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San Jose foreign tax compliance lawyerU.S. taxpayers who own offshore accounts or other foreign assets may struggle to understand their requirements for reporting foreign investments to the Internal Revenue Service (IRS) and paying taxes on foreign income. In some cases, these matters have become even more confusing following recent changes to the programs the IRS has made available to taxpayers. In 2018, the IRS ended the Offshore Voluntary Disclosure Program (OVDP), and recently, it also took down the Delinquent International Information Return Submission Procedures (DIISP) from its website. This has left many taxpayers concerned about their ability to become compliant with IRS requirements and avoid penalties related to reporting foreign assets and income.

What Is DIISP?

Previously, the DIISP allowed taxpayers to receive a waiver of the penalties that would normally apply to unreported foreign assets. Taxpayers could qualify for the DIISP if they did not have any unreported income, as long as they could show that they had reasonable cause for their non-compliance, such as death, serious illness, natural disasters, or ignorance of tax laws.

The IRS quietly ended the DIISP in November 2020 without providing any notice that these procedures would no longer be available. Without this option, taxpayers will be required to follow other procedures to become compliant, and they may be subject to tax penalties.

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San Jose, CA offshore tax compliance attorneyU.S. taxpayers are required to report foreign financial accounts and other offshore assets and investments, and taxes may apply to income earned from foreign sources. In the past, the IRS allowed taxpayers who had not met these requirements to become compliant through the Offshore Voluntary Disclosure Program (OVDP). This program is no longer available, and it has left some taxpayers unsure about how to report their foreign assets and pay any taxes owed while minimizing the potential penalties that may apply. 

One issue that the IRS has identified as an area of concern involves taxpayers who applied for pre-clearance with the OVDP but did not complete this program. Specifically, some taxpayers may have been denied access to the program, or they may have voluntarily withdrawn their requests. The IRS’s Large Business & International (LB&I) division will be investigating these taxpayers, and tax audits may be performed in cases involving continued noncompliance.

Options for Compliance With Foreign Tax Reporting Requirements

In some cases, taxpayers who were unable to become compliant through the OVDP may be eligible for the Streamlined Domestic Offshore Procedures (SDOP) or Streamlined Foreign Offshore Procedures (SFOP) programs. A person will qualify for this program if he or she can show that his or her noncompliance was non-willful, meaning that the taxpayer did not know about or did not understand the requirements for reporting foreign assets and income. These taxpayers will be required to comply with tax return requirements for the past 3 years, Foreign Bank and Financial Account Reports (FBAR) requirements for the past 6 years, and other required information. They must provide information about the balances of unreported foreign accounts for the past 6 years, and they must pay all outstanding taxes and interest. In most cases, a 5% penalty will apply to the taxpayer’s highest aggregate foreign account value, although this penalty may be waived in certain cases.

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San Jose tax compliance lawyer for foreign corporationsThe U.S. tax code is very complex, and taxpayers are required to file a wide variety of forms correctly when completing their tax returns. This is especially true for those who own foreign assets or earn income from foreign sources. Failure to meet these requirements can result in tax audits, and taxpayers may face hefty penalties for their failure to comply with their tax requirements. 

The Large Business & International (LB&I) division of the Internal Revenue Service maintains a number of “campaigns” meant to address ongoing concerns about misreporting of assets and income and noncompliance with tax obligations. One notable campaign addresses “loose filing” of Form 5471, (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

Requirements for Filing Form 5471

Form 5471 is used to evaluate the extent of a taxpayer’s foreign assets while also tracking the profits earned by a foreign corporation and any changes in a company’s structure or ownership that may affect the taxes it pays. There are several categories of filers that are required to submit Form 5471, including shareholders of specified foreign corporations (SFCs) or controlled foreign corporations (CFCs), officers or directors of foreign corporations in which a U.S. person has at least 10% ownership stake, or a U.S. person who had control (more than 50% of stock or voting power) of a foreign corporation during the relevant tax accounting period.

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San Jose, CA tax penalty lawyerThe Internal Revenue Service is always on the lookout for taxpayers who fail to comply with tax laws, and it maintains a number of Large Business and International (LB&I) campaigns to address tax avoidance through unreported income or undisclosed assets. Foreign investments are an area that the IRS commonly examines, and one issue that has been highlighted is the holding of assets in trusts outside the United States. Failing to file the proper forms or making errors when reporting assets in foreign trusts can lead to tax audits and significant penalties.

Penalties for Errors in Form 3520 and 3520-A

There are a variety of reporting requirements that apply for U.S. citizens and companies or estates in the United States that are owners or beneficiaries of foreign trusts. The term “foreign trust” is broadly interpreted to include any trust that is not considered a domestic trust. Domestic trusts are trusts that are primarily controlled by people or entities in the United States and are supervised by a U.S. court. There is a lack of clarity concerning some financial accounts that may be treated by the IRS as a trust.

U.S. taxpayers who are considered the owner of a foreign trust or who engage in transactions with foreign trusts are required to file Form 3520 to report these transactions. These transactions may include creating a trust, transferring assets to a trust, receiving a distribution from a trust, or making or receiving a loan with a trust.

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San Jose, CA tax attorney foreign foreign tax compliance

U.S. taxpayers are required to report all of the income they earn and pay applicable taxes, including income earned from foreign investments and offshore accounts. The requirements related to these types of accounts can often be complex. Taxpayers who are not compliant may be audited, and they could face penalties that include civil fines or criminal prosecution. 

Foreign tax compliance has become more difficult since the end of the Offshore Voluntary Disclosure Program (OVDP). This program, which was discontinued in September 2018, allowed taxpayers to avoid penalties by disclosing their foreign assets and paying taxes due. Since the end of the OVDP, some taxpayers who had previously been compliant may be facing additional scrutiny and potential penalties from the IRS. The IRS’s Streamlined Domestic Offshore Procedures (SDOP) and Streamlined Foreign Offshore Procedures (SFOP) programs are still available for taxpayers able to make sworn nonwillfulness statements and file the required forms and make the required payment.

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