Friday, February 5, 2016

Disclosing Foreign Accounts -- Delinquent International Information Return Submission Procedures | Bethesda Tax Lawyer

As I discussed in my previous post, if you have a foreign account and have reported the income and paid taxes on it, but you have not filed FBARs, you can file the late forms without fear of late filing penalties. Unfortunately, the IRS is not as generous if you have reported the income from foreign entities (i.e. foreign partnerships, corporations, or trusts), but not filed the required information returns. The service does offer the Delinquent Information Return Submission Procedures for filing the missing documents, with a major drawback being that it requires a reasonable cause statement.  

The requirements, per the IRS's web page, to enter the procedures are that a taxpayer: 
  • "has not filed one or more required international information returns,
  • has reasonable cause for not timely filing the information returns,
  • is not under a civil examination or a criminal investigation by the IRS, and
  • has not already been contacted by the IRS about the delinquent information returns."

The major drawback to this program is that most people will not qualify because they have not properly reported all income because the reporting requirements for a foreign business are very complex. For example, if you (a US citizen or tax resident) and a friend rent property in a foreign country and formed a foreign LLC equivalent, you have just formed a foreign corporation. Your new business means that you now have to file IRS Form 1120-F, possibly, Form 5471 and Form 926, among others.  To further complicate the situation, did you know that foreign property is subject to different depreciation rules, or that there are rules about which exchange rate you use when converting foreign currency? 

Another problem with the procedures is that reasonable cause is not an easy standard to satisfy. The situations which the IRS provided standards of reasonable cause are:

  • Written advice from the IRS; 
  • Reliance on advice from your tax preparer; and
  • death, disability, sickness, natural disaster, etc.
As you can see, the IRS does limit what it will accept as an explanation for filing these forms late. While these examples are limited, the IRS might allow the excuse of I did not know about these requirements if you entered this program. However, this analysis would be a very fact based argument and is beyond the scope of this brief blog post. If you meet the above requirements including a reasonable explanation, the IRS will not assess penalties for the late filing of the information returns. 

Dealing with offshore accounts is a complicated matter, and not selecting the correct disclosure method could have significant long-term repercussions on penalties.  For a free consultation on these and other tax-related matters, please contact The Law Offices of Aaron P. Richter, a Bethesda-based firm with expertise in Tax Controversy, Business Formation, Estate Planning, and Tax Preparation.

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