What Are the Foreign Financial Reporting Requirements or Forms That Should Be Filed With the Internal Revenue Service (IRS) for Individuals, Businesses, Trusts and Foundations?
Under 26 USC § 6038D and 26 USC §§ 1471-1474, individuals and companies in the U.S. and abroad face a number of reporting obligations related to foreign financial assets and foreign business entities doing business in the United States. Failing to meet these obligations can have drastic consequences, including civil penalties and the potential for criminal federal prosecution. While specific reporting obligations can vary greatly from one tax situation to the next, some of the most-commonly-used foreign financial reporting forms are:
- IRS Form 3520
- IRS Form 3520 A
- IRS Form 5471
- IRS Form 5472
- IRS Form 8938
- IRS Form 926
Each of these forms has its own substantive and technical requirements, and not only can submitting an inaccurate or incomplete form result in a failure to adequately report your foreign financial assets, but it can also potentially trigger allegations of tax fraud and other tax-related federal crimes as well. As a result, for the individuals and entities that are required to file these forms, ensuring completeness and accuracy are of paramount importance. Federal tax attorney and Managing Partner of Thorn Law Group Kevin E. Thorn has helped taxpayers nationwide and around the globe satisfy their obligations to the IRS, and he has also protected numerous clients who have been at risk for prison time and other penalties as a result of reporting violations. If you need help with any issue related to the reporting of foreign financial assets, you should call 202-349-4033 or email Mr. Thorn at email@example.com. Visit thorntaxlaw.com for more information.
What is IRS Form 3520?
IRS Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipts of Certain Foreign Gifts, is a form used to report certain foreign transactions and events to the IRS. The Instructions for Form 3520, provide that the purpose of Form 3520 is to report:
- Certain transactions with foreign trusts,
- Ownership of foreign trusts under the rules of Sections 671 through 679 of the Internal Revenue Code, and
- Receipt of certain large gifts or bequests from certain foreign persons (including nonresident alien individuals and foreign corporations, partnerships and estates).
Within each of these three categories of reportable events, there are additional conditions and requirements, and taxpayers’ specific reporting obligations will often be contingent upon multiple factors related to the specific transaction in question. As a result, determining whether it is necessary to file Form 3520 can be challenging and in many cases, taxpayers will benefit from submitting what is known as a “Protective Filing.”
When Should IRS Form 3520 Be Filed?
In the Instructions for Form 3520, the IRS identifies four categories of taxpayers who may have an obligation to file Form 3520. Notably, while Form 3520 must be filed at the same time as a taxpayer’s annual income tax return, it must be submitted to a different office than the one that processes annual returns: Internal Revenue Service Center, P.O. Box 409101, Ogden, UT 84409.
1. Foreign Trust Transfers
The Instructions for Form 3520 state that filing is required if, “[y]ou are the responsible party for reporting a reportable event that occurred during the current tax year, or you are a U.S. person who transferred property (including cash) to a related foreign trust (or a person related to the trust) in exchange for an obligation.”
2. Foreign Trust Ownership
The Instructions for Form 3520 also require filing if, “[y]ou are a U.S. person who, during the current tax year, is treated as the owner of any part of the assets of a foreign trust under the rules of sections 671 through 679.”
3. Foreign Trust Distributions
Another instance in which filing is required is if, “[y]ou are a U.S. person . . . who received (directly or indirectly) a distribution . . . from a foreign trust during the current tax year or you are a U.S. person who is a U.S. owner or beneficiary of a foreign trust and such foreign trust made a loan of cash or marketable securities (including an extension of credit) to you or a U.S. person related to you or provided you or a U.S. person related to you with the uncompensated use of trust property.”
4. Gifts from Foreign Individuals, Estates and Business Entities
Finally, a Form 3520 filing is required if, “[y]ou are a U.S. person who, during the current tax year, received either: a. More than $100,000 from a nonresident alien individual or a foreign estate (including foreign persons related to that nonresident alien individual or foreign estate) that you treated as gifts or bequests); or b. More than $16,076 [as of 2018] from foreign corporations or foreign partnerships (including foreign persons related to such foreign corporations or foreign partnerships) that you treated as gifts.”
Under these four provisions, examples of transactions and ownership interests that will trigger an obligation to file Form 3520 include:
- Acquiring an ownership interest in a foreign trust,
- Transferring money or other property to a foreign trust,
- Receiving a distribution or loan from a foreign trust,
- Acquiring a qualified obligation of a foreign trust,
- Being appointed the executor of a U.S. resident’s estate which includes a foreign trust,
- Receiving a gift of $100,000 or more from a foreign individual or estate, and
- Receiving more than $16,076 as a gift from a foreign business entity.
What Are the Penalties for Failure to File IRS Form 3520?
