Form 8938 Penalties

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As discussed in an earlier article, Form 8938 is used by specified individuals to report the ownership of specified foreign financial assets if the total value of those assets exceeds an applicable threshold amount.

Similarly to most international tax forms issued by the IRS, Form 8938 has its own system of penalties. What makes Form 8938 penalties stand out are the scope of coverage, the severity of penalties, and the effect on the IRS statute of limitations.

A. Scope of Form 8938

Form 8938 is much more intrusive than the now-famous FBARs. While the threshold amount for filing the FBAR is much lower (only $10,000), the type of information requested by Form 8938 is much broader. The FBARs only require disclosure of foreign bank and financial accounts.

Form 8938, however, requires the disclosure not only of the interest held in foreign bank and financial accounts (which may also be somewhat different from the FBAR definition), but also of the interest held in foreign entities and “other foreign financial assets” – the definition of which includes an array of varies types of swaps, contracts, and stocks.

Moreover, Form 8938 directly ties assets disclosed on Forms 3520, 3520-A, 5471, 8621, 8865 and 8891 to the assets that need to be reported on Form 8938 (pursuant to the “duplication” rule, the taxpayers do not need to report on Form 8938 the assets already reported the five aforementioned forms). Therefore, Form 8938 makes it much easier for the IRS to to uncover potential issues with the other six forms (all of which have their own applicable penalty standards).

A word of caution: even if a specified foreign financial asset is reported on any of the six forms listed above, the taxpayer must still include the value of the asset in determining whether the aggregate value of the taxpayer’s specified foreign financial assets is more then the reporting threshold that applies to the taxpayer.

Finally, the IRS can use Form 8938 to analyze if the taxpayer was supposed to file the FBAR and failed to do so (or failed to do so correctly).

Thus, it becomes obvious that Form 8938, which popularly known as a “Son of FBAR”, far excels its father-FBAR in enhancing the IRS capacity to gather additional taxpayer data, use this data for deeper analysis of the taxpayer non-compliance, and imposing civil and criminal penalties on non-compliant taxpayers.

B. Form 8938 Penalties

Form 8938 has a severe penalty system.

1. Failure-to-File Penalty

If the taxpayer is required to file Form 8938, but fails to file a complete and correct Form 8938 by the due date (including extensions), he may be subject to a penalty of $10,000.

If the IRS discovers non-compliance and mails the corresponding notice to the taxpayer, but the taxpayer still does not file Form 8938 within 90 days after the mailing of the notice, additional penalties of $10,000 may be imposed for each 30-day period (or part of a period) of non-compliance after the expiration of the 90-day period. This additional penalty is currently capped at $50,000.

What about the situations where the taxpayer believes that the assets in question are below the threshold amount but the IRS asks the information about the assets in any case? In this case, if the taxpayer fails to respond to the IRS inquiry, the IRS has the power to presume that the taxpayer owns specified foreign financial assets with a value of more than the reporting threshold (even if it is not so in reality). Hence, the IRS can impose failure to file penalties if Form 8938 is not filed.

Common to other forms, From 8938 instructions provide for the reasonable cause exception. However, to avoid the penalties, the taxpayer must affirmatively show the facts that support a reasonable cause claim. The IRS does not consider the potential imposition of civil and criminal penalties by a foreign jurisdiction as a reasonable cause.

Keep in mind that the married taxpayers who file a joint income tax return have a joint and several liability for all IRS penalties.

2. Accuracy-Related Penalty

While Form 8938 is a purely reporting requirement, it contains a provision related to enhancing the accuracy-related penalties. If the taxpayer underpays his tax as a result of a transaction involving an undisclosed specified foreign financial asset, the IRS may impose a penalty of 40% of the underpayment.

For example, if the taxpayer does not report a foreign pension on Form 8938 and he receives a taxable distribution from the pension plan that he did not report on his income tax return, the taxpayer will be subject to the 40% penalty on the underpayment.

The same would be true with respect to any specified foreign financial asset, including ownership of shares in a foreign corporation or an interest in a foreign partnership.

3. Civil Fraud Penalty

If the taxpayer commits civil fraud which results in non-payment of penalties and involves Form 8938, the taxpayer will be subject to the civil fraud penalty of 75% of the underpayment due to fraud.

4. Criminal Penalties

In addition to civil penalties, the IRS may initiate a criminal prosecution of (and impose criminal penalties on) the taxpayers who fail to file Form 8938, fail to report an asset on Form 8938 or have an underpayment of tax.

