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Top FBAR Reporting Error

The most common FBAR reporting mistake is simply failing to file. Some U.S. persons continue to deliberately conceal assets in secret offshore bank accounts in the hope of evading U.S. tax authorities. In many other cases, however, Americans living and working outside the U.S., recent immigrants, foreign citizens who are resident in the U.S., and U.S. children who received gifts or bequests from their foreign parents are simply unaware of their FBAR filing obligations. Despite well-publicized enforcement actions against financial institutions and individual account holders, as well as corresponding amnesty programs, many U.S. persons with foreign financial accounts remain unaware of the FBAR reporting obligations.

U.S. persons with ownership or signature authority over foreign financial accounts should obtain complete copies of their account records and fully educate themselves regarding FBAR reporting obligations and, when necessary, seek advice from U.S. tax professionals in advance of the June 30 filing deadline.

Those who fail to resolve prior reporting errors can expect harsh treatment from U.S. tax authorities and remain exposed to substantial penalties and possible criminal prosecution. Similarly, U.S. courts have not been sympathetic to uninformed foreign account.holders who failed (deliberately or otherwise) to investigate their reporting obligations. In some cases, U.S. courts have imposed a penalty equal to 50 percent of the highest account balance for each year that remained open under the statute of limitations.[10] Many who deliberately concealed offshore bank accounts have been prosecuted and received prison terms.

Correcting Common FBAR Errors

The IRS offers four options to fix FBAR mistakes. Participation in the two formal disclosure programs is permitted only if the funds held in the foreign financial account(s) are from a legal source (and not the proceeds of an illegal activity) and if the IRS is not already in a position to know of the person’s noncompliance.

1. File an Amended FBAR

According to the FBAR instructions, a person who previously filed an FBAR but mistakenly provided incomplete or inaccurate information on the form is required to file an amended FBAR. FinCEN Form 114 includes a box for providing a brief explanation of the error. Because of the six-year statute of limitations, a filer need not correct an error on an FBAR filed more than six years ago.

Filing an amended or delinquent FBAR outside one of the IRS’s penalty relief programs does not afford any penalty protection and therefore requires careful consideration. The IRS may impose penalties if it later determines that the FBAR error was willful or due to negligence. On the other hand, no penalties may be imposed under the law if the error was due to reasonable cause (i.e., an innocent mistake). Even if the error was not due to reasonable cause, under the IRS’s penalty mitigation guidelines, the IRS has discretion to determine that a penalty would be inappropriate and may instead issue an FBAR warning letter.

2. File Pursuant to the IRS’s Delinquent FBAR Submission Procedures

A person who has not previously filed an FBAR, but who has properly filed federal income tax returns that fully reported the income from any foreign account(s), may be eligible for the IRS’s Delinquent FBAR Submission Procedures. Under the Delinquent FBAR Submission Procedures, “[t]he IRS will not impose a penalty for the failure to file the delinquent FBARs if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted.”

The U.S. person should e-file the delinquent FBAR and include a statement that explains why the FBAR is being filed late. Although not required by the procedures, the explanation should also reference that the FBAR is being filed pursuant to the “IRS’s Delinquent FBAR Submission Procedures.”

3. File Pursuant to the IRS’s Streamlined Filing Compliance Procedures

The IRS’s Streamlined Filing Compliance Procedures (commonly referred to as the “Streamlined Offshore Program”) are available for a resident or nonresident U.S. person who mistakenly failed to file an FBAR and/or failed to report on a U.S. tax return income related to foreign financial account(s). These procedures are also available for a nonresident U.S. taxpayer who failed to file a federal income tax return (i.e., Form 1040).

In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or FBAR was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) for three prior years and FBARs for six prior years, along with a declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, FBAR and information return penalties, as well as criminal liability.

In general, under the terms of the streamlined program, the IRS will not impose any penalties on a participating nonresident taxpayer. For a taxpayer resident in the U.S., the IRS will impose (1) accuracy penalties (20 percent) on the unreported tax, and (2) an FBAR-type penalty equal to 5 percent of the maximum aggregate balance in the unreported foreign financial account(s) during the six-year period. The streamlined procedures are fully described on the IRS’s website.

