Delinquent Foreign Information Procedures

How To Stay in IRS Tax Compliance

U.S. taxpayers who have income, assets, bank accounts, closely held corporations, partnerships, or other assets in foreign countries are required to disclose this information to the IRS every year.

For those who fail to disclose that information, the Delinquent Foreign Information Procedures are designed to help get U.S. taxpayers into compliance with the IRS.

The tax lawyers at Kugelman Law have helped clients throughout the world with Delinquent Foreign Information Procedures compliance efforts.

However, you must meet the following requirements:

• You must have reported related foreign-sourced income, if any.
• The failure to file the foreign information returns must have been due to reasonable cause.
• You are not under a civil examination or a criminal investigation by the IRS.
• You have not already been contacted by the IRS about the delinquent information returns.

Informational Return Forms

Some of the most common Delinquent Foreign Information return forms that taxpayers – whether they are in California or anywhere else – are required to fill out are:

• Form 3520 (Gifts and Foreign Trust Distribution)
• Form 8621 (Passive Foreign Investment Companies)
• Form 5471 (U.S. Shareholder in a Foreign Corporation)
• Form 5472 (Foreign Shareholder in a U.S. Corporation)
• Form 8938 (Foreign Bank and Financial accounts – similar to FBAR)
• Form 8865 (Foreign Partnerships)

Reasonable Causes for Not Timely Reporting

Delinquent Foreign Information Procedures require that the taxpayer demonstrate reasonable cause for not timely reporting the item.

The IRS requires taxpayers certify any entity associated with the information returns must not be engaged in tax evasion, as part of the reasonable cause statement. If a reasonable cause statement is not attached to each delinquent information return filed, then the IRS can assess penalties.

The IRS will consider any “sound” reason as a reasonable cause explanation but does not automatically have to accept the reasoning. That is why it is important to work with one of Kugelman Law’s California tax lawyers to help with the process.

The IRS includes, but not limited to, the following sound reasons:

• Fire, casualty, natural disaster or other disturbances
• Inability to obtain records
• Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family

Penalties for Not Timely Reporting

The IRS prioritizes enforcement in this area because many U.S. taxpayers have concealed income from foreign assets. Consequently, civil and criminal penalties are steep.

Taxpayers that do not successfully disclose assets through the various disclosure programs may be liable for penalties that have no financial cap. Keep in mind that the statute of limitations does not begin until a taxpayer files the necessary forms disclosing the asset. Thus, these penalties may be assessed years after the fact.

The IRS may assess $10,000 for each failure. In some instances, penalties may compound or there may be no maximum.