International Tax Filings: What’s the Penalty for Noncompliance?
No one can outrun or outsmart the IRS. The IRS keeps a close eye on your international activity, and failing to comply with international reporting requirements can cost you. Keeping up with your filing responsibilities is much easier — and much cheaper — than the alternative.
Penalties for Noncompliance
Our clients know that we come from a position of zero judgement. We know that running or investing in an international business comes with a lot of responsibilities, and it’s easy to see how filing informational tax forms can get demoted on your list of concerns. Unfortunately, failing to comply with international reporting requirements can be expensive for both you and your business, and may even land you in jail.
If you fail to comply with your international reporting requirements, you will likely face one or more of the following consequences.
Civil Penalties
Civil penalties are monetary penalties assessed when you or your business fails to file a required report. Most civil penalties are a percentage of the tax due and/or a dollar amount based on the infraction. Civil penalties are typically reserved for those who were not trying to willfully deceive the IRS.
Criminal Penalties
Criminal penalties are usually only assessed if you commit fraud or purposefully withhold information from the IRS. Most criminal penalties include a fine (in orders of magnitude larger than civil penalties), and if the infraction is severe enough, they may also come with jail time.
Interest
The IRS charges interest when you don’t pay your penalties or your taxes due. Interest typically begins accruing immediately and will compound daily until you pay what you owe. For most small businesses and individual taxpayers, the IRS will charge the Federal short-term rate plus three percentage points on the underpaid amount.
The IRS may even assess all three — civil penalties, criminal penalties, and interest — for severe violations.
To gain a better understanding of what you’re up against, let’s look at the potential penalties for three common international filings: Form 5471, Form 5472, and Form 8938.
Form 5471 Penalties
In general, you should file Form 5471 if you hold at least a 10% ownership in a foreign corporation. This report helps the IRS determine if you’re paying your fair share of US taxes on foreign corporate earnings.
If you fail to file Form 5471 within 90 days of receiving an IRS notice, the IRS will assess a fine of $10,000. If you continue to withhold the report, the IRS will assess an additional $10,000 penalty every 30 days up to the maximum of $50,000.
In addition to the flat-fee penalty, the IRS may also reduce your foreign taxes that are available for credit by 10%. After the 90-day grace period, they’ll reduce your potential credit by another 5% every three months until you file. Continued failure to file could result in criminal penalties as determined by a judge or jury, and interest.
Click here to read more about Form 5471 penalties.
Form 5472 Penalties
Your US corporation will be required to file Form 5472 if your business is at least 25% owned by foreign parties. The IRS uses this form to keep an eye on potentially taxable transactions between US corporations and related foreign parties.
If your business fails to file Form 5472 within 90 days of receiving a notice from the IRS, the IRS could assess an initial penalty of $25,000. After that, additional penalties of $25,000 will be assessed every 30 days with no stated maximum. Criminal penalties and interest could also apply.
Click here to read more about Form 5472 penalties.
Form 8938 Penalties
Under the Foreign Account Tax Compliance Act (FATCA), you should file Form 8938 if you have foreign financial assets that exceed a certain threshold.
There are a few different penalties that could apply for failing to comply with the FATCA.
- Failure to File — If you fail to file Form 8938, you will be subject to an initial penalty of $10,000.
- Continued Failure to File — If you continue to withhold your report after the IRS issues a notice, you could be assessed an additional $10,000 every 30 days for a maximum of $50,000.
- Inaccuracy — If you neglect to pay taxes on a taxable transaction, you may be assessed a penalty equal to 40% of your underpayment of tax.
- Inaccuracy Due to Fraud — If you fraudulently avoid paying tax on reportable transactions, you may be assessed a penalty equal to 75% of your underpayment of tax.
For severe violations, the IRS may seek criminal penalties. Interest will also apply.
Click here to read more about the FATCA and Form 8938 penalties.
Penalties for Other International Tax Forms
As you can see, each form’s penalties vary. Click here to take you to our comprehensive penalty chart for nearly all international tax forms.
Compliance Solutions
We get it. Mistakes happen. If you’ve failed to file a required informational return, there are a few programs that can help you come back into compliance.
Automatic Extensions
The IRS will often grant you an automatic extension to file your informational return. Form 5471, for example, is due with your annual tax return. If you extend your tax return, the IRS will automatically extend the due date of Form 5471.
Streamlined Filing Compliance Procedures
The IRS offers a program that helps you avoid most or all penalties when you file delinquent returns. To use the streamlined filing compliance procedures, you must be able to prove that your failure to file was not willful, and that you had a good faith misunderstanding of the law. The program is only available to individual taxpayers filing certain informational returns, so contact us to see if you’re eligible.
Streamlined Foreign Offshore Procedures
The streamlined foreign offshore procedures applies to US persons who reside outside of the states and whose failure to file was non-willful conduct.
Delinquent International Information Return Submission Procedures
If you have not already been contacted by the IRS about delinquent returns, you can submit delinquent returns using the IRS’s delinquent international information return submission procedures. The IRS may still assess penalties and interest, but you will have the opportunity to explain why you failed to file your returns, and the IRS may be lenient with their punishments.
Delinquent FBAR Submission Procedures
The delinquent FBAR submission procedures is a simple and effective way to avoid penalties for filing late FBARs.
Voluntary Disclosures
Voluntary disclosures are reserved for when you willfully failed to comply with the law. Coming back into compliance via the voluntary disclosure process will help limit your criminal fines, but you should be prepared to pay the maximum civil penalties plus all prior taxes and interest. For those seeking help with international reports, they should look into the IRS Criminal Investigation Voluntary Disclosure Practice. You should only initiate a voluntary disclosure with help from a CPA or lawyer familiar with international reporting requirements.