The penalty for failing to file IRS Form 3520 is the greater of $10,000 or a percentage-based penalty calculated based upon the type of transaction or ownership interest at issue:
- 35 percent of the gross value of any property transferred,
- 35 percent of the gross value of any distributions received, or
- 5 percent of the gross value of trust assets treated as the taxpayer’s property.
The IRS can impose additional penalties who fail to file Form 3520 within 90 days of receiving a mailed notice of failure to comply. Critically, the IRS will not impose any penalties if a taxpayer can show that a failure to file was due to, “reasonable cause and not willful neglect.” This is one of numerous areas in which an expert tax attorney like Managing Partner Kevin E. Thorn can help. To find out what it takes to avoid penalties, call 202-349-4033 or email Mr. Thorn at firstname.lastname@example.org. Visit thorntaxlaw.com for more information.
Should You Consider Making a “Protective Filing” with IRS Form 3520?
In some cases, it may not be entirely clear whether a reportable event has occurred or whether a foreign asset or entity qualifies as a “trust” for purposes of Form 3520. In these circumstances, taxpayers can submit what is known as a “protective filing.” A protective filing starts the three-year statute of limitations for the IRS to pursue taxes and penalties, and it provides protection against the penalties discussed above in the event it is subsequently determined that a filing was indeed required. There are certain technical requirements for submitting a protective filing, and a protective filing can potentially involve certain risks as well. As a result, prior to submitting a protective filing, taxpayers should discuss their options with an experienced federal tax attorney like the Managing Partner of Thorn Law Group, Kevin E. Thorn. Call 202-349-4033 or email Mr. Thorn at email@example.com. Visit thorntaxlaw.com for more information.
What is IRS Form 3520 A?
IRS Form 3520 A is, “the annual information return of a foreign trust with at least one U.S. owner.” While Form 3520 A must be filed by the trust, all U.S. owners are responsible for ensuring that the form is timely filed on an annual basis and that the trust provides all required annual statements to U.S. owners and beneficiaries. Further, the Instructions for Form 3520 A provide that if the foreign trust fails to submit an annual filing in any year, then each U.S. owner must complete a substitute Form 3520 A and attach it to their Form 3520.
The penalty for failing to file Form 3520 A is the greater of $10,000 or five percent of the gross value of the trust assets deemed owned by the U.S. owner who is subject to penalization. This is in addition to the penalty for failing to file Form 3520. Additionally, similar to Form 3520, taxpayers can face additional penalties if they fail to correct a deficient or delinquent filing within 90 days of receiving mailed notice from the IRS, and willful violations can trigger criminal prosecution.
When Should IRS Form 3520 A be Filed?
If a U.S. taxpayer is required to file Form 3520 based upon a transaction with or acquisition of an ownership interest in a foreign trust, then Form 3520 A will likely need to be filed as well. Form 3520 A should be filed at the same time as Form 3520 (when the taxpayer’s annual income tax returns are due) and should be submitted to the same office in Ogden, Utah as Form 3520. The only exception to the foreign trust reporting requirements under Form 3520 A is for custodians of Canadian registered retirement savings plans (RRSPs) and Canadian registered retirement income funds (RRIFs), which are not required to file Form 3520 A with respect to U.S. citizens and resident aliens who hold an interest in the RRSP or RRIF. If you are required to file IRS Form 3520 A, failing to do so can have serious consequences. To find out if you need to file, and to make sure you do everything necessary in order to avoid penalization (and possible criminal prosecution) by the IRS, call 202-349-4033 or email Mr. Thorn at firstname.lastname@example.org. Visit thorntaxlaw.com for more information.
What is IRS Form 5471?
IRS Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, is used to report transactions between foreign corporations and U.S. taxpayers. Officers, directors and shareholders who are U.S. citizens and resident aliens can all potentially be required to file; and, in the words of the IRS, “[s]ubstantial penalties exist for U.S. citizens and U.S. residents who are liable for filing Form 5471 and who failed to do so.”
When Should IRS Form 5471 Be Filed?
The reporting requirements for transactions with foreign corporations apply to individuals and business entities. Taxpayers that may be required to file IRS Form 5471 include:
- S. citizens and resident aliens,
- S. domestic corporations,
- S. domestic partnerships, and
- S. domestic trusts.
The Instructions for Form 5471 further detail four “categories” of filers who are required to file the form (and who can face steep penalties if they fail to do so):
Category 2 Filers
Due to a statutory repeal, there is no longer a “Category 1 Filer” status for Form 5471. Instead, the list of potential filers starts at Category 2. A “Category 2 Filer” is any U.S. citizen or resident alien who is an officer or director of a foreign corporation) in which a U.S. person has acquired:
- 10 percent stock ownership of the foreign corporation, or
- An additional 10 percent or more (in value or voting power) of the foreign corporation’s stock.
For purposes of Form 5471, a person is deemed to have “acquired” stock in a foreign corporation when he or she has “an unqualified right to receive the stock,” regardless of whether or not the stock has been formally issued.
