International Tax Form Filing Penalties: Explaining the Basics

International Tax Form Filing Penalties: Explaining the Basics

International Tax Form Filing Penalties

For most U.S. Taxpayers, their tax return filings are relatively straightforward and usually just include the filing of Form 1040 along with a few schedules. But, when a taxpayer has foreign assets, accounts, investments, or income then their tax return becomes much more complicated because they are required to file various International Information Returns (IIR), such as Form 3520 and Form 8938. The failure to timely and accurately file these forms can result in significant civil fines and penalties — noting, that 99% of the time the violations are civil so please be careful of any fear-mongering tax professionals goading you into believing that will go to jail or be criminally investigated just because you did not report a foreign bank account or investment fund. For many years, tax attorneys have been challenging the IRS on their ability to even issue these types of assessable penalties and the recent U.S. Tax case of Farhy shows that the tide may be turning in favor of taxpayers. Let’s recap seven (7) important pieces of information regarding international information returns. A much more detailed summary can be found on the Taxpayer Advocate’s Service Blog.

International Information Return (IIR) Assessable Penalties

Unlike many other types of penalties, the IRS can issue, International Information Return Penalties are typically automatically assessed. That means that the penalties do not go through the typical IRS deficiency procedures — and so taxpayers do not have an opportunity to challenge the penalty before it is actually assessed. This is extremely unfair and puts taxpayers automatically in the defensive position to try to get out from underneath the penalty, as opposed to avoiding the penalty in the first place.

It is Almost Never Criminal

Most International Information Return violations are civil in nature. For example, maybe you were unaware that you had to report your foreign bank and financial accounts on the annual FBAR or were unaware that that gift you received from your sweet grandma in Peru is actually reportable on form 3520. And, while the size of the penalties may be absurd, it is not a criminal violation.

You Are (Most Likely) Not Going to Jail

Since most penalty investigations involving International Information Returns are civil in nature, non-compliance rarely results in the Taxpayer going to jail or prison for failing to report their foreign information. Taxpayers get the opportunity to challenge these penalties although the method for challenging the penalties will be dependent on what type of penalty they receive and what phase of the challenge process they are in.

You Can Protest the Penalty

When a person receives an International Information Return penalty, they have an opportunity to protest the penalty within 30 days of receiving it. The protest letter is an important phase in challenging the penalty because it sets the tone and puts the IRS on notice as to what the taxpayer believes are valid and legitimate reasons as to why they should not be penalized. Sometimes taxpayers may be successful at the protest phase, but being that the IRS is understaffed and oftentimes agents and officers will require approval from a supervisor in order to abate the penalty, sometimes these requests get lost in the IRS blackhole and are denied without the IRS really taking any of the substantive facts into consideration.

Appeal or CDP

Sometimes, the taxpayer may not be successful at the protest phase and instead will have to pursue either an Appeal at the IRS Independent Office of Appeals or consider a Collection Due Process Hearing. Typically, taxpayers cannot pursue both for the same penalty and there are pros and cons to either approach.

Appeal and/or Court Litigation

Depending on the outcome of a Collection Due Process Hearing or Appeal, the taxpayer may still have some options to pursue the case at either Tax Court or the United States Court of Federal Claims or District Court – although federal court litigation typically requires the taxpayer to pay the fine first and then challenge by lawsuit although in Mendu the court noted that prepayment (‘Flora Rule’) may not apply to FBAR penalty challenges

Farhy Case

Recently, the US Tax Court ruled against the Internal Revenue Service on being able to issue automatically assessed penalties against taxpayers involving Form 5471. The IRS Form 5471 involves the reporting of foreign corporations. It is important to note that in this case, the taxpayer had potentially acted willfully and failed to file Form 5471 and the court still ruled against the IRS in finding the IRS cannot continue issuing penalties via automatically assessed penalties and instead would have to file a lawsuit against Taxpayer. This ruling may impact various other international information reporting code sections as well, noting that the IRS did file a Notice of Appeal so that it looks like the U.S. Government will challenge the U.S. tax court’s ruling.

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 who 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.