International Tax Attorneys

We assist clients in resolving international penalty disputes with the IRS. We defend individuals and companies in administrative appeals and federal court. We are one of few law firms that have successfully litigated penalties associated with the laying filing of a Form 3520.

In our experience, most individuals and businesses are not aware of the U.S. reporting requirements relating to foreign financial assets. There are two categories of international penalties. The first set of international penalties can be found in the Internal Revenue Code. Chapter 61 of the Internal Revenue Code contains countless reporting requirements regarding foreign information filing obligations. Many of the sections under Chapter 61 impose significant penalties for the failure to comply with the reporting requirements. The more well known reporting requirements and penalties are found in Chapter 61 and are as follows:

The Internal Revenue Code requires certain persons to provide the Internal Revenue Service or IRS with information regarding foreign corporations on a Form 5471. Form 5471 is used by certain U.S. persons who are officers, directors, or shareholders in respect of certain foreign entities that are classified as corporations for U.S. tax purposes. The Form 5471 and schedules are used to satisfy the reporting requirements of the Internal Revenue Code. The Form 5471 is ordinarily attached to a U.S. person’s federal income tax return. The penalty for failure to file, or for delinquent, incomplete or materially incorrect filing is a reduction of foreign tax credits by ten percent and a penalty of $10,000, as well as a reduction in the taxpayer’s foreign tax credit. An additional $10,000 continuation penalty may be assessed for each 30 day period that noncompliance continues up to $60,000 per return, per year.

Similarly, Internal Revenue Code Section 6038A requires 25 percent foreign-owned domestic corporations and limited liability companies to report specified information as an attachment to a corporate tax return. This is done on Form 5471, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. In filing a Form 5472, the filer must provide information regarding its foreign shareholders, certain other related parties, and the dollar amounts of transactions that it entered into during the taxable year with foreign related parties. A separate Form 5472 is filed for each foreign or domestic related party with which the reporting entity engaged in reportable transactions during the year. Any reporting corporation or limited liability company that fails to file Form 5472 may be subject to a penalty of $25,000. If the failure continues for more than 90 days after notification by the IRS, there is an additional penalty of $25,000 for each 30 day period or fraction. There is no upper limit on this penalty.

Another well known provision in Chapter 61 is Section 6039F. Section 1905 of the 1996 Tax Act created new reporting requirements under Section 6039F for U.S. persons (other than certain exempt organizations) that receive large gifts (including bequests) from foreign persons. The information reporting provisions require U.S. donees to provide information concerning the receipt of large amounts that the donees treat as foreign gifts, giving the IRS an opportunity to review the characterization of these payments and determine whether they are properly treated as gifts. Donees are currently required to report certain information about such foreign gifts on Part IV of Form 3520.

Section 6039F(b) generally defines the term foreign gift as any amount received from a person other than a U.S. person that the recipient treats as a gift or bequest. However, a foreign gift does not include a qualified transfer (within the meaning of Section 2503(e)(2)) or any distribution from a foreign trust. A distribution from a foreign trust must be reported as a distribution under Section 6048(c)(discussed below) and not as a gift under Section 6039F.

Section 6039F(c) provides that if a U.S. person fails, without reasonable cause, to report a foreign gift as required by Section 6039F, then (i) the tax consequences of the receipt of the gift will be determined by the Secretary and ii) the U.S. person will be subject to a penalty equal to 5 percent of the amount for the gift for each month the failure to report the foreign gift continues, with the total penalty not to exceed 25 percent of such amount. Under Sections 6039F(a) and (b), reporting is required for aggregate foreign gifts in excess of $100,000 during a taxable year. Once the $100,000 threshold has been met, the U.S. donee is required to file a Form 3520 with the IRS.

Under Section 6048 of the Internal Revenue Code, U.S. owners of a foreign trust must ensure that the foreign trust files a Form 3520-A with the IRS. Under Section 6677 of the Internal Revenue Code, the penalty for failure to file Form 3520-A is the greater of $10,000 or 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that taxable year. If the IRS issues a continuation letter, and the Form 3520-A is not filed, the IRS may assess an additional penalty of $10,000 for each 30-day period until the 3520-A is filed.

Originally, penalties associated with Form 5471, Form 5472, and Form 3520 (hereinafter “international penalties”) were assessed manually on individuals and entities whose missing filings were discovered during an audit. The IRS is still assessing international penalties during audits. Several years ago the IRS began a systemic assessment of international penalties associated with the late filing of these returns. The systemic assessment of international penalties is controversial. Many taxpayers are unaware of their international reporting obligations and learn of their filing obligations after the due date of the filing obligation has already passed. Many of these same taxpayers often try to comply with their international filing obligations by filing an international informational return (i.e. Form 5471, Form 5472, and Form 3520) late. The IRS typically rewards these same taxpayers “trying to do the right thing” by automatically assessing international penalties against them. These penalties can range from a minimum of $10,000 to several million dollars.

The second category of international penalties can be found in Title 31 of the United States Code. Title 31 of the United States Code requires U.S. persons that have a “financial interest” in or “signature authority” over, or “other authority” over one or more “financial accounts” located in a “foreign country” with an aggregate value of such account(s) exceeding $10,000 at any time during the calendar year to file an FBAR with FinCEN. Failure to timely disclose foreign financial accounts on an FBAR can result in significant penalties. The IRS can either assess non-willful FBAR penalties in the amount of $10,000 per violation or willful penalties in the amount of $100,000 or 50 percent of the balance of the account(s) at the time of the violation.

There are a number of defenses to international penalties. The IRS offers programs for individual taxpayers to correct previous filing mistakes. One such program is known as the Streamlined Filing Compliance Procedures. The Streamlined Procedures are available to participants who certify that their non-compliance was “non-willful.” Through the Streamlined Procedures, the participant files amended tax returns and discloses previously omitted foreign information returns. The Streamlined Compliance Procedures offers participants an opportunity to either avoid international penalties or pay a small portion of the penalty they would otherwise be exposed to.

The Streamlined Procedures is only available to individuals that have not been assessed an international penalty. If the IRS has already assessed an international penalty, it may be possible to contest the penalty through an IRS administrative appeal or in court. Common defenses to an international penalty is reasonable cause, the IRS failed to follow proper procedure when it assessed the penalty, and the IRS did not have legal authority to assess the penalty.

Consult Our International Tax Attorneys Now

Whether you are a foreign national, a U.S. citizen working outside the country, or a multinational corporation, it is important to have qualified legal counsel to help you minimize your tax liability and ensure compliance. The attorneys at the law firm of Diosdi & Liu, LLP have the experience to assist with complicated global tax planning, so please call 833.829.4376 or contact us online. We have offices in Florida and California and help clients throughout the U.S. and the world.