4. Apply to Participate in the IRS’s Offshore Voluntary Disclosure Program

The current iteration of the OVDP program is intended to help those taxpayers who knowingly violated the tax laws to come back into compliance and avoid criminal prosecution. In general, this program requires a taxpayer to file eight prior years’ tax returns and FBARs, provide detailed information regarding any unreported foreign financial account(s), and pay all taxes, accuracy penalties, delinquency penalties, and interest due for the eight-year period. In addition, the IRS imposes an FBAR-type civil penalty equal to 27.5 percent of the single maximum aggregate balance in the unreported foreign financial accounts during the eight-year period. The penalty is increased to 50 percent if the IRS or DOJ has initiated an investigation of the financial institution in which the accounts are held. Nevertheless, this program remains a potentially attractive option for a U.S. person otherwise exposed to even greater civil penalties or potential criminal prosecution.

New FBAR FIling Deadline Law Signed

The president signed into law today legislation that modifies the due dates for several common tax returns.  These new due dates are generally ones that tax professionals have been advocating for several years to create a more logical flow of information and help taxpayers and tax professionals in filing timely and accurate tax returns.

The new law harmonizes the FBAR and income tax return deadlines. Up until now the due date for the FBAR, which must be filed electronically on FinCEN Form 114 (formerly TD F 90-22.1) was June 30th. The new FBAR filing deadline is April 15th. The new law also provides for an extension of time of up to 6 months to file the FBAR, making the extended due date October 15th.  This reconciles the due date and extended due date for the FBAR with the individual tax return filing date.

Before now many taxpayers were often confused by the differences in the filing dates. There were many instances of individuals that realize they had a filing responsibility on the June 30th deadline. Those taxpayers were usually stunned to find out that the extension of the filing date for their tax return did not extend the time to file their FBARs.

The new law also authorizes a first time penalty abate procedure. The new law states: “[f]or any taxpayer required to file such [FBAR] Form for the first time any penalty for failure to timely request for, or file, an extension may be waived by the Secretary.”  This appears to provide authority to abate an FBAR penalty if the FBAR is filed after April 15th, but before October 15th, if this is the first time the FBAR was due.

High penalties apply for failure to file FBARs.  However, the IRS already has discretion to waive FBAR filing penalties. Many of our clients have experienced significant penalty relief from delinquent FBARs.

The new law also sets new due dates for partnership and C corporation returns, as well as FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), and several other IRS information returns.

The new due dates will apply to returns for tax years beginning after Dec. 31, 2015.  Therefore the new 2015 FBAR filing deadline will be April 15, 2016.

Below is a List of Common Forms Applicable in Compliance Requirements for U.S. Citizens and Residents with Foreign Assets, Trusts, and Entities

  • Foreign Financial Assets
  • FinCEN Form 105 Report of International Transportation of Currency or Monetary Instruments
  • FinCEN Form 114 Report of Foreign Bank and Financial Accounts (FBAR)
  • Form 8938 Statement of Specified Foreign Financial Assets
  • Foreign Trusts Reporting Forms
  • Form 3520-A Annual Information Return of Foreign Trust With a U.S. Owner
  • Form 3520 Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
  • Foreign Entity Reporting Forms and Disclosures
  • Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships
  • Form 8621 Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund
  • Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation
  • Form 8832 Entity Classification Election
  • Form 8858 Information Return of U.S. Persons With Respect to Foreign Disregarded Entities

 

How Will the IRS Find Out By Your Foreign Account? Let’s Count the Dozens of Ways

1.      FATCA (Foreign Account Tax Compliance Act of 2009) requires disclosure of your account information.

A.     July 1, 2014 FATCA withholding began.

B.     FATCA requires a 30 percent withholding tax on any “withholdable payment” made either to an FFI (foreign financial institution, e.g. an offshore bank) or certain other entities if it fails to comply with new reporting, disclosure, and related requirements.

