How To Avoid Civil Penalties for Failing to Apply to OVDP

A previous article on this topic addressed the civil penalties potentially applying to taxpayers who qualify for the Offshore Voluntary Disclosure Program but fail to apply. This article will touch upon some additional civil penalties to which taxpayers may be subject.

OVDP Penalty: Failure to File Form 3520-A Reporting Ownership in Foreign Trusts

Taxpayers with ownership interests in foreign trusts have special reporting requirements. If they fail to properly report these ownership interests as required, that information might be discovered if the taxpayer fails to avail itself of the protections of the voluntary disclosure program. Specifically, U.S. persons with interests in and power over foreign trusts under IRC § 6048(b) must report that ownership interest using Form 3250-A, an Information Return of Foreign Trust with a U.S. Owner (1). The penalty for failing to file each one of these information returns or for filing an incomplete return, is the greater of $10,000 or 5 percent of the gross value of trust assets determined to be owned by the United States person (2).

OVDP Penalty: Penalty for Failing to File Form 5471 and Form 5472

If a U.S. Person is an officer, shareholder, or director in certain foreign corporations, he or she has reporting obligations found in IRC §§ 6035, 6038, 6046 and must complete an informational return of Form 5471 (3). If a taxpayer has failed to file Form 5471 as required and this failure is discovered before the taxpayer has completed an OVDP submission, a civil penalty will apply. The penalty for failing to file each one of these information returns is $10,000, with an additional $10,000 added for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $50,000 per return.

A related penalty arises out of the obligation to file Form 5472, which applies to taxpayers who are required to report transactions between 25 percent-owned foreign U.S. corporations or foreign corporation engaged in U.S. trade or business. Under IRC §§ 6038A and 6038C, taxpayers must report transactions between 25 percent foreign-owned domestic corporation or a foreign corporation engaged in a trade or business in the United States and a related party. Failure to do so may result in a civil penalty amounting to $10,000. To this initial penalty may be added an additional $10,000 for each month the failure continues beginning 90 days after the taxpayer is notified of the delinquency.

OVDP Penalty: Penalty for Failing to File Form 926

Another reporting requirement related to foreign transactions arises under IRC § 6038B, which requires taxpayers to report transfers of property to foreign corporations. To satisfy this obligation, taxpayers must complete Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. The penalty for failing to file each one of these information returns is ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional (4).

OVDP Penalty: Penalty for Failure to File Form 8865 for Interests in Foreign Partnerships

United States taxpayers with certain interests in foreign partnerships are required to report those interests foreign corporations, transfers of property to the foreign corporation, and acquisitions, dispositions, and changes in partnership interests on Form 8865. This reporting obligation is found in IRC §§ 6038, 6038B, and 6046A. The penalty for failing to complete this filing is $10,000 for each failure to file the return. In addition to the initial penalty, there is a $10,000 fee added for each month the failure continues after an initial 90 days after the taxpayer is notified of the deficiency in his or her reporting. Although there is a monthly additional fee, the total fee cannot exceed $50,000 per return, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

How a Tax Attorney Can Help

If you have undisclosed offshore foreign accounts or assets, you may be eligible to participate in OVDP. In order to evaluate whether OVDP is the right decision for your international tax situation, you should consider consulting a knowledgeable international tax attorney. The OVDP program is rapidly changing, but a tax attorney can help you navigate the confusing aspects of the IRS program.

The Tax Lawyer - William D Hartsock Tax Attorney Inc. has been successfully helping clients with tax issues related to their foreign assets since the early 1980s. Mr. Hartsock offers free consultations with the full benefit and protections of attorney client privilege to help people clearly understand their situation and options based on the circumstances of their case. To schedule your free consultation simply fill out the contact form found on this page, or call (858) 481-4844.

Tax Law References

1. IRC § 6048(b).
2. Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers, FAQ 5, http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.
3. IRS Form 5471, http://www.irs.gov/pub/irs-pdf/f5471.pdf.
4. Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers, FAQ 5, http://www.irs.gov/Individuals/International-Taxpayers/Offshore-Voluntary-Disclosure-Program-Frequently-Asked-Questions-and-Answers-2012-Revised.