Foreign Information Reporting and Compliance Howard B. Epstein, CPA FREED MAXICK Michael J. Tedesco, Esq. ANDREOZZI BLUESTEIN LLP - 1 -
What to Expect Discuss some of the most common information reporting forms relating to foreign assets and common mistakes. Explain penalty and punitive tax treatment for unmet, late or incomplete information filings. Brief overview of current methods for getting clients into full compliance with any unmet or incomplete filing obligations. - 2 -
Foreign Information Reporting Forms 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or Foreign Corporation Engaged in a U.S. Trade or Business 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations 8621 - Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund 3520 - Annual Return to Report Transaction With Foreign Trusts and Receipt of Certain Foreign Gifts - 3 -
Foreign Information Reporting Forms (cont.) 3520A Annual Information Return of Foreign Trust with a U.S. Owner FBAR FinCEN Form 114 (Annual Report of Foreign Accounts) Form 8938 Statement of Foreign Financial Assets - 4 -
Form 5472 Required if at least one foreign owner of a Corp. owns 25% or more of U.S. Co. Must list all direct and ultimate indirect owners Disclose reportable transactions between reporting corporation and foreign related party - 5 -
Form 5472 (cont.) Examples of Reportable Transactions Sales/purchases of stock in trade (inventory) Technical, managerial, engineering and like services Amount borrowed/loaned Interest/Commission paid/received Royalties paid/received Common Errors If no reportable transaction = don t have to file Info reported on tax returns not on 5472 Failure to file Form 1042 or related W-8 BEN s - 6 -
Form 5472 (cont.) Penalty Considerations A non-filed or late Form 5471 is penalized with a $10,000 penalty Reasonable cause exception Automatic assertion in recent years Cannot be filed separate from the tax return Subject to a continuation penalty Other Considerations Holds Statute of Limitations open - 7 -
Form 5471 Purpose Used by U.S. citizen or resident who is a shareholder, officer or director of foreign corporation to satisfy reporting requirements under IRC Sections 6038 & 6046 US Person Definition Citizen or resident of the U.S. A domestic partnership or corporation A U.S. estate or trust - 8 -
Form 5471 (cont.) US Shareholder Definition Owns directly/indirectly/constructively 10% or more of stock Owns directly/indirectly/constructively ANY stock in a captive insurance company - 9 -
Form 5471 (cont.) Categories of Filing 2 and 3: Relate to reporting for when a U.S. person acquires or disposes of stock during the year 4: U.S. person had control (>50%) of foreign corporation for 30 day period 5: Owns directly/indirectly/constructively 10% or more of stock and on the last day of the year - 10 -
Form 5471 (cont.) Common Errors Incomplete filing Schedule H E&P Adjustments Schedule O Schedule M Include even if blank Current year items should agree - 11 -
Form 5471 (cont.) Penalty Considerations $10,000 for late filing Subject to a continuation penalty Possible reduction in foreign tax credits Other Considerations May need to file Form 926 - Return by a U.S. Transferor of Property to a Foreign Corporation Holds Statute of Limitations open - 12 -
Form 8621 Purpose Used to fulfill certain informational filing requirements for a US person that is a direct or indirect shareholder of a Passive Foreign Investment Company (PFIC) under the following circumstances Receive certain direct/indirect distributions from PFIC Recognize gain or direct/indirect sale of PFIC stock Report information related to a QEF or mark-to-market election Making certain elections Reporting certain annual information required related to PFIC investments - 13 -
Form 8621 (cont.) Definition of PFIC A foreign corporation is a PFIC if it meets either the income or assets test: Income Test 75% or more of gross income is passive income Asset Test at least 50% of the average percentage of assets held by the corp are assets that produce passive income CFC Overlap rule if a corporation is both a CFC and a PFIC, it will be treated as a CFC Examples of PFICs Foreign Mutual Funds Foreign Private Company with US shareholders - 14 -
Form 8621 (cont.) Reporting Regimes Qualified Electing Fund (QEF) Mark to Market (only available if publicly traded) Excess Distribution (default) - 15 -
Form 8621 (cont.) Common Errors Failure to identify an entity is a PFIC Failure to make QEF elections Inability to get current or historical data Failure to file if pass-through entities don t file for the US person Reporting properly on return Foreign Mutual funds within foreign retirement plans - 16 -
Form 3520 Who Must File: U.S. person who transferred property to a foreign trust U.S. owner or beneficiary of a foreign trust US individual receives a gift > $100,000 from a nonresident alien or foreign estate Copy filed with 1040 and also separately Due April 15 th No separate extension required - 17 -
Form 3520 (cont.) Examples: Traditional Foreign Trust Liechtenstein Stiftung Foreign Retirement Arrangements: Australian Superannuation fund Canadian RESP & TFSA - 18 -
Form 3520 (cont.) Common Errors Not reporting distributions correctly on Part III Failure to identify foreign trusts Late Filing Failure to provide Foreign Grantor Trust Owner Statement or Foreign Grantor Trust Beneficiary Statement Failure to report all distributions Distributions subject to throwback tax and interest calculation - 19 -
Form 3520 (cont.) Penalty Considerations IRC 6677 Greater of $10,000 penalty for non-filing or late filing or 35% of gross value of property transferred to foreign trust 35% of gross value of distributions from foreign trust 5% of gross value of the portion of assets of the foreign trust treated as owned by a U.S. person under grantor trust rules - 20 -
Form 3520 (cont.) Penalty Considerations (cont.): Subject to continuation penalty Penalty under I.R.C. Section 6662(j) Penalties relating to foreign gifts 5% per month until filed maxing out at 25% Reasonable Cause exception to all penalties Penalties asserted for a Form 3520 do not reduce or offset those that could be asserted for a late filed or non-filed Form 3520-A - 21 -
