American Bar Association Section of Taxation 2011 Midyear Meeting Foreign Activities of U.S. Taxpayers January 21, 2011 Boca Raton, Florida Panelists: David B. Bailey, Associate Chief Counsel (Int l), STR-Br 4, Internal Revenue Service, Washington, DC J. Brian Davis, International Tax Director, Viacom Inc., New York, NY Michael A. DiFronzo, PricewaterhouseCoopers LLP, Washington, DC Joseph M. Erwin, Attorney at Law, Dallas, TX Jeffrey Johnson, Technical Advisor, LB&I, Internal Revenue Service, Washington, DC List of Contents: Charts: Form: Quick Reference Guide to International Penalties List of International Forms for U.S. Tax Compliance International Penalties International Penalties Subject to or t Subject to Deficiency Procedures Reasonable Cause Relief Comparison of 31 U.S.C. 5314 and I.R.C. 6038D Draft Form 8938 Statement of Foreign Financial Assets
Quick Reference Guide to International Penalties ADAPTED FROM Internal Revenue Manual, 20.1.9 International Penalties, Exhibit 20.1.9-1 (11-20-2007) TAXPAYER FILING REQUIREMENT IRC 1. U.S. person with interest in a foreign corporation (FC) or a foreign partnership (FP). FC - Form 5471 FP - Form 8865 FCs & FPs w/ FDE - Form 8858 2. Penalty reducing foreign tax credit. FCs - Form 5471 FPs - Form 8865 FCs & FPs w/ FDEs - Form 8858 6038(b) 6038(c) 3. 25 percent foreign-owned U.S. corporations. Form 5472 6038A(d) 4. 25 percent foreign-owned U.S. corporations that fail to (i) authorize the reporting corporation to act as agent of a foreign related party or (ii) substantially comply with a summons for information. 5. Transferor of certain property to foreign persons (corporations and partnership). N/A FC - Form 926 FP - Form 8865 Sch O 6038A(e) 6038B(c) 6. Foreign corporations engaged in U.S. business Form 5472 6038C(c) 7. Foreign corporations engaged in U.S. business that fail to (i) authorize reporting corporation to act as agent of a foreign related party or (ii) substantially comply with a summons for information. 8. Individuals receiving gifts from foreign sources exceeding $10,000 (adjusted for cost of living). 9. Individuals that relinquish their U.S. citizenship or abandon their longterm resident status. 10, Foreign persons holding direct investments in U.S. real property interests. 11. U.S. person who transfers to or receives a distribution from a foreign trust. N/A Form 3520 Form 8854 N/A Form 3520 6038C(d) 6039F(c) 6677(b) 6039G 6652(f) 6677(a) 12. U.S. Owner of a foreign trust. Form 3520-A 6677(b) 13. Failure to file returns with respect to acquisitions of interests in foreign corporations or foreign partnerships under 6046 or 6046A, or foreign personal holding company information under 6035. 14. Foreign corporation failure to file personal holding company tax return. Form 5471, Sch. O for 6046. Form 8865 Sch. P for 6046A. Form 5471, Sch. N for 6035. 6679 Form 1120 Sch. PH 6683 15. DISC, IC-DISC, or FSC failure to file returns or supply information. Form 1120-DISC Form 1120-IC-DISC, or Form 1120-FSC 16. Allocation of Individual Income Tax to Guam or the CMNI. Form 5074 6688 6686 17. Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession. Form 8898 6688 18. Allocation of Individual Income Tax to the Virgin Islands. Form 8689 6688 2
19. Taxpayer s failure to file notice of foreign tax redetermination under 905(c) or 404A(g)(2). 20. Taxpayer s failure to file notice of foreign deferred compensation plan under 404A(g)(2). Form 1116 or Form 1118 (attached to 1040-X or 1120-X) 6689 N/A 6689 21. Taxpayer s failure to disclose treaty-based return position. Form 8833 or statement 6712 3
