IRS Eases Penalty Assessment Rules for Late-Filed Foreign Gift and Inheritance Forms
At the urging of the Taxpayer Advocate Service and practitioners, the IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520 to report foreign gifts and inheritances. Also, by the end of the year, the IRS will begin reviewing any reasonable cause statements attached to late-filed Forms 3520 and 3520-A for the trust portion of the form BEFORE assessing any penalty. The IRS previous practice was to automatically assess penalties, even when a reasonable cause statement was attached. The burden was on the taxpayer to raise the reasonable cause argument AFTER the assessment.
Read more about this here: https://www.taxpayeradvocate.irs.gov/news/nta-blog/irs-hears-concerns-from-tas-and-practitioners-makes-favorable-changes-to-foreign-gifts-and-inheritance-filing-penalties/2024/10/
The penalties imposed on U.S. persons for failure to file international information returns are severe:
- The penalty for willfully failing to file Form TD F 90-22.1 (commonly known as an “FBAR”) to report direct or indirect financial interest in, or signature authority over, a foreign financial account that has a value exceeding $10,000 at any time during the year can be the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. Non-willful violations not due to reasonable cause are subject to a $10,000 penalty per violation.
- The penalty for failing to file Form 8938 to report the taxpayer’s interest in certain foreign financial assets, including financial accounts, certain foreign securities and interests in foreign entities, that exceeds a certain aggregate value (depending on the filing status and residence) can be $10,000, 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. The threshold aggregate value depends on filing status and residency, e.g., single taxpayers living in the US: $50,000 in specified foreign financial assets on the last day of the tax year or $75,000 at any point during the year; and married taxpayers living in the US: $100,000 in specified foreign financial assets on the last day of the tax year or $150,000 at any point during the year.
- 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. However, the IRS has ended its practice of automatically assessing penalties at the time of filing for late-filed Forms 3520 to report foreign gifts and inheritances.
- The penalty for failing to file Form 3520-A to report ownership interests in foreign trusts is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person. However, by the end of the year, the IRS will begin reviewing any reasonable cause statements attached to late-filed Forms 3520 and 3520-A for the trust portion of the form BEFORE assessing any penalty.
- The penalty for failing to file Form 5471 to report certain information by U.S. persons who are officers, directors or shareholders in certain foreign corporations is $10,000, 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.
- The penalty for failing to file Form 5471 to report certain information by 25% foreign-owned U.S. corporation or a foreign corporation engaged in a U.S. Trade or Business is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
- The penalty for failing to file Form 962 to report transfers of property to foreign corporations and related information is 10% of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.
- The penalty for failing to file Form 8865 to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests by U.S. persons with certain interests in foreign partnerships include $10,000 for failure to file each return, 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.
- If the violation also includes unreported income, there may also be: (a) accuracy-related penalty on underpayments of tax (a 20 percent or 40 percent penalty); (b) penalties for failing to pay the amount of tax shown on the return of .5 percent of the amount of tax shown on the return, plus an additional .5 percent for each additional month or fraction thereof that the amount remains unpaid, not exceeding 25 percent; and (c) where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer can be liable for penalties that essentially amount to 75 percent of the unpaid tax.
Additionally, the failure to file international information returns could lead to criminal investigations and prosecution.
Fortunately, there are several procedures that avoid criminal prosecution and partially or completely abate the potential penalties before they are assessed by the IRS. Such procedures are complex and should be handled by an experienced tax attorney.
Contact The Wilson Firm, PLLC, if you have any questions or need legal representation in connection with international information returns.