International Information Disclosure Obligations – Part 2: More Information on the Required Forms

Who Must File: U.S. persons (citizens, residents, entities) with foreign financial accounts collectively exceeding $10,000 at any time in a calendar year.

Trigger: Ownership or signature authority over foreign bank, brokerage, or other financial accounts.

Trap: foreign retirement accounts and cryptocurrency held in foreign exchanges should be reported on an FBAR, if the $10,000 threshold is met.

Penalties:

• Non-Willful Violation: Up to $16,536 (2025) per violation
  • $10,000 penalty is adjusted for inflation each year
  • Limited to per-form, not per-account, penalty per Bittner case .
• Willful Violation: Greater of $165,353 (2025) or 50% of the account balance per year
  • Penalty is adjusted for inflation each year
  • Recently, the U.S. District Court for the Northern District of Texas (Fort Worth Division) held that the IRS’s administrative assessment of an FBAR penalty violates the taxpayer’s Seventh Amendment right to a jury trial. The government has appealed the decision to the U.S. Court of Appeals for the Fifth Circuit.
  • Limited to per-form, not per per-account, penalty per Bittner case .
  • In United States v. Williams, the court held that willfulness includes a reckless disregard of the statutory duty to report foreign financial accounts.
  • In United States v. Toth, willful FBAR penalties upheld for an undisclosed Swiss account.

Who Must File: Specified individuals (U.S. citizens, resident aliens and certain non-residence aliens) and domestic entities (domestic corporations, partnerships and trusts)

Trigger: Foreign financial assets exceeding $50,000 (single filers) or $100,000 (joint filers) on the last day of the year or exceeding $75,000 (single filers) or $150,000 (joint filers) at any time during the year. The thresholds are higher for taxpayers living abroad.

What are “foreign financial assets”? Foreign financial assets generally include the same type of accounts reported on the FBARs, and also, foreign stock or securities not held in a financial account, foreign partnership interests and foreign mutual funds.

Trap: foreign retirement accounts and cryptocurrency held in foreign exchanges should be reported on Form 8938 if the applicable threshold is met.

Penalties:

• Failure to File: $10,000 penalty plus up to $50,000 for continued failure.
• Underreported Income: Additional 40% penalty on unreported foreign income.

Who Must File:

• Citizens and residents who are officers, directors, or shareholders (10%+ ownership) in a foreign corporation.
• Depending on the specific category of filer an individual fits in, there are different schedules, statements, and other information that must be completed on Form 5471.

Trigger: Ownership, control, or transactions with a foreign corporation.

Penalties:

• Failure to File: Minimum $10,000 per violation, increasing with continued noncompliance.
• Additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return

CFCs (Subpart F Income and GILTI Income). Additionally, if U.S. shareholders (that own at least a 10% stake in the corporation) collectively own 50% or more of the foreign corporation, then, the corporation may be considered a controlled foreign corporation (CFC) and there are very complex rules and tax liability that applies to the U.S. shareholders which is beyond the scope of this article. Note that attribution rules apply to these percentages, including family attribution under §958(b) and §318, which can unexpectedly cause U.S. persons to meet the ownership thresholds. Attribution rules treat U.S. persons as owning stock of a CFC held by certain family members and entities.

Who Must File: Citizen, resident, domestic partnership/corporation, estate, or trust with 10% or more interest in a foreign partnership.

Trigger: Control or substantial ownership in a foreign partnership.

Penalties: $10,000 per violation with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return, AND ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Who Must File: Citizen, resident, domestic partnership/corporation, estate, or trust with an interest in a foreign disregarded entity (e.g., a sole proprietorship).

Trigger: Control or ownership of a disregarded entity.

Penalties: $10,000 per violation.

Who Must File: Citizen, resident, domestic partnership/corporation, estate, or trust receiving large foreign gifts or distributions from foreign trusts.

Trigger:

• Foreign gifts over $100,000.
• Foreign trust ownership or distributions.

Foreign retirement plans: May be considered trusts and may be reportable and taxable in the U.S., subject to the following:

• Under Rev. Proc. 2020-17 and proposed Treasury Regulation section 1.6048-5, a “tax-favored foreign retirement trust” is exempt from reporting obligations and U.S. taxation, but only if certain conditions are met.
• Tax treaties may provide for special treatment of foreign retirement plans, e.g., the U.S.-Canada tax treaty provides special treatment for Canadian Registered Retirement Savings Plan (RRSP)
• Certain foreign benefits may be treated as nontaxable U.S. social security benefits for U.S. tax purposes.

Penalties:

• The penalty for failing to file Form 3520 to report transaction with foreign trusts and receipt of certain foreign gifts was the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty was five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
• The IRS previous practice was to automatically assess penalties, even when a reasonable cause statement was attached. However, on October 24, 2024, IRS Commissioner, Daniel Werfel, announced that the IRS will stop assessing penalties immediately for late-filed Forms 3520/3520-A, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts/Annual Information Return of Foreign Trust With a US Owner, relating to a US Person's receipt of foreign gifts and bequests and certain foreign trust reporting. Instead, the IRS will review reasonable cause statements, and any other information provided by the taxpayer, before issuing such penalties.”

Who Must File: The trust with the U.S. owner, but, if the trust does not file, then the U.S. owner is required to file a substitute Form 3520-A themselves to avoid the penalty.

Trigger:

• Foreign trust with U.S. owner

Penalties: Greater of:

• $10,000 or
• 5% of the value of the trust assets owned by the U.S. owner.
• At the end of 2024, the IRS started reviewing reasonable cause statements attached to late-filed Forms 3520 and 3520-A for the trust portion of the form BEFORE assessing any penalty.

Who Must File: Specified individuals transferring property to a foreign corporation.

Trigger: Transfers over certain thresholds.

Penalties: 10% of the fair market value of the transfer.

Who Must File: Specified individuals holding shares in a PFIC (foreign mutual funds, foreign ETFs, etc.).

Trigger: Ownership of a PFIC at any point in the year.

Penalties: Taxed at highest ordinary income rate, plus interest on deferred gains.

Who Must File: Specified individuals taking a return position that a U.S. income tax treaty overrides or modifies provisions of the Internal Revenue Code (IRC). This is to disclose that you’re claiming treaty benefits that reduce or eliminate your U.S. tax obligation.

Trigger: You are claiming a tax treaty benefit that reduces or modifies your U.S. tax liability, and that benefit is not automatically exempted from disclosure under the exceptions listed in Treas. Reg. § 301.6114-1(c).

Penalties: May lose the benefit of the tax treaty.