List of International Forms for U.S. Tax Compliance ADAPTED FROM Internal Revenue Manual, 20.1.9 - International Penalties, Reference Guide to Forms, Exhibit 20.1.9-2 (11-20-2007) FORM DESCRIPTION 1. 926 Return by Transferor of Property to a Foreign Corporation 2. 941-SS Employer s Quarterly Tax Return for American Samoa, Guam, the Commonwealth of the rthern Mariana Islands, and the U.S. Virgin Islands 3. 1040-C U.S. Departing Alien Income Tax Return 4. 1040NR 1040-SS U.S. nresident Alien Income Tax Return U.S. Self-Employment Tax Return (including the Additional Child Tax Credit for Bona Fide Residents of Puerto Rico) U.S. Virgin Islands, Guam, American Samoa, the Commonwealth of the rthern Mariana Islands (CNMI), or Puerto Rico 5. 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons 6. 1042-S Foreign Person s U.S. Source Income Subject to Withholding 1042-T Annual Summary and Transmittal of Forms 1042-S 7. 1116 Computation of Foreign Tax Credit (Individual, Estate or Trust) 8. 1118 Computation of Foreign Tax Credit - Corporations 1120-F U.S. Income Tax Return of a Foreign Corporation 9. 1120-FSC U.S. Income Tax Return of a Foreign Sales Corporation 10. 1120-DISC U.S. Income Tax Return of a Domestic International Sales Corporation 11. 1120-IC-DISC U.S. Income Tax Return of an Interest Charge Domestic International Sales Corporation 12. 2063 U.S. Departing Alien Income Tax Statement 13. 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts 14. 3520-A Annual Return of Foreign Trust with U.S. Owner 15. 5074 Allocation of Individual Income Tax to Guam or Commonwealth of the rthern Mariana Islands 16. 5344 Examination Examined Closing Record 17. 5471 Information Return of U.S. Person with Respect to Certain Foreign Corporations 18. 5472 Information Return of a 25% Foreign-Owned U.S. Corporation of a Foreign Corporation Engaged in a U.S. Trade or Business 19. 8278 Computation and Assessment of Miscellaneous Penalties 20. 21. 8288 8288-A U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests Statement of Withholding on Disposition by Foreign Persons of U.S. Real Property Interests 22. 8689 Allocation of Individual Income Tax to the Virgin Islands 23. 8804 Annual Return for Partnership Withholding Tax (Section 1446) 24. 8805 Foreign Partner s Information Statement of Section 1446 Withholding Tax 4
8806 Information Return for Acquisition of Control or Substantial Change in Capital Structure 25. 8813 Partnership Withholding Tax Payment (Section 1446) 8832 Entity Classification Election 26. 8833 Treaty Based Return Position Disclosure Under Section 6114 or 7701(b) 8840 Closer Connection Exception Statement for Aliens 8848 Consent to Extend the Time to Assess the Branch Profits Tax Under Regulations Section 1.884-2(a) and (c) 27. 8854 Initial and Annual Expatriation Information Statement 28. 8858 Information Return of U.S. Persons with Respect to Foreign Disregarded Entities 29. 8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships 30. 8898 Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession 31. 8938 Statement of Foreign Financial Assets TD F 90-22.1 Report of Foreign Bank and Financial Accounts 32. W-2VI U.S. Virgin Islands Wage and Tax Statement 33. W-2GU Guam Wage and Tax Statement 34. W-2AS American Samoa Wage and Tax Statement 35. W-8BEN Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding 36. 37. 38. W-8ECI W-8EXP W-8IMY W-8CE Certificate of Foreign Person s Claim That Income is Effectively Connected With the Conduct of a Trade or Business in the United States Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain Branches for United States Tax Withholding tice of Expatriation and Waiver of Treaty Benefits 5