Form 3520-A Purpose provides information about foreign trusts and U.S. Beneficiaries Penalties = greater of $10,000 or 5% if gross value of portion if trust treated as owned by U.S. person Due March 15 th and extend on separate 7004 Reported using U.S. income tax principles - 22 -
Form 3520 - A (cont.) Common Errors Proper reporting of items Getting info from foreign brokers Failure to extend separately - 23 -
Form 3520-A (cont.) Penalty Considerations Greater of $10,000 or 5% of the portion of trust assets treated as owned by the U.S. person Subject to continuation penalties Application of I.R.C. Section6662(j) Penalty for the 3520-A does not limit penalty potential for non-filing of Form 3520 Reasonable cause exception - 24 -
FBAR (FinCEN Form 114) Purpose Filed by U.S. person Report financial interest or signature authority over a foreign financial account (exceeding certain thresholds) Includes: Bank account Brokerage account Mutual fund Trust Other - 25 -
FBAR (FinCEN Form 114) (cont.) Who Must File U.S. person with financial interest in or signature authority over at least one account located outside the United States; And The aggregate value of all financial accounts exceeded $10,000 at anytime during the calendar year - 26 -
FBAR (FinCEN Form 114) (cont.) Filing: Due April 15 th but can be extended until October 15 th Must be filed electronically with FinCen; not IRS Answer questions on Schedule B and file Form 114-27 -
FBAR (FinCEN Form 114) (cont.) Common Errors Not reporting all accounts that represent financial interest or signature authority Not correctly answering questions on Schedule B U.S. persons residing in foreign countries unaware of filing requirements - 28 -
FBAR (FinCEN Form 114) (cont.) Penalty Considerations Non-willful Maximum $10,000 per account, per year As a practical matter IRS has developed a structure for the non-willful penalties Willful Greater of $100,000 or 50% of the account balance Can be applied in each open year (i.e. penalties equal to 3 times the account balance) Reasonable cause exception - 29 -
Form 8938 Purpose Report specified foreign assets Who Must File: Individuals and certain entities that have an interest in specified foreign assets that meet the reporting threshold - 30 -
Form 8938 (cont.) Filing Filed with tax return to IRS By extended due date of return May be required for individuals, trusts, partnerships, corporations, or S-corporations. Report current income from disclosed assets on 8938 Part III Some types of specified foreign assets are excepted in Part IV - 31 -
Form 8938 (cont.) Common Errors Failure to include current year income from disclosed assets Indicate number of forms filed for Excepted Specified Foreign Financial Assets Reporting all Specified Foreign Financial Assets - 32 -
Form 8938 (cont.) Penalty Considerations $10,000 penalty for non-filing or late filing Subject to continuation penalties Holds Statute of Limitations open Subject to I.R.C. 6662(j) Reasonable cause exception - 33 -
Disclosure Options Disclosure options where an untimely information return filing obligation is discovered before IRS contacts taxpayer Delinquent Return Procedures Foreign and Domestic Streamlined Submission Procedures Offshore Voluntary Disclosure Program (OVDP) - 34 -
Delinquent International Information Return Submission Procedures Available to taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who: 1. Have not filed one or more required international information returns, 2. Have reasonable cause for not timely filing the information returns, 3. Are not under civil examination or criminal investigation by IRS, and 4. Have not already been contacted by IRS about the delinquent information returns - 35 -
Delinquent International Information Return Submission Procedures (cont.) Must certify that any entity for which the forms are being filed was not engaged in tax evasion Must attach reasonable cause statement FAQ explains that having unreported income does not preclude use of this procedure Still subject to normal audit procedures IRS may determine explanation does not meet reasonable cause and apply a penalty - 36 -
Delinquent FBAR Submission Procedures Available for taxpayers who do not need to use either the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who: 1. Have not filed one or more required FBAR return, 2. Have reasonable cause for not timely filing the FBAR return, 3. Are not under civil examination or criminal investigation by IRS, and 4. Have not already been contacted by IRS about the delinquent FBAR - 37 -
Foreign Streamlined Generally, requires three (3) years of Income tax returns and six (6) years of FBARs Must certify non-willfulness Must use caution with respect to narrow definition of nonresident - Many taxpayers actually residing outside the U.S. may not qualify because of days present in the U.S. - IRS modified the Certification to include check boxes for which years meet the nonresident requirement No penalty asserted under this program Consider potential for Streamlined audits - 38 -
Domestic Streamlined Generally, requires three (3) years of income tax returns and six (6) years of FBARs Must certify non-willfulness Can only make an amended return submission under the program 5% miscellaneous penalty Consider potential for streamlined audits - 39 -
OVDP Clearance through IRS Criminal Investigation Requires eight (8) years of tax returns, information returns and FBARs Title 26 miscellaneous penalty of 27.5% (in certain cases 50%) - 40 -
General Considerations Regarding Penalty Issues International penalty appeals are subject to Coordinated Issue Procedures To date, IRS Appeals has a single FBAR coordinator with final say on Appeals determinations If dealing with FBAR and other foreign penalty issue, separate coordinators will be involved Potential for significantly different appeals settlements - 41 -
General Considerations Regarding Penalty Issues (cont.) Appeals settlement proposal requires review and concurrence Possible disagreement between Appeals Officer and Coordinator at this time Coordinator has final say - 42 -
Thank you! Howard Epstein, CPA International Tax Director 424 Main Street, Suite 800, Buffalo NY 14202 (P) 716-332-2644 (E) howard.epstein@freedmaxick.com (W) www.freedmaxick.com Michael J. Tedesco, Esq. 9145 Main Street, Clarence NY 14031 (P) 716-565-1100 (E) mjt@andreozzibluestein.com (W) www.andreozzibluestein.com - 43 -