If you’re a U.S. citizen or permanent resident, Uncle Sam wants to know if you’re investing or doing business offshore. And if you don’t “tell all” to the IRS, you could face some very nasty penalties.
Here are a few examples (there are MANY others) of the reporting obligations U.S. persons have:
- Failure to acknowledge foreign bank accounts. If you have an interest in or authority over foreign “bank, financial, or ‘other’ financial accounts” with an aggregate value that exceeds $10,000, you must file Treasury Form TDF 90-22.1 annually. You face a $10,000 civil penalty for each year you fail to file—or if you file late. You must file this form by June 30 of the current year for any foreign accounts you held during the previous year.
- Failure to file detailed reports on foreign trusts. If you fund a foreign trust, the IRS almost always considers you its “owner.” And it insists that you (or the trustee of the trust) send it detailed reports about the trust. Each year, you must file Form 3520-A, which contains financial information about the trust. If you don’t bother filing Form 3520-A, or file it late, you face a penalty equal to 5% of its gross value. This form is due at the same time as your personal tax return. You (or someone to whom you delegate this responsibility) must file additional paperwork (Form 3520) when the trust makes loans, distributions, or you make additional contributions. The penalty for failing to file—or filing late—is a whopping 35% of the loan, distribution, or contribution. Generally, Form 3520 is also due at the same time as your personal tax return. What if you formed and funded a foreign foundation, such as a Panamanian private interest foundation? Most people who form foundations intend to use them as a “trust substitute.” In that case, you’ll need to file Form 3520-A annually and Form 3520 when the foundation conducts a reportable transaction. If you fail to make these filings, the same penalties apply. Don’t try to prepare Form 3520 or 3520-A yourself. You’ll probably require professional assistance, as they’re among the most complex forms the IRS publishes.
- Failure to acknowledge ownership of a foreign corporation. If you hold or acquire more than 10% of the shares (by vote or value) of a foreign corporation, you must file Form 5471 annually. If you’re an officer or director of the corporation, you may also have a filing obligation. And if you neglect to file this form (possibly accompanied by highly-detailed schedules), The IRS can fine you US$10,000. This form is due at the same time as your personal tax return.
Incidentally, these penalties are only for civil violations of the reporting rules. If the IRS believes that you “willfully” failed to file any of these forms, it has the authority to bring criminal charges against you, with even heavier penalties.
Fortunately, the IRS often waives these penalties—or fails to impose them—if there’s a reasonable explanation why they weren’t filed. And, up to now, not knowing you have a filing obligation has often been deemed an acceptable excuse.
But that’s beginning to change. The IRS is already imposing the 35% penalty for delinquent Form 3520s, even if it’s only one day late. And earlier this month, the IRS issued a notice stating that beginning on Jan. 1, 2009, it will automatically assess the US$10,000 penalty on late filings of Form 5471. I wouldn’t be at all surprised to see similar announcements in the near future for other mandatory disclosures relating to foreign investments or business relationships.
Copyright © 2008 by Mark Nestmann
Update: If you have more than $50,000 of "foreign financial assets," you may also be required to file Form 8938 annually. Click here for more information.
(An earlier version of this post was published by The Sovereign Society.)