C.     FATCA reporting of specific account information is effective for accounts open as of January 1, 2014, and the reports are due March 15, 2015.

D.     FFIs are required to:

a.      Obtain information from each account holder as is necessary to determine which accounts are “U.S. accounts”

b.      Comply with verification and due diligence procedures with respect to the identification of U.S. accounts

E.      Report annually certain information related to any U.S. account maintained by such institution

F.      Deduct and withhold 30 percent on certain pass thru payments made to the benefit of an account holder that refuses to provide the required information (a “recalcitrant account holder”)

G.     Attempt to obtain a waiver in any case in which any foreign law would (but for a waiver) prevent reporting of information under the provision related to any U.S. account maintained by such institution and, if a waiver is not obtained, to close the account.

H.     File a 1099 with the IRS, or provide detailed information about the foreign account, e.g. Name and address, Account Balance, Gross Receipts and Gross withdrawals.

2.      IRS Investigations of numerous banks, including Credit Suisse, Julius Baer, HSBC, Basler Kantonalbank, Bank Leumi, Bank Hapoalim, and numerous others. The banks were required to disclose of your account information.

3.      Swiss Bank Program where Swiss Banks seek non-prosecution agreements and were required to disclose of your account information. The Swiss Bank Program provides a path for Swiss banks to resolve potential criminal liabilities in the United States. Swiss banks eligible to enter the program were required to advise US DOJ by December 31, 2013, that they had reason to believe that they had committed tax-related criminal offenses in connection with undeclared United States-related accounts.

A.     106 Swiss Banks signed up

B.     Information regarding the accounts held by the bank that existed as of Aug. 1, 2008 must be turned over to the IRS as part of the non-prosecution agreements (NPA)

C.     June 30, 2015 is the deadline for Swiss banks to submit data to US DOJ

D.     Make a complete disclosure of their cross-border activities;

E.      Provide detailed information on an account-by-account basis for accounts in which U.S. taxpayers have a direct or indirect interest;

F.       Cooperate in treaty requests for account information;

G.      Provide detailed information as to other banks that transferred funds into secret accounts or that accepted funds when secret accounts were closed;

H.     Provide assistance to any state law enforcement agencies to authenticate documents to be used in state civil or criminal tax proceedings against individuals

I.       Close all recalcitrant (noncompliant) accounts;

J.       Demonstrate controls to prevent employees from assisting recalcitrant accountholders in further acts of concealment;

K.      Use best efforts within term of the NPA to close dormant accounts; and

L.      Retain all records for 10 years from the termination date of the NPA.

4.      Whistle Blowers disclose of your account information in exchange for payment or non-prosecution.

A.     Disgruntled Bank Employees

B.     Bank Employees Under Indictment

C.     Advisors and/or facilitators

D.     Ex-Spouses

E.      Ex-employees

F.      Ex-business partners

5.      IRS Activity

A.     John Doe Summons, e.g., HSBC Summons for account information

B.     Information submitted by more than 50,000 taxpayers participating in OVDP/OVDI as of January 2015, possibly including your banker, advisor or facilitator (who in turn is investigated and interviewed for information)

C.     Sometime in 2012 Credit Suisse turned over client information to IRS pursuant to a treaty request

D.     Guilty Plea by Wegelin Bank

E.      Swiss Bank Clariden Leu turned over client information to IRS in late 2011

F.      Ongoing negotiations with the Swiss government and Fourteen Swiss Banks who are under investigation by IRS and Department of Justice

G.     110 clients turned over to IRS by Swisspartners

If you have risk of discovery of tax non-compliance, you must seek the advice of a tax legal professional. Failure to do so can result in significant civil penalties or a referral for criminal tax prosecution. Patel Law Offices can explain your legal situation and present potential solutions.

Taxpayers’ Evidence of Non-Willfulness or Willfulness Factors

We have come across the below 3 questions numerous times with our clients.