C. Form 8938 Effect on the Statute of Limitations

Similar to other FATCA provisions (with respect to Forms 5471, 8621, 8865, et cetera), the IRS greatly extended the statute of limitations for the purposes of Form 8938. Unlike the other forms, however, Form 8938 contains a singular provision without a precedent.

The IRS sets forth this general rule in its instructions: the failure to file Form 8938 or the failure to report a required specified foreign financial asset keeps the statute of limitations open for all or a portion of the taxpayer’s income tax return. Once the correct Form 8938 is filed, the statute of limitations is subject to the common three-year rule (i.e. the IRS has three years to audit the taxpayer’s tax return and assess additional tax and penalties), subject to the aforementioned singular provision.

This provision states that, if the taxpayer does not include in his gross income an amount relating to one or more specified foreign financial assets and this amount is more than $5,000, then the statute of limitations is extend to six years after the taxpayer files a complete tax return that contains Form 8938.

Furthermore, for the purpose of the six-year extended statute of limitations provision, “specified foreign financial assets” include any such asset regardless of: (i) the reporting threshold that applies to the taxpayer, or (ii) whether this asset is excepted from reporting because it was reported on certain other forms (such as Form 5471, 8621, 8865, et cetera).

These provisions constitute an incredible increase in the IRS power to extend the statute of limitations and assess additional tax and penalties on the taxpayers.

Contact Sherayzen Law Office For Legal Help With Form 8938

Given the severe penalties that accompany Form 8938, it is very important that you properly comply with the Form’s requirements. Therefore, if you need to file Form 8938, contact Sherayzen Law Office for legal help. Our experienced international tax compliance firm will guide you through the complex web of the U.S. international tax reporting requirements and assist you in bringing your tax affairs in full compliance with the U.S. tax system.

New Version of the FBAR Form

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In November of 2011, the U.S. Department of the Treasury issued a new version of Form TD F 90-22.1, now known as FinCen Form 114 commonly known as FBAR. All filers must now use this form in order to report their foreign bank and financial accounts.

The main difference between the previous (March 2011) version and the current (November 2011) version is the simplified process of amending the FBARs. However, you can still use the more thorough method described in the FBAR FAQ.

If you are filing the FBARs for previous years (perhaps as part of the voluntary disclosure), you should use the latest FBAR form. While it used to be Ok to use the 2008 version to file FBARs for the prior years, it is becoming doubtful whether the IRS would accept this version at this point. It is highly recommended that the taxpayers use only the latest version of the FBAR.

Any United States person who has a financial interest in or signature authority or other authority over any financial account in a foreign country, if the aggregate value of these accounts exceeds $10,000 at any time during the calendar year. Failure to comply with the FBAR requirements carries a very high penalty. Please, visit our Voluntary Disclosure and FBAR Center for details.

Contact Sherayzen Law Office to Comply with FBAR Requirements

If you need any legal help with FBARs, contact Sherayzen Law Office by telephone or email. Our experienced international tax firm will help you resolve all of your FBAR questions and help you comply with all of the FBAR requirements.

Tax Effect of a Complete Liquidation of a Corporation on Its Shareholders

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The tax effects to shareholders of liquidating a corporation are largely governed by IRC Sections 331, 332 (liquidations of subsidiaries) and 338 (dealing with certain stock purchases treated as asset acquisitions). This article will examine only the general tax rule found in Section 331 (keep in mind that there are numerous exceptions and variations depending on your particular tax situation).

In the case of distributions in a complete liquidation of a corporation, IRC Section 331(a) provides that amounts (or assets) received by shareholders shall be treated as “full payment in exchange for the stock”. In other words, these amounts (or assets) are deemed as a sale or exchange of assets distributed in return for stock. Therefore, the shareholders will need to recognize gain or loss on the difference between the fair market value of the asset distributed to them and the adjusted basis of the stock that they surrendered.

IRC Section 1101 is the general rule for the amount of gain or loss to be recognized. Pursuant to that section, if the stock is a capital asset to the shareholder, then a capital gain or loss will result. Similar to the general tax rules in a sale or exchange, the basis of the property distributed to shareholders in a complete liquidation will be the fair market value of the property on the date of distribution.

It is very important that the transaction is properly documented. The shareholders are responsible for providing evidence of the adjusted basis of the stock. However, if such evidence is not provided, then the IRS may treat the stock as having a zero basis, and the entire fair market value amount of the liquidation proceeds will thus constitute the gain to be recognized by the shareholder.