Category 3 Filers
Category 3 covers U.S. taxpayers who acquire and dispose of shares of qualifying corporate entities (as opposed to Category 2, which covers the corporation’s officers and directors). Individuals and business entities that will qualify as “Category 3 Filer” include:
- S. persons who acquire stock in a foreign corporation that brings their total ownership to share to 10 percent or greater,
- S. persons who acquire 10 percent or more of a foreign corporation’s stock (without regard to any prior ownership),
- Persons who are treated as U.S. shareholders under Section 953(c) of the Internal Revenue Code (dealing with insurance income), and
- S. persons who dispose of sufficient stock to reduce their ownership share below the reporting threshold.
Category 4 Filers
A “Category 4 Filer” is any U.S. person (including an individual or business entity) that has control of a foreign corporation for at least 30 consecutive days during the foreign entity’s annual accounting period. For purposes of Form 5471, a person is deemed to have “control” of a foreign corporation if that person holds either: (i) more than 50 percent of the total combined voting power of all classes of shares, or (ii) more than 50 percent of the total value of all classes of shares.
Category 5 Filers
Category 5 covers U.S. shareholders in foreign entities that qualify as “controlled foreign corporations” for a period of at least 30 consecutive days during the tax year and who own stock in the foreign entity on the last day of the year. A U.S. shareholder will be subject to reporting requirements as a “Category 5 Filer” if he, she or it either: (i) owns 10 percent or more of the total combined voting power of all classes of shares, or (ii) owns any stock in a controlled foreign corporation that is also a captive insurance company.
What are the Penalties for Failing to File IRS Form 5471?
Failing to file Form 5471 or filing Form 5471 with inaccurate or incomplete information can subject U.S. taxpayers to a penalty of $10,000 for each annual accounting period in which the filing is delinquent or deficient. Taxpayers can face an additional penalty of up to $50,000 for failing to file a complete and accurate Form 5471 after receiving mailed notice from the IRS. Violations of the foreign corporation reporting requirements can also result in reduction of the foreign tax credits available to the taxpayer under Sections 901, 902 and 960 of the Internal Revenue Code. Call 202-349-4033 or email email@example.com to speak with the Managing Partner of Thorn Law Group, Kevin E. Thorn to find out if there are any options available to help you avoid such penalties. Visit thorntaxlaw.com for more information.
What is IRS Form 5472?
IRS Form 5472 is used to report foreign ownership interests in U.S. corporations as well as the U.S. business activities of foreign entities. As a result of recent changes, U.S. single-member limited liability companies (LLCs) that would otherwise be treated as disregarded entities are now treated as domestic corporations with regard to foreign reporting requirements. As a result, these entities (and the foreign entities that own them) will often be required to file Form 5472.
When Should IRS Form 5472 Be Filed?
Pursuant to the Instructions for Form 5472, a corporation (or LLC) is subject to reporting requirements, “if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.” This applies to ownership of 25 percent of either: (i) the total voting power of all classes of stock, or (ii) the total value of all classes of stock. Transactions that qualify as reportable U.S. business activities include sales, leasing transactions and any other transactions involving monetary consideration (including U.S. or foreign currency).
The requirement to file Form 5472 is subject to a number of exceptions. These exceptions include circumstances in which:
- The foreign entity has no reportable transactions during the applicable tax year;
- A U.S. person who controls the foreign corporation files Form 5471 disclosing all reportable transactions (this exception is not available to foreign-owned disregarded entities);
- The related entity qualifies as a foreign sales corporation and files Form 1120-FSC (this exception is not available to foreign-owned disregarded entities);
- The foreign entity does not have a permanent establishment in the U.S. under an applicable income treaty and timely files Form 8333;
- All of the foreign entity’s income is exempt from taxation under Section 883 of the Internal Revenue Code and the entity complies with the reporting requirements of Section 883 and 887;
- Neither the reporting entity or the related entity is a U.S. person, and no transaction generates income from within the U.S. or in connection with trade or business in the U.S. or any expenses, losses or deductions allocable to such income.
What are the Penalties for Failing to File IRS Form 5472?
Failure to file Form 5472 (or filing a “substantially incomplete” Form 5472) triggers a $25,000 penalty. Taxpayers can face additional $25,000 penalties with respect to each related party for which a failure occurs as well, with an additional penalty accruing every 30 days beginning 90 days following receipt of mailed notice from the IRS. U.S. persons accused of intentionally failing to file Form 5472 or submitting fraudulent filings can also face criminal prosecution. Due to the substantial complexities of determining whether it is necessary to file IRS Form 5472 and the extreme legal risks involved, individuals with interests in foreign corporations should discuss their reporting obligations with an expert tax attorney promptly. To speak with the Managing Partner of Thorn Law Group, Kevin E. Thorn in confidence, call 202-349-4033 or email Mr. Thorn directly at firstname.lastname@example.org. Visit thorntaxlaw.