Additional Civil Penalties for Failing to Apply to Offshore Voluntary Disclosure Program And How to Avoid Them

Here, we will discuss some additional civil penalties to which taxpayers may be subject if they fail to participate in the Offshore Voluntary Disclosure Program.

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

One consequence of failing to participate in OVDP is the Failure to File Form 3520-A penalty. Form 3520-A relates to taxpayers with ownership interests in foreign trusts have special reporting requirements and U.S. persons with interests in and power over foreign trusts under IRC § 6048(b) must report that ownership interest using this form.^[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

Form 5471 is required by taxpayers who act as officers, shareholders, or directors in certain foreign corporations. These reporting obligations are found in IRC §§ 6035, 6038, 6046.^[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 Form 5471 penalty 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 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 Form 5472. 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. The civil penalty for failing to file Form 5472 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.

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

A Form 8865 reporting obligation is found in IRC §§ 6038, 6038B, and 6046A and applies to United States taxpayers with certain interests in foreign partnerships. Taxpayers subject to the Form 8865 requirement must report those interests foreign corporations, transfers of property to the foreign corporation, and acquisitions, dispositions, and changes in partnership interests. Failing to properly file Form 8865 can come with a penalty of $10,000 for each failure to file the return, with an additional $10,000 fee for each month the failure continues after an initial 90 days after the taxpayer is notified of the deficiency in his or her reporting. 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 with Civil Penalties Associated with OVDP

William D. Hartsock 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 call (858) 481-4844.

[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.