Contact Sherayzen Law Office For Legal Help With Corporate Tax Transactions

This article covers only some general information with respect to the tax effect of a complete liquidation of a corporation on its shareholders; the article does not offer any legal advice and it should not be relied upon to determine the tax obligations in your particular situation.

If you have any questions or concerns regarding U.S. corporate taxation laws and regulations, contact Sherayzen Law Office for legal help. Our experienced corporate tax firm will guide you through even the most complex corporate transactions and help you properly document such transactions as required by the Internal Revenue Code as well as relevant business laws and regulations.

Basic Individual Tax Reporting Requirements for U.S. Citizens Residing Outside of the United States

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If you are a U.S. citizen or a dual citizen of the United States and another country (or countries) the IRS expects you to comply with certain individual tax reporting requirements even you reside outside of the United States. The purpose of this article is to outline some of the most important of these reporting requirements; it should be noted, however, that this article simply provides a broad background information and does not cover all of the requirements that may be applicable to in your situation – you are advised to consult Sherayzen Law Office for a detailed analysis of your particular tax reporting requirements.

A. Tax Return Filing Requirements

The United States has a very complex tax system which is somewhat unique in the world. One of the most singular features of this tax system is the taxation of the worldwide income of its citizens. As a United States citizen, you must file a federal income tax return for any tax year in which your gross income is equal to or greater than the applicable exemption amount and standard deduction. I wish to emphasize here that “gross income” means worldwide income. For example, if you earned $1,000 in the United States and $50,000 outside of the United States, you must file a U.S. tax return (however, if you meet all of its requirements, you may be able to take the foreign earned income exclusion). With exceptions which may or may not apply to your case, you have to report the worldwide income irrespective of what type of income you are receiving – rental, bank interest, dividends, et cetera. Note, however, that certain tax treaties may apply and modify your particular tax reporting requirements.

B. Form TD F 90-22.1: FBAR (Report on Foreign Bank and Financial Accounts)

As a United States citizen, you may be required to report your interest in certain foreign financial accounts on FinCEN Form 114 formerly Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR). The form should be filed separately from your tax return by June 30 of each relevant calendar year. Visit our Voluntary Disclosure and FBAR Center for more information.

It is important to emphasize that the combination of failure to file the FBAR with failure to pay U.S. tax can radically complicate your legal situation as the FBAR penalties are more likely to be imposed in this scenario. These FBAR penalties are likely to be much higher than your average failure to file penalty.

Please schedule a consultation with Sherayzen Law Office experienced FBAR tax firm in order to deal with this situation properly.

C. Individual Reporting With Respect to Foreign Business Ownership: Forms 5471, 8865, et cetera.

In some situations, you may be required to file additional forms with respect to foreign business ownership. The most common of these forms are 5471, 8865, 8858, and so on. These are highly complex forms which are usually filed with your tax return.

D. Reporting of Foreign Gifts, Inheritance, and Trust Income: Form 3520

In some situations, you may be required to file Form 3520 in order to report qualifying foreign gifts, inheritance, and trust income.

Keep in mind, additional requirements may apply with respect to domestic gifts, inheritance and trust distributions.

E. Passive Foreign Investment Company Income: Form 8621

In some situations, you may be required to file Form 8621 in order to properly report what is known as “passive foreign investment company” or PFIC income. Despite its deceivingly simple format, this form may require extremely complex accounting calculations and legal determinations. A separate penalty structure applies to Form 8621.

F. New Reporting Requirements of Foreign Financial Assets: Form 8938

A new law (FATCA) requires U.S. taxpayers who have an interest in certain specified foreign financial assets with an aggregate value exceeding the specified threshold amount to report those assets to the IRS. Taxpayers who are required to report must submit Form 8938 with their tax return. See our earlier article with respect to Notice 2011-55 for additional information about this reporting requirement under IRC section 6038D.

This form carries its own elaborate penalty structure which may even affect your ability to take foreign tax credit.

H. Other Reporting Requirements

Obviously, it is beyond the scope of this article to list every tax reporting requirements that may apply to your case. This article merely attempts to sketch some of the most important tax filing requirements that you may need to comply with. There are may be other forms that may apply to your particular situation; you will need to consult Sherayzen Law Office for a particular analysis of your fact pattern.

G. Penalties

1. Penalties and Interest imposed for failure to file income tax returns or to pay tax

Failure to file the income tax return and/or pay tax due may result in substantial IRS penalties unless you show that the failure is due to reasonable cause and not due to willful neglect. Main penalties are listed in Internal Revenue Code (IRC) Section 6651 and include failure to file and failure to pay tax (both of which are limited to 25 percent of your total tax deficiency).

In addition to penalties, pursuant to IRC Sections 6621 and 6622, the IRS will also require you to pay the interest on the tax liability according to underpayment rate (compounded daily) published on a quarterly basis.

2. Reasonable Cause Considerations

Whether a failure to file or failure to pay is due to reasonable cause is based on a consideration of the facts and circumstances. Reasonable cause relief is generally granted by the IRS when you demonstrate that you exercised ordinary business care and prudence in meeting your tax obligations but nevertheless failed to meet them. In determining whether you exercised ordinary business care and prudence, the IRS will consider all available information.

This is why it is important to have an experienced tax attorney advocating your position and presenting the arguments to the IRS. While it is not a guarantee that the IRS will actually abate the penalties, your chances of success are likely to be higher than if you were to present your case without professional assistance.

3. Possible additional penalties that may apply in particular cases

In addition to the failure to file and failure to pay penalties, in some situations, you could be subject to other civil penalties, including the accuracy-related penalty, fraud penalty, and certain information reporting penalties.

Moreover, you may be subject to additional penalties for failure to accurately file other informational reports such as 3520, 8865, 5471, 8621, 8938 and other forms. These penalties can be extremely severe and such cases must be reviewed by a tax professional before presenting the argument to the IRS. FBAR penalties especially stand out due to their potentially draconian severity. For example, the civil penalty for willfully failing to file an FBAR can be up to the greater of $100,000 or 50 percent of the total balance of the foreign account at the time of the violation. See 31 U.S.C. § 5321(a)(5). Since the penalty can be imposed for each year of non-compliance, the FBAR penalties can greatly exceed the current balance on an account.

Finally, criminal penalties may be imposed in extreme cases.

You should visit our Voluntary Disclosure and FBAR Center in order to learn more about the tax reporting requirements as well as the various penalty structures that may apply to you.

Contact Sherayzen Law Office To Determine Your IRS Reporting Requirements

This article merely provides a general background information on U.S. tax reporting requirements and is NOT meant to be treated as a legal advice. If you are U.S. citizen or a dual citizen and you live abroad (or have exposure to international taxes), contact Sherayzen Law Office for legal help with U.S. international tax compliance. Our experienced tax compliance firm will guide you through the complex web of international tax reporting requirements and help you bring your tax affairs into full compliance with U.S. tax laws and regulations.

Payroll Tax Cut Temporarily Extended into 2012

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The Temporary Payroll Tax Cut Continuation Act of 2011 temporarily extended the two percentage point payroll tax cut for employees, continuing the reduction of their Social Security tax withholding rate from 6.2 percent to 4.2 percent of wages paid through February 29, 2012. This reduced Social Security withholding will have no effect on employees’ future Social Security benefits.

The IRS warned employers that they should implement the new payroll tax rate as soon as possible in 2012 but not later than January 31, 2012.  If however any extra Social Security tax is withheld in January of 2012, the employers should make an offsetting adjustment in workers’ pay as soon as possible but not later than March 31, 2012.

Workers do not need to do anything else; employers and payroll companies should handle the withholding changes.

Recapture Provision

The Act also includes a new “recapture” provision, which applies only to those employees who receive more than $18,350 in wages during the two-month period (the Social Security wage base for 2012 is $110,100, and $18,350 represents two months of the full-year  amount). This provision imposes an additional income tax on these higher-income employees in an amount equal to 2 percent of the amount of wages they receive during the two-month period in excess of $18,350 (and not greater than $110,100).

This additional recapture tax is an add-on to income tax liability that the employee would otherwise pay for 2012 and is not subject to reduction by credits or deductions.  The recapture tax would be payable in 2013 when the employee files his or her income tax return for the 2012 tax year. This may change, however, since there is a possibility of a full-year extension of the payroll tax cut being discussed for 2012.

IRS May Issue Additional Guidance

The IRS will closely monitor the situation in case future legislation changes the recapture provision.  The IRS also promises to issue additional guidance as needed to implement the provisions of this new two-month extension, including revised employment tax forms and instructions and information for employees who may be subject to the new “recapture” provision.

For most employers, the quarterly employment tax return for the quarter ending March 31, 2012 is due on April 30, 2012.