Foreign Income & Taxpayers
Eligible taxpayers may avoid penalties on certain delinquent foreign bank and financial account reports and tax information returns such as Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, and 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, filed by August 31, 2011 (penalty relief). The IRS provided this penalty relief in guidance related to its latest offshore voluntary disclosure initiative. Although voluntary disclosure is discussed briefly below, the focus of this item is who qualifies for penalty relief and procedures for obtaining this relief.
Foreign Bank Account Reporting
A U.S. person with a financial interest in, or signature authority over, certain foreign financial accounts must report those accounts to the IRS on a Form TD F 90.22-1, Report of Foreign Bank and Financial Accounts, known as an FBAR. The FBAR must be filed with the IRS Enterprise Computing Center in Detroit (not the service center where the income tax return is filed) by June 30 of the year following the calendar year in which the aggregate value of such accounts exceeds $10,000 (31 U.S.C. §5314; 31 C.F.R. §§1010.306(c) and 1010.350). Those who fail to timely file required FBARs or pay tax associated with foreign accounts face significant penalties and possible criminal sanctions (31 U.S.C. §§5321 and 5322).
Offshore Voluntary Disclosure Initiative
On February 8, 2011, the IRS announced its second offshore voluntary disclosure initiative (2011 OVDI). To participate in the 2011 OVDI, the taxpayer must file the required paperwork and pay the required tax, penalty, and interest by August 31, 2011. Although the terms of the 2011 OVDI are not as favorable as the IRS’s first offshore disclosure initiative in 2009, it still provides an opportunity for taxpayers to reduce penalties and avoid potential criminal prosecution. Guidance for how to participate in the 2011 OVDI is provided in FAQs published on the IRS website and in a February 8, 2011, IRS News Release (IR-2011-14). For more information on the IRS’s 2011 voluntary disclosure initiative, see Gervie, “Offshore Voluntary Disclosure Initiative,” 42 The Tax Adviser 271 (April 2011).
According to the FAQs on the IRS website, the 2011 OVDI is for those who did not report or pay tax due with respect to undisclosed foreign financial accounts. Taxpayers who reported and paid all tax due but who failed to file FBARs and tax information returns should not seek relief from penalties under the 2011 OVDI. Instead, these taxpayers should seek relief according to instructions in FAQ 17 and FAQ 18, discussed below.
FBARs: Specific instructions for obtaining relief for delinquent FBARs are in FAQ 17, where the IRS advises taxpayers to file delinquent FBARs according to the instructions on the form, sending the FBAR to the address identified in the instructions and attaching a statement explaining why the reports are being filed late. The FAQ provides that the IRS will not impose penalties on these late-filed FBARs if there are no underreported tax liabilities and the FBARs for prior years are filed by August 31, 2011. (The FBAR for 2010 was still due by June 30, 2011.)
Form 5471, Form 3520, and similar tax information returns: The specific instructions for obtaining relief for delinquent tax information returns such as Forms 5471 and 3520 are in FAQ 18. The term “tax information returns” is not defined in the FAQs but appears expansive enough to cover other foreign-related tax information returns such as Forms 926, Return by a U.S. Transferor of Property to a Foreign Corporation; 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner; 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business; and 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships, which are identified in FAQ 5 regarding potential penalties for taxpayers that do not participate in the OVDI.
Under FAQ 18, the IRS instructs taxpayers to file delinquent tax information returns with the appropriate service center according to the instructions for the particular form and to attach a statement explaining why the information returns are being filed late. A taxpayer must submit a delinquent Form 5471 (or other applicable foreign-related tax information return) with an amended return for that year showing no change to income or tax liability. Depending on the year and type of taxpayer, the taxpayer may have to file this amended return electronically. FAQ 18 provides that the IRS will not impose penalties on these late-filed information returns if there are no underreported tax liabilities and the information returns are filed by August 31, 2011.
There is a small window left for taxpayers who owe no tax to take advantage of penalty relief for delinquent FBARs and foreign-related tax information returns. Taxpayers who qualify should seriously consider taking advantage of this relief by filing eligible forms with the IRS by August 31, 2011.
Valrie Chambers is a professor of accounting at Texas A&M University–Corpus Christi in Corpus Christi, TX. Rochelle Hodes is with PricewaterhouseCoopers LLP in Washington, DC. They are both members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For more information about this column, contact Prof. Chambers at email@example.com.