What kind of evidence is relevant to demonstrate “non-willfulness” for purposes of the SDOP and the SFOP when the definition of non-willful conduct ranges from negligent conduct to conduct resulting from a good faith misunderstanding of the law?

How does a taxpayer actually prove that he/she did not know about including offshore income on his/her U.S. tax return or that he/she never knew about the FBAR filing requirement? What kind of supporting evidence does the taxpayer need to show?

In determining whether the taxpayer can legitimately certify that he or she is non-willful, ALL relevant facts and circumstances should be analyzed to determine whether the taxpayer’s conduct is really non-willful.

Unfortunately, the IRS has publicly stated that it will intentionally give no further definition of non-willful conduct for purposes of the Streamline Compliance Programs (SFOP or the SDOP). It has said that the concept of willfulness is well documented in case law and expects tax professionals to apply those definitions, as well as relevant portions of the IRS Manual in advising clients on whether their conduct fits within the definition of non-willfulness.

However over the years we have compiled a list of numerous practical factors which impact Taxpayers’ Non-Willful Status / Reasonable Cause Determination. Below are a few factors of various importance.

— failure to advise preparer about foreign accounts v. denying existence of such assets. Will the preparer confirm possibly erroneous advice?

— Did the taxpayer use an accountant or paid return preparer to prepare the tax returns? If so, was the taxpayer given a tax organizer? If yes, did the taxpayer fill it out truthfully? Does the taxpayer have a copy of the organizer?

— If the taxpayer did not receive an organizer from the tax advisor, was he/she asked about the existence of any offshore accounts or assets, or about any foreign source income?

— If the advisor did not ask the taxpayer the above questions, did the taxpayer affirmatively tell the accountant or tax return preparer about the existence of any offshore accounts, offshore assets, or foreign source income?

— failure to seek professional advice, or using “under-qualified” preparer

— impact of accounts being in “tax haven” countries

— impact of funds being untaxed income

— access to and use of funds, debit cards, etc. If so, did the taxpayer ever use it? If so, how frequently?

 

— inherited assets vs unreported income

— residence of taxpayer outside the U.S.

— existence of foreign entities to hold title to the account. Was an entity used when the account was opened? If so, did the bank require the use of an entity? Was it used to disguise the true identity of the account owner?

— accounts in country of residence v. other country where account holder has no other relationship

— role of foreign tax evasion / role of foreign tax compliance

— lawful reasons to have an account outside the U.S., e.g., asset protection, estate planning

— unfiled v. partially correct FBARs

— Did the taxpayer have any knowledge of the foreign source income, foreign accounts or foreign assets? Why was there income?

— What is taxpayer’s level and type of education? What is the perceived degree of financial and business sophistication and education of the account holder?

— Does the taxpayer have any specialized knowledge of tax rules or finance or the fact that the U.S. requires U.S. persons to report income on a worldwide basis on their tax returns?

— Does the taxpayer know anything about an FBAR or international information returns, such as a Form 5471?

— POAs as substitute for account holder/beneficial owner

— full compliance after notification from bank of reporting requirements

— actions on closure of accounts, “leavers” – transfers to yet another foreign institution, etc.

— Was the taxpayer a citizen or resident of the country where the accounts/assets were/are located? If not, why were the accounts opened in that country?

— If the taxpayer opened the account, did he/she do so with a U.S. passport, if applicable? Was the account opened in a jurisdiction with no bank secrecy laws?

— What were/are the sources of the funds in the accounts?

— Is the source of funds traceable to previously taxed income? Were the funds an inheritance? Were the funds from taxpayer’s work in the country where the accounts are located?

— “hold mail” instructions to the bank

— What type of activities took place with respect to the accounts? Deposits, withdrawals, wire transfers? If so, how frequent were these activities?

— Were there any trades in the accounts? If so, who managed the accounts?

— Did the taxpayer receive regular statements from the bank? If not, did a relative or friend receive statements or did the bank have instructions not to send any statements to the taxpayer?

— Has the account ever been moved? If so, why? Was it moved to a tax transparent country or to a jurisdiction with a tradition of bank secrecy?