International Penalties ADAPTED FROM Quick Guide for Reference Numbers to Process International Penalty Assessments, Internal Revenue Manual, 20.1.9 International Penalties, Exhibit 20.1.9-3 (11-20-2007) IRS REFERENCE NO. 603 Failure of Foreign Corporation Engaged in a U. S. Business to Furnish Information or Maintain Records PENALTY PENALTY RATE / AMOUNT IRC $10,000 per failure within 90 days of initial notification, plus an additional penalty of $10,000 after the expiration of such 90-day period. maximum penalty amount. 6038C(c) 604 Failure of Foreign Person to File Return Regarding Direct Investment in U. S. Real Property Interests 605 Failure to File (FTF) Returns or Supply Information by DISC or FSC 613 FTF Form 5471 Sch O (Sec. 6046) / Form 8865 Sch P (Sec. 6046A) $25 each day of failure. Max at lesser of $25,000 or 5% of aggregate FMV of U.S. real property interest $100 each failure (max $25,000) to supply info and $1,000 for each FTF 1120 DISC or -FSC $10,000 per failure within 90 days of initial notification. Additional penalty of $10,000 for each 30-day period after the expiration of such 90-day period not to exceed $50,000 6652(f) 6686 6679 614 FTF Form 5471 Sch N (Sec. 6035) $1,000 per period for each failure 6679 619 Penalty for Continued Failure to Provide Information After 90-Day Period $10,000 per each 30-day period after the expiration of the 90-day initial notification period. 6038 6038A 6677 6679 623 FTF Form 5471 / Form 8865 $10,000 per failure plus FTC reduction within 90- day initial notification period not to exceed $50,000. 6038(b) 625 Failure to Provide Information with Respect to Certain Foreign-Owned Corporations (Form 5472) $10,000 per failure within 90 days of initial notification, plus an additional penalty of $10,000 after the expiration of such 90-day period. maximum penalty amount. 6038A 659 FTF Form 3520 transactions with foreign trusts (IRC Sec. 6048(a)) 660 FTF Form 3520-A Foreign Trust with U.S. Owner (IRC Sec. 6048(b)) 669 (IMF) FTF Form 8898 Regarding Residence in a U.S. Possession required by IRC sec. 937(c) 35% of the gross reportable amount 6677(a) 5% of the gross reportable amount 6677(b) $1,000 per failure for tax years ending after 10/22/04. $100 per failure for tax years ending before 10/23/04. 6688 FTF Form 5074 Allocation of Income Tax to Guam or CNMI required by IRC sec. 7654 and Regulations sec. 301.7654-1(d) FTF Form 8689 Allocation of Income Tax to VI required by IRC sec. 932(a) and Regulations sec. 1.932-1T(b)(1) 671 (IMF) Failure to File an Information Statement Regarding Loss of U. S. Citizenship or Long-term Permanent Residency FTF Form 8854 regarding expatriation $1,000 per failure for tax years ending after 10/22/04. $100 per failure for tax years ending before 10/23/04. $1,000 per failure for tax years ending after 10/22/04. $100 per failure for tax years ending before 10/23/04. $10,000 or the greater of 5% of the required tax OR $1,000 per failure for expatriation after or before June 4, 2004, respectively. 6688 6688 6039G 6
676 FTF Form 926/Form 8865 Sch O 10% of the fair market value of property at time of transfer or exchange, not to exceed $100,000. maximum amount of penalty for failure due to intentional disregard. 6038B 668 FTF Form 3520 for reporting receipt of certain foreign gifts 5% of the amount of the gift per month not to exceed 25% 6039F 1. Prior to 2003 Reference Number 677 was used to assess IRC 6677/6048 in relation to Forms 3520 and 3520-A. 2. Check current version of the Form 8278 on publish.no.irs.gov,for the most up to date listing of penalty reference numbers. 7
International Penalties Subject to or t Subject to Deficiency Procedures ADAPTED FROM Internal Revenue Manual, 20.1.9 International Penalties, Exhibit 20.1.9-4 (11-20-2007) IRC FORM AMOUNT 6038(b) FC 5471 $10,000 for initial failure and $10,000 continuation penalty for each 30 day period after 90 days notice (Continuation penalty not to exceed $50,000) (reflects increase for tax years beginning after 8/5/97). 6038(c) FCs 5471 FPs 8865 FCs & FPs w/fdes 8858 te: FP penalties postponed for tax years after 8/5/97 until final regulations published on 7/22/98. 