP or Streamlined Procedures but who failed to file FBARs Persons not seeking treatment under OVDP or Streamlined Procedures but who failed to file international information returns Penalties Miscellaneous Title 26 offshore penalty of 27.5% (or 50%) in lieu of other applicable penalties Delinquency penalties, accuracy-related penalties, information return penalties, and FBAR penalties are waived Miscellaneous Title 26 offshore penalty of 5% in lieu of other applicable penalties No automatic penalties; Safe harbor if account was reported and all tax was paid; Taxpayer provides statement of reasonable cause No automatic penalties; taxpayer provides statement of reasonable cause Covered period 8 years 3 years for income tax returns; 6 years for FBARs 3 years for income tax returns; 6 years for FBARs Up to taxpayer Up to taxpayer CI protection Yes No No No No Closing agreement Yes No No No No 43