Patel Law Offices has consulted with hundreds of clients regarding their non-willful advocacy and offshore asset compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

India and US signed FATCA Agreement Today

India and the US today signed an agreement to implement the Foreign Account Tax Compliance Act (FATCA) that will facilitate exchange of information between the two countries starting on October 1, 2015.

FATCA was signed by Revenue Secretary Shaktikanta Das and US Ambassador Richard Verma in New Delhi. “FATCA is a mutual effort to combat tax evasion and it would be mutually beneficial for both the countries. FATCA would detect, discourage offshore tax evasion. This kind of exchange of information is top priority for governments”, Ambassador Verma said.

Under the inter-governmental agreement, Indian financial institutions would have to reveal information about US tax payers to the revenue department which would be passed on to the US tax authorities. Under the pact, US will also share with India financial information. The current reporting period beginning October 1 would be for July-December 2014. If a financial institution does not comply to FATCA, it will have to pay 30 per cent penalty tax on all its US revenues, including dividend, interest, fees and sales.

The initiative, the US Ambassador said, marked a significant improvement in mutual cooperation to combat offshore tax evasion and will benefit both the countries. “I am confident working together we can detect, deter and discourage offshore tax evasion, increase transparency and create stronger global financial system”, Verma said.

The US has signed IGAs with more than 110 jurisdictions and is engaged in related discussions with many other nations. America had enacted FATCA in 2010 to obtain information on accounts held by US taxpayers in other countries. It requires US financial institutions to withhold a portion of payments made to foreign financial institutions (FFIs) who do not agree to identify and report information on US account holders. As per the IGA, FFIs in India will be required to report tax information about US account holders directly to the Indian government which will, in turn, relay that information to the IRS.

Which Banks are Reporting?

Many Indian financial institutions have already registered on the IRS’s FATCA Registration Portal. The IRS has published a searchable list of financial institutions. The FFI List Search and Download Tool is located on the IRS’s FATCA website. The tool can be used to search for the name of a specific foreign financial institution and find out if it has registered under FATCA. As of today, over 714 financial institutions in India have registered with the IRS.  Users can also download an entire list of financial institutions with the tool. See the FFI List Search and Download Tool and User Guide. Countries complying withFATCA can be found at FATCA – Archive.

Who is Reported?

Financial institutions in India will carry out a detailed due diligence on all their clients and report details of their U.S. clients to the Internal Revenue Service.  U.S. persons for tax purposes are generally considered as:

  • A citizen of the U.S. (including an individual born in the U.S. but resident in another country, who has not renounced U.S. citizenship);
  • A lawful resident of the U.S. (including any U.S. green card holder);
  • Most U.S. visa holders (including H-1 and L-1 visa holders);
  • A person residing in the U.S.
  • Somebody who has spent considerable period of time in the U.S.
  • American corporations, estates and trusts may also be considered U.S. persons

Which Accounts?

Indian financial institutions need to report certain accounts to the IRS under FATCA. The need for identifying U.S. person(s) arises from the fact that money invested in India needs to be reported to IRS in the U.S.  While the threshold limit for reporting will be specified by the regulators in India based on FATCA regulations, institutions will have reporting requirements under FATCA, in terms of threshold limits. Most NRI, NRE, and NRO accounts will be reported.

While the IRS has recently targeted Swiss, Israeli and Indian banks, India continues to be a focal point for the U.S.  government. While new criminal prosecutions start and continue, our law firm expects unabated aggressive enforcement of the U.S. tax laws, including increased criminal prosecutions and civil investigations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets, particularly for Indian assets.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

India Expected to Sign FATCA Agreement Tomorrow

India is expected to sign an inter-governmental agreement (IGA) for the US tax compliance law Foreign Account Tax Compliance Act (FATCA) tomorrow.