10% reduction in foreign tax credit plus an additional 5% continuation penalty for each 3-month period after 90 days notice, total not to exceed the greater of $10,000 or foreign business income for accounting period of failure. NOTE: FP penalties for tax years beginning after 8/5/97, postponed until final regulations published on 7/22/98. 6038A(d) 5472 $10,000 for initial failure and $10,000 continuation penalty for each 30-day period after 90 days notice. 6038A(e) N/A Determination of deductions and costs for transaction based upon information available to Secretary. DEFICIENCY PROCEDURES BACKGROUND FCs tax years beginning after 1962; FPs tax years ending after 12/31/00; FCs & FPs w/ FDEs tax years of tax owner (FC or FP) beginning on or after 01/01/ 2004. FCs tax years beginning after 1962; FPs tax years ending after 12/31/00; FCs & FPs w/ FDEs tax years of tax owner (FC or FP) beginning on or after 01/01/2004. Tax years beginning after 1982. Tax years beginning after 7/10/89. 6038B(c) 926 and 8865 Sch O 10% of FMV of property, not to exceed $100,000 (unless intentional disregard) and, if 721 contribution to foreign partnership, the gain is recognized (reflects change for post- 8/5/97 transfers/exchanges)., monetary., gain. Transfers or exchanges to corporations after 1984 and to partnerships after 8/5/97. 6038C(c) 5472 $10,000 for initial failure and $10,000 continuation penalty for each 30-day period after 90 days notice. 6038C(d) N/A Treatment of transaction based upon information available to Secretary. Awaiting regulations Awaiting regulations 6039F(c) 3520 5% of the value of the gift for each month in which the gift is not reported (not to exceed 25%). Also, if the U.S. person fails to file, the tax consequences of the receipt of gift may be determined by the Secretary. 6039F(c)(1)(A) 6039F(c)(1)(B) Amounts received after 8-20-96. 6039G 8854 For tax years prior to 06/04/2004: Greater of 5% of the tax required to be paid under IRC 877 or $1,000 for each taxable year that the initial Form 8854 is not filed. For tax years after June 3, 2004: $10,000 per required annual statement. Prior to 2004: Initial statement due for expatriations after 6/7/97. After 2004: Annual statements due for 10 tax years after expatriation if IRC 877 applies on date of expatriation. 8
6652(f) N/A $25 per day (limited to the lesser of $25,000 or 5% of the fair market value of U.S. real property interests owned during the year). 6677(a) 3520 35% of the gross reportable amount plus continuation penalty of $10,000 per 30-day period after 90 days notice not to exceed gross reportable amount. See tice 97-34. 6677(b) 3520-A 5% of the gross reportable amount plus continuation penalty of $10,000 per 30-day period after 90 days notice not to exceed gross reportable amount. See tice 97-34. 6679 5471, Sch O for 6046 8865 Sch P for 6046A 5471 Sch N for 6035 For foreign corporations and foreign partnerships, $10,000 plus continuation penalty of $10,000 for each 30-day period after 90 days notice (continuation penalty not to exceed $50,000) (reflects increase for transfers/changes after 8/5/97); For foreign personal holding companies (FPHCs), $10,000 penalty per return for tax years of foreign corp. beginning before 1/1/05 (see note under effective date). 6652(f)(1) 6679(b) Awaiting 6039C regulations. Reportable events and distributions after 8/20/96 (see tice 97-34 and Ann. 98-30 for transition rules). Tax years of U.S. person beginning after 1995 (see Ann. 98-30 for transition rules). Corporations 1/1/63 Partnerships 1/1/00 FPHC 1/1/63-12/31/04 NOTE: FPHC provisions repealed effective taxable years of foreign corp. beginning after 12/31/04, and to tax years of U.S. shareholders w/ or w/in which such tax year of foreign corp. ends. 6683 1120, Sch PH 10% of personal holding company income tax (including 541 tax). Tax years after 1966. 6686 1120 DISC 1120-IC DISC, or 1120-FSC $100 for each failure to supply information not to exceed $25,000; $1,000 for each failure to file return. DISC tax years beginning after 1971. FSC tax years ending after 1984. 