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Staying IRS Compliant As An American Overseas

18 Apr
Staying IRS Compliant As An American Overseas

Late Tax Filing Concerns Of The American Abroad

The tax filing deadline for U.S. persons was Monday. Today, the IRS, in its “Tax Tips” e-letter, detailed the penalties for not filing your 1040 form on time. In fact, you face two potential penalties related your 1040 form. Failure to file on time and failure to pay on time.

The IRS will give you an extension to file, but they still want to be paid by April 15, at least 90% of your total tax liability for the year (or 100% of the tax liability for the previous year). Of course, if you’re not filing your return on time, the presumption is you haven’t completed your return and therefore may not actually know what your tax liability is.

However, it’s not the penalties for Form 1040 that you should be most worried about as a U.S. person with an offshore life. The 5%-per-month late-filing penalty for the 1040 is calculated on the amount of unpaid taxes as of April 15 and maxes out at 25% (five months tardiness). Pay your taxes in full, and you have no penalty despite not having filed. (Note, though, that you’ll still want to file, as the IRS will eventually calculate your tax return for you using the data in their database, and they’ll do it in the most unfavorable way possible, meaning they could show you owe tax when you don’t.)

Other Penalties You Should Be Concerned About

Other penalties you should be concerned about if you have offshore activities have to do with the forms associated with those activities, namely, Form 5471 for offshore corporations, forms 3520 and 3520-a for offshore trusts, the FBAR (TD F 90-22.1) if you have qualifying offshore bank accounts, and Form 8938, which goes with your Form 1040 if you have qualifying offshore financial assets.

Failure to file these forms can result in draconian penalties. For example, the FBAR carries a minimum penalty of US$10,000 per year, up to the greater of US$100,000 or 50% of the value of the account. Criminal penalties of up to five years in prison also can be imposed.

For Form 8938, penalties can include 40% or 75% of any underpayment resulting from the unreported transaction.

For Form 5471, penalties can include a US$10,000 to US$60,000 fine and 40% or 75% of any underpayment resulting from the unreported transaction. Criminal penalties can also apply.

For Form 3520, penalties are the greater of US$10,000 or:

  • 35% of the gross value of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of or transfer to a foreign trust or
  • 35% of the gross value of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution or
  • 5% of the gross value of the portion of the trust’s assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information.

For Form 3520-A, penalties are the greater of US$10,000 or 5% of the assets of the trust.

The bottom line is that the penalties can be way greater than the tax owed, if tax is owed. If you’ve now missed the filing deadline (again, Monday) and have not yet requested an extension, I recommend completing the appropriate forms and sending them in as soon as you can. The sooner you get the forms on record the better chance you have of mitigating any potential penalties.

Lief Simon