FATCA is aimed at combating possible tax evasion by Americans through financial entities of other countries. FATCA is a U.S. law which seeks to facilitate flow of financial information. FATCA requires Indian banks to reveal account information of persons connected to the U.S.  Non-compliant financial institutions could be frozen out of U.S. markets and subjected to punitive withholding taxes.  If a financial institution does not comply with FATCA, it would have to pay 30 per cent penalty tax on all its US revenues, including dividend, interest, fees and sales.

The IGA is likely to be signed by Revenue Secretary Shaktikanta Das and US Ambassador Richard Verma on July 9, 2015.

Foreign financial institutions (FFIs) in India, i.e. an insurance company, bank, or mutual fund, would be required to report all FATCA-related information to Indian governmental agencies, which would then report these information to Internal Revenue Service (IRS).  Foreign Financial Institutions must report account numbers, balances, names, addresses, and U.S. identification numbers.

India agreed to sign a Model 1 FATCA Model Intergovernmental Agreement (IGA) with the U.S.  The IGA would likely require Indian financial institutions to report information on U.S. account holders to India’s Central Board of Direct Taxes, which would then share the information with the U.S. Internal Revenue Service (IRS).  The agreement would provide the Internal Revenue Service (IRS), access to details of all offshore accounts and assets beyond a threshold limit held by Americans here, while a reciprocal arrangement would be offered for Indian authorities as well.

India is expected to start receiving information through Automatic Exchange of Information (AEOI) route under FATCA from the US later in the year.

FATCA compliance will cover all new accounts opened by Indian financial institutions from July 1, 2014 onwards. Indian financial institutions must share data with the government in respect of all new accounts opened from July 1 till December 31, 2014, to enable the government to share this data with US by September 30, 2015 .  Indian financial sector regulators, including SEBI and CBDT, are expected to shortly publish regulations for implementation of FATCA.

Who is Reported?

Many Indian financial institutions have already registered on the IRS’s FATCA Registration Portal. The IRS has published a searchable list of financial institutions. The FFI List Search and Download Tool is located on the IRS’s FATCA website. The tool can be used to search for the name of a specific foreign financial institution and find out if it has registered under FATCA. As of today, over 714 financial institutions in India have registered with the IRS.  Users can also download an entire list of financial institutions with the tool. See the FFI List Search and Download Tool and User Guide. Countries complying withFATCA can be found at FATCA – Archive.

Financial institutions in India will carry out a detailed due diligence on all their clients and report details of their U.S. clients to the Internal Revenue Service.  U.S. persons for tax purposes are generally considered as:

  • A citizen of the U.S. (including an individual born in the U.S. but resident in another country, who has not renounced U.S. citizenship);
  • A lawful resident of the U.S. (including any U.S. green card holder);
  • Most U.S. visa holders (including H-1 and L-1 visa holders);
  • A person residing in the U.S.
  • Somebody who has spent considerable period of time in the U.S.
  • American corporations, estates and trusts may also be considered U.S. persons

Which Accounts?

Indian financial institutions need to report certain accounts to the IRS under FATCA. The need for identifying U.S. person(s) arises from the fact that money invested in India needs to be reported to IRS in the U.S.  While the threshold limit for reporting will be specified by the regulators in India based on FATCA regulations, institutions will have reporting requirements under FATCA, in terms of threshold limits.

As per FATCA, U.S. persons need to report to IRS in the following scenarios:

  • If the total value is at or below $50,000 at the end of the tax year, there is no reporting requirement for the year, unless the total value was more than $75,000 at any time during the tax year.
  • The threshold is higher for individuals who live outside the U.S. .
  • Thresholds are different for married and single taxpayers.

There is a provision for third party reporting under FATCA for FFIs which states, “Foreign financial institutions may provide to the IRS, third-party information reporting about financial accounts, including the identity and certain financial information associated with the account, which they maintain offshore on behalf of U.S. individual account holders”.

While the IRS has recently targeted Swiss, Israeli and Indian banks, India continues to be a focal point for the U.S.  government. While new criminal prosecutions start and continue, our law firm expects unabated aggressive enforcement of the U.S. tax laws, including increased criminal prosecutions and civil investigations. We have been advising our clients to expect the unexpected (and the worst) in their tax treatment and disclosure of offshore assets, particularly for Indian assets.