Always More to Think About
Missing a due date here or there likely won’t be the catastrophe you had envisioned, but it’s important you get on a regular reporting schedule to limit your exposure to penalties and interest. If you want to make sense of all your filing responsibilities, reach out to a firm or a professional you trust. At AB FinWright, we have helped many clients with their international reporting responsibilities and would love to help with yours. Reach out to us today so we can help.
Penalties for Commonly Filed International Tax Forms
Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts |
If you own a foreign trust, completed asset transfers with a foreign trust, or received large gifts from a foreign person, you may need to file Form 3520. Failing to do so (or filing an incomplete or inaccurate form) could cost you a civil penalty of $10,000 and/or one or more of the following:
No penalties will be imposed if you can prove that your failure to comply was not willful, but if the IRS sends you a notice of an incomplete or missing filing, you must address the issue within 90 days or you will be assessed additional noncompliance penalties. Click here to read more about Form 3520 penalties. |
Annual Information Return of Foreign Trust with a U.S. Owner |
A foreign trust must file Form 3520-A to report information about the trust itself, its US beneficiaries, and its US owners. Failing to file Form 3520-A (or leaving out important information) will subject your trust to an initial penalty of the greater of $10,000 or 5% of the trust’s assets that are owned by US parties. The penalties will never exceed the gross value of the trust, and no penalties will be imposed if you can demonstrate that you were not willfully neglecting your filing responsibilities. Criminal penalties may be imposed if you file a false or fraudulent return. Click here to read more about Form 3520-A penalties. |
Information Return of U.S. Persons With Respect to Certain Foreign Corporations |
In general, you should file Form 5471 if you hold at least a 10% ownership in a foreign corporation. This report helps the IRS determine if you’re paying your fair share of US taxes on foreign corporate earnings. If you fail to file Form 5471 within 90 days of receiving an IRS notice, the IRS will assess a fine of $10,000. If you continue to withhold the report, the IRS will assess an additional $10,000 penalty every 30 days up to the maximum of $50,000. In addition to the flat-fee penalty, the IRS may also reduce your foreign taxes that are available for credit by 10%. After the 90-day grace period, they’ll reduce your potential credit by another 5% every three months until you file. Continued failure to file could result in criminal penalties as determined by a judge or jury, and interest. Click here to read more about Form 5471 penalties. |
Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business |
Your US corporation will be required to file Form 5472 if your business is at least 25% owned by foreign parties. The IRS uses this form to keep an eye on potentially taxable transactions between US corporations and related foreign parties. If your business fails to maintain adequate records or fails to file Form 5472 within 90 days of receiving a notice from the IRS, the IRS could assess an initial penalty of $25,000. After that, additional penalties of $25,000 will be assessed every 30 days with no stated maximum. Criminal penalties and interest could also apply. Click here to read more about Form 5472 penalties. |
Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund |
Form 8621 is only for certain direct and indirect owners of passive foreign investment companies (PFICs). The IRS does not go into detail about the penalties for failing to file this form other than to say that you could be charged civil and/or criminal penalties if you file your form with false information. Additionally:
Click here to read more about Form 8621 penalties. |
Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs) |
If you are a direct or constructive tax owner of a foreign disregarded entity (FDE) or operate a foreign branch (FB), you may need to file Form 8858. Failing to do so will cost you $10,000. If you fail to file within 90 days of receiving a notice from the IRS, they could impose an additional $10,000 every 30 days up to a max additional penalty of $50,000. In total, this means you could be fined $60,000 for simply failing to file one return. This $60,000 potential penalty applies to each unfiled return, so if you are three years behind in your filings, you could owe up to $180,000 in penalties. In addition to the flat-fee penalty, the IRS may also reduce your foreign taxes that are available for credit by 10%. After the 90-day grace period, they’ll reduce your potential credit by another 5% every three months until you file. Continued failure to file could result in criminal penalties as determined by a judge or jury, and interest. Click here to read more about Form 8858 penalties. |
Return of U.S. Persons With Respect to Certain Foreign Partnerships |
Certain US partners in a foreign partnership are required to file Form 8865 to report transactions between themselves and the partnership. Penalties for failing for file Form 8865 change depending on the type of filer you are.
Click here to read more about Form 8865 penalties. |
Statement of Specified Foreign Financial Assets (FATCA) |
Under the Foreign Account Tax Compliance Act (FATCA), you should file Form 8938 if you have foreign financial assets that exceed a certain threshold. There are a few different penalties that could apply for failing to comply with the FATCA.
For severe violations, the IRS may seek criminal penalties. Interest will also apply. Click here to read more about the FATCA and Form 8938 penalties. |
Return by a U.S. Transferor of Property to a Foreign Corporation |
US individuals and entities should file Form 926 if they’ve transferred property to a foreign corporation that either (1) is valued at over $100,000, or (2) results in them owning 10% or more of the corporation’s voting stock. If the IRS discovers you failed to file your form timely, you can be fined 10% of the value of the property you transferred to the corporation, with a max penalty of $100,000. You could also be assessed a 40% penalty for underpayment of tax. If your failure to file was not to willfully deceive the IRS, the IRS will likely waive these penalties. Click here to read more about Form 926 penalties. |
Report of Foreign Bank and Financial Accounts (FBAR) |
You may be required to file the FBAR if you hold financial assets in overseas bank accounts. If you file the FBAR late or fail to file it at all, you may be subject to both civil and criminal penalties. Most civil penalties will not exceed $10,000 per filing, and if you have a reasonable cause for failing to file your return, your penalties may be waived altogether. If you willfully withhold information from the IRS, you could be subject to a civil penalty of $100,000 or 50% of the balance in your overseas account. Severe willful violations may even land you in jail. Click here to read more about FBAR penalties. |