6688 5074 and 8689 $100 for each failure to file Form 5074 with U.S. income tax return. Tax years beginning after 1972. Effective for tax years ending after 10/22/04 penalty is increased to $1,000 per failure. 8898 New form effective for tax years ending after 10/22/04 Penalty is increased to $1,000 per failure. New form effective for tax years ending after 10/22/04. te: AJCA 908 made this provision retroactive 3 years to include tax years 2001, 2002, and 2003. 6689 1116 or 1118 (attach to 1040-X or 1120-X) Foreign tax redetermination under 905(c) or 404A(g)(2) 5% of the deficiency if the failure is for not more than one month, and an additional 5% for each month or fraction thereof while the failure continues not to exceed 25% of the deficiency. Awaiting regulations (applies to redeterminations after 1979). N/A Foreign deferred compensation plan under 404A(g)(2) 5% of the deficiency if the failure is for not more than one month, and an additional 5% for each month or fraction thereof while the failure continues not to exceed 25% of the deficiency. Awaiting regulations (applies to employer contributions for tax years after 1979). 9
6712 8833 For each separate treaty-based position taken and not properly disclosed, $10,000 for C corporations and $1,000 for all other taxpayers. Returns due after 1988. 10
Reasonable Cause Relief ADAPTED FROM Internal Revenue Manual, 20.1.9 International Penalties, Exhibit 20.1.9-5 (11-20-2007) IRC FORM 6038(b) FCs 5471 FPs 8865 FCs & FPs with FDEs 8858 6038(c) FCs 5471 FPs 8865 FCs & FPs with FDEs 8858 REASONABLE CAUSE RELIEF 6038A(d) 5472 6038A(e) N/A N/A 6038B(c) 926 8865 Sch O 6038C(c) 5472 6038C(d) N/A N/A 6038D 8938? 6039F(c) 3520 6039G 8854 6652(f) N/A 6677(a) 3520 6677(b) 3520-A 6679 5471 Sch O for 6046 8865 Sch P for 6046A 5471 Sch N for 6035 6683 1120 Sch PH 6686 1120-DISC, 1120-IC-DISC, or 1120-FSC 6688 5074 8689 8898 6689 1116 or 1118 (attach to 1040-X or 1120-X) 11
CHART COMPARING 31 U.S.C. 5314 With I.R.C. 6038D Description TYPE OF TAXPAYER TIME PERIOD COVERED INFORMATION DUE DATE TYPE OF INTEREST IN FOREIGN FINANCIAL ACCOUNTS/ASSE TS VALUE MAKING FOREIGN ACCOUNT OR ASSET REPORTABLE TYPE OF FOREIGN FINANCIAL ACCOUNT OR ASSET REPORTABLE 31 U.S.C. section 5314 Provisions U.S. person (defined as individual, corporation, or any partnership, trust estate, a joint stock company, or other unincorporated organization or group 1 ) means a citizen or resident of the U.S. or a person in and doing business in the U.S. Any time during the calendar year. June 30, with no extensions. Financial interest in, or signature authority over, foreign financial accounts. Aggregate value of financial accounts exceeds $10,000. Bank account, securities account, or other financial account in a foreign country. Term also includes savings, demand, checking, deposit, time deposit, or other account (including debit card and prepaid credit card accounts) maintained with a financial institution or other person engaged in the business of a financial institution. I.R.C. section 6038D Provisions Individual, U.S. citizen or resident alien, or domestic entity formed or availed of for purposes of holding, directly or indirectly, specified foreign financial assets. Taxable year. April 15, with extensions. Any interest in foreign financial asset. Aggregate value of all such assets exceeds $50,000. 1. Any financial account maintained by a foreign financial institution. 2. Any of the following assets which are not held in an account maintained by a financial institution A. Any stock or security issued by a person other than a U.S. person. 2 B. Any financial instrument or contract held for investment that has an issuer or counterparty which is other than a U.S. person. C. Any interest in a foreign entity. 12