The fact that 77,000 banks have registered and over 100 countries will be providing government help to the IRS means that no foreign account is secret. U.S. persons must report worldwide income and most must file IRS Form 8938 and Foreign Bank Account Reports (FBAR) to report foreign accounts and assets. With such comprehensive databases, noncompliant taxpayers should beware; the government has better and more complete information than ever.  Significant penalties apply (and possibly criminal prosecution) for failure to file required forms.

Patel Law Offices has consulted with hundreds of clients regarding their offshore asset compliance issues. Patel Law Offices is a law firm dedicated to helping clients resolve complicated tax, criminal tax, and international tax problems. Our firm assists (and defends) clients and their advisors to legally disclose (and legitimize) foreign accounts.

Penalties for Form 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

We would like to highlight a recent change in the IRS’ policy with respect assessing statutory late filing penalties related to certain international information forms. Of particular concern to international businesses is the revised policy that the $10,000 penalty may be systematically applied during the initial processing of a Form 5472 that is attached to a late filed Form 1120. Thus, the IRS is now automatically assessing an initial penalty of $10,000 for each failure to timely file a Form 5472. A separate Form 5472 is required to report each related party with which the taxpayer had a reportable transaction during a taxable year. Thus, penalties can multiply quickly.

As more fully discussed below, a penalty also applies for failure to maintain records as required under U.S. tax law. The automatic assessment represents a departure from previous IRS procedure where penalties were assessed at the discretion of an examiner after a return was selected for examination. While the penalty provisions have always been available to the IRS, they have been inconsistently applied in our experience. With a significant number of International companies having cross-border transactions with related parties in the United States, it is likely that the potential exposure for such penalties in the International marketplace is high.

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is required as an attachment to Form 1120, U.S. Corporate Income Tax Return (and certain other returns), if the reporting corporation had a reportable transaction with a foreign or domestic related party during the tax year.

The due date for filing Form 5472 with the IRS is the same as the due date of the corporation’s Form 1120, including extensions. For purposes of filing Form 5472, a reporting corporation is either a 25% foreign-owned U.S. corporation (i.e., a corporation with at least one direct or indirect 25% foreign shareholder at any time during the tax year) or a foreign corporation engaged in a trade or business within the United States.

If a reporting corporation fails to furnish (within the time prescribed by regulations) any necessary information, or fails to maintain records as required, it is subject to a penalty of $10,000 for each taxable year with respect to which such failure occurs. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of a 90- day period. U.S. tax law provides that certain failures (including not timely filing Form 5472) may be excused for reasonable cause.

A taxpayer may file a penalty abatement request based on reasonable cause after a penalty notice has been received. The taxpayer must, in a written statement containing a declaration that the statement is made under the penalties of perjury, make an affirmative showing of all the facts demonstrating that it had reasonable cause for failure to timely file Form 5472, and prove that it acted in good faith. To show that reasonable cause exists, the reporting corporation must have filed for all open years (excluding the current year on extension). Importantly, reasonable cause does not apply to penalties assessable after the taxpayer was notified of the requirement to file or was requested to provide specific required information. Treasury Regulations provide a separate reasonable cause exception for small corporations. The provision states that reasonable cause will be applied liberally in the case of a small corporation that had no knowledge of the requirements imposed by Internal Revenue Code Section 6038A, has limited presence in (and contact with) the United States, promptly and fully complies with all requests to file Form 5472, and promptly and fully complies with all requests to furnish books and records relevant to the reportable transaction. A small corporation is defined as corporation whose gross receipts for a taxable year are $20 million or less.

Taxpayers should review their previously filed returns and consult with their tax advisors as necessary to determine whether they are in compliance with the information reporting requirements with respect to foreign corporations in which they may have certain levels of control or reportable transactions. Any outstanding or late Forms 5472 should be filed as soon as possible with a persuasive well-analyzed request for penalty abatement, as appropriate, based on reasonable cause.