Failure to do timely voluntary disclosure may expose non-compliant U.S. taxpayers with foreign bank and financial accounts to tremendous amount of audit penalties. In this article, I will describe these penalties which may apply to non-compliant U.S. taxpayers during an IRS audit (remember, the application of these penalties in your particular case will depend on your particular circumstances; this article merely provides an overview of potential penalties that generally exist).
FBAR Civil Penalties
The civil penalty for willfully failing to file the Form 114 (formerly TD F 90-22.1) (Report of Foreign Bank and Financial Accounts, commonly known as an “FBAR”) can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5). Non-willful violations that the IRS determines were not due to reasonable cause are subject to a $10,000 penalty per violation. Please, visit our Voluntary Disclosure and FBAR Center for more detailed information.
Form 8938 Penalties
Closely related to the FBAR is Form 8938. This is a new form that is required to be filed beginning with the 2011 tax year by certain taxpayers (see this article for more information). While Form 8938 is the IRS equivalent of the FBAR required to be filed by the U.S. Department of the Treasury, it has it own penalty structure.
Failure to file Form 8938 as required by I.R.C. §6038D is $10,000 per each information return. An additional $10,000 penalty is 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.
Form 3520 Penalties
These penalties are relevant only to the taxpayers who are required to file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, pursuant to IRC §§ 6048 and 6039F. The penalty for failing to file each one of these information returns, or for filing an incomplete return, is the greater of $10,000 or 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.
Form 3520-A Penalties
These penalties are relevant only to the taxpayers who must report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts under IRC § 6048(b). A penalty for failing to file each Form 3520-A, Information Return of Foreign Trust With a U.S. Owner, 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.
Form 5471 Penalties
Certain categories of U.S. persons who are officers, directors or shareholders in certain foreign corporations (including International Business Corporations) are required to report information under IRC §§ 6035, 6038 and 6046 (see this article for more information).
A penalty for failing to file each Form 5471, Information Return of U.S. Persons with Respect to 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.
Form 5472 Penalties
Taxpayers may be required to report transactions between a 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party as required by IRC §§ 6038A and 6038C.
A penalty for failing to file 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 $10,000 per form. An additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.
Form 926 Penalties
Taxpayers are required to report transfers of property to foreign corporations and other information under IRC § 6038B. A penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, is ten percent 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.
Form 8865 Penalties
United States persons with certain interests in foreign partnerships are required 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 under IRC §§ 6038, 6038B, and 6046A.
A penalty for failing to file Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, is $10,000 per 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. Furthermore, there is a penalty of ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.
Civil Fraud Penalties
Pursuant to IRC §§ 6651(f) or 6663, where an underpayment of tax, or a failure to file a tax return, is due to fraud, the taxpayer is liable for penalties that, although calculated differently, essentially amount to 75 percent of the unpaid tax.
Failure to File Penalty: IRC § 6651(a)(1)
Generally, taxpayers are required to file income tax returns. If a taxpayer fails to do so, a penalty of 5 percent of the balance due, plus an additional 5 percent for each month or fraction thereof during which the failure continues may be imposed. The penalty shall not exceed 25 percent.
Failure to Pay Tax Due Penalty: IRC § 6651(a)(2)
If a taxpayer fails to pay the amount of tax shown on the return, he may be liable for a penalty of 0.5 percent of the amount of tax shown on the return, plus an additional 0.5 percent for each additional month or fraction thereof that the amount remains unpaid. The penalty is capped at 25 percent.
Accuracy-Related Penalty: IRC § 6662
An accuracy-related penalty on underpayments may be imposed by the IRS. Depending upon which component of the accuracy-related penalty is applicable, a taxpayer may be liable for a 20 percent or 40 percent penalty.
Other Civil Penalties
Other penalties may be applicable depending on a situation.
Potential Criminal Penalties
In addition to civil penalties, the non-compliant taxpayers also face various potential criminal penalties.
FBAR Criminal Penalties
FBAR penalties are not limited to civil penalties, but also expose non-compliant taxpayers to criminal penalties. Willfully failing to file an FBAR and willfully filing a false FBAR are both violations that are subject to criminal penalties under 31 U.S.C. § 5322. Failing to file an FBAR subjects a person to a prison term of up to ten years and criminal penalties of up to $500,000.
Criminal Penalties Related to Tax Returns
Possible criminal charges related to tax returns include tax evasion (26 U.S.C. § 7201), filing a false return (26 U.S.C. § 7206(1)) and failure to file an income tax return (26 U.S.C. § 7203).
A person convicted of tax evasion is subject to a prison term of up to five years and a fine of up to $250,000. Filing a false return subjects a person to a prison term of up to three years and a fine of up to $250,000. A person who fails to file a tax return is subject to a prison term of up to one year and a fine of up to $100,000.
Contact Sherayzen Law Office for Help With IRS Audits Involving Offshore Assets
If you have undisclosed foreign assets and foreign income and you are subject to IRS audit, contact Sherayzen Law Office immediately. An experienced international tax attorney will thoroughly review your case, create a case plan, complete the required forms, and offer rigorous ethical IRS representation.