- 1 Foreign Account and Tax Reporting
- 2 FBAR (FinCEN Form 114)
- 3 Form 8938 (FATCA)
- 4 Form 5471 (Foreign Corporations)
- 5 Form 3520 (Foreign Gifts and Trusts)
- 6 Form 8621 (Passive Foreign Investment Companies)
- 7 Procedures for Compliance
- 8 VDP and OVDP
- 9 Streamlined Filing Compliance Procedures SDOP/SFOP 2014
- 10 Delinquency Procedures (DFSP and DIIRSP)
- 11 Reasonable Cause
- 12 What Does the Future Hold for Offshore Reporting?
- 13 Will Streamlined Remain or Penalty Increase?
- 14 Will DFSP go the way of DIIRSP?
- 15 Will VDP Become Even More Complex?
- 16 Late Filing Penalties May be Reduced or Avoided
- 17 Current Year vs Prior Year Non-Compliance
- 18 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 19 Need Help Finding an Experienced Offshore Tax Attorney?
- 20 Golding & Golding: About Our International Tax Law Firm
Foreign Account and Tax Reporting
Over the past several years, the United States government has made foreign tax and reporting compliance key enforcement priorities. To best understand how the Internal Revenue Service reached the point of aggressively enforcing missed international reporting forms with high fines and penalties, it is important to take a look at the history and introduction of the different foreign account tax reporting forms — and how forms such as the FBAR have evolved over the past 50 years. It is also important to try to determine what may lie ahead, especially for taxpayers who are on the fence about whether they want to proactively get into foreign tax and reporting compliance or play a wait-and-see game with the IRS.
FBAR (FinCEN Form 114)
First, the FBAR is not a tax form but rather it is a reporting form and was developed for FinCEN reporting. Technically, the FBAR is referred to as FinCEN Form 114. And while increased IRS enforcement has only become a key priority over the past 10-20 years, the FBAR form has been around for more than 50 years. The FBAR was introduced in 1970 and the idea behind the FBAR was to simply ensure taxpayers were reporting their foreign accounts. Back then, the IRS had not yet been tasked with enforcement (that was not until 2003), and the form was just as a reporting mechanism via FinCEN. Fast-forward to the present day and the IRS has been aggressively enforcing FBAR non-compliance with high fines and penalties — although in 2023 they were limited by the Supreme Court ruling in Bittner which limits non-willful FBAR penalty enforcement.
Form 8938 (FATCA)
FATCA refers to the Foreign Account Tax and Compliance Act. While the act itself is very complicated, from a US reporting standpoint it primarily requires certain US Taxpayers to report interests that they have in foreign accounts, assets, and investments. Hundreds of thousands of Foreign Financial Institutions (FFIs) across the globe have agreed to report US taxpayers who have foreign accounts and foreign income. For US Taxpayers, the reporting requirement was introduced in 2012 as part of their 2011 tax return.
Form 5471 (Foreign Corporations)
While foreign corporation reporting had been around for many years, the actual Form 5471 was introduced back in 1983. The form is required by US persons who have ownership interests either direct or constructive ownership of a foreign corporation. Depending on whether the foreign corporation is a controlled foreign corporation or not will impact other requirements associated with form 5471 such as Subpart F Income and GILTI.
Form 3520 (Foreign Gifts and Trusts)
Form 3520 was previously limited to reporting foreign trust transactions, but in 1996, the form was expanded to report gifts received from foreign persons. The form is commonly used by U.S. persons to report gifts from non-resident aliens — and penalties have been on the rise. Oftentimes, the IRS will issue automatic penalties upwards of 25% value of the unreported gift. The process to challenge the IRS on Form 3529 penalties can be a long and arduous task for Taxpayers.
Form 8621 (Passive Foreign Investment Companies)
Form 8621 is used to report Passive Foreign Investment Companies (PFICs) and has been around since the 1980s. A PFIC can take on many shapes and sizes, but more often than not, Taxpayers must file Form 8621 because they have to report foreign pooled funds such as Mutual Funds and ETFs.
Procedures for Compliance
Let’s take a brief look at the history of IRS offshore disclosure and compliance:
VDP and OVDP
The IRS Voluntary Disclosure Program otherwise known as VDP has been around for many years and is used for both domestic and offshore disclosure. Between tax years 2009 and 2018 though, there was a specific version of voluntary disclosure for international tax matters, which was referred to as the offshore voluntary disclosure program or OVDP. In late 2018, the Internal Revenue Service did away with the specific offshore version of the program, and now, all taxpayers — whether they have domestic or offshore non-compliance issues (and who are willful) — submit to the traditional VDP program.
Streamlined Filing Compliance Procedures SDOP/SFOP 2014
As part of the Offshore Voluntary Disclosure Program, there was an offshoot referred to as the streamlined procedures. The idea behind it was that taxpayers who were non-willful could try to avoid the much larger penalty under OVDP and instead qualify as non-willful. In 2014, the IRS developed the standalone Streamlined Filing Compliance Procedures to assist taxpayers who specifically are non-willful. There are two versions of the program, the domestic version and the foreign version of streamlined procedures — noting, that both versions of the program or for offshore or foreign accounts and assets, it is just that the domestic version of the program refers to US residents.
Delinquency Procedures (DFSP and DIIRSP)
There are alternatives to the streamlined filing compliance procedures for taxpayers who are non-willful. Some taxpayers may qualify for the Delinquent FBAR Submission Procedures while other taxpayers may qualify for the Delinquent International Information Return Submission Procedures (DIIRSP), although with DIIRSP, the IRS no longer offers an automatic penalty waiver.
Taxpayers who can prove that they acted with reasonable cause and not willful neglect when submitting late or incomplete foreign account reporting forms may avoid penalties altogether. Making a delinquent submission procedure or reasonable cause submission is different than the streamlined or VDP programs because there is no specific certification form. Rather, the taxpayer submits a package based on the totality of the circumstance seeking to avoid or abate penalties.
What Does the Future Hold for Offshore Reporting?
With so many recent changes in the world of offshore disclosure in the past few years, along with the recent Supreme Court ruling in Bittner and the Tax Court’s ruling in Farhy, it is impossible to know exactly what the future holds for taxpayers who are noncompliant with offshore and foreign account, asset, investment, and income.
Here are three important questions to consider for taxpayers who may be on the fence about getting into compliance:
Will Streamlined Remain or Penalty Increase?
For the past ten years, the Streamlined Domestic Offshore Procedures has carried the same 5% Title 26 Miscellaneous Offshore Penalty. If the streamlined procedures are to remain, the IRS may end up increasing the penalty like what it did during the lifespan of OVDP — which capped out at 27.5% or 50% penalty depending on whether bad banks or financial institutions were involved.
Will DFSP go the way of DIIRSP?
Previously, taxpayers who had unreported international information reporting forms could avoid penalties by submitting to the Delinquent International Information Return Submission Procedures. In November 2020, the IRS eliminated the automatic penalty waiver. The question then becomes whether the Delinquent FBAR Submission Procedures will meet the same fate as DIIRSP.
Will VDP Become Even More Complex?
The current version of ‘offshore’ VDP is much more complicated and complex than it has been in previous years. The program is still evolving post-OVDP and it is currently unclear whether the IRS will make the program even more complicated or if it will pull back a bit to entice more taxpayers to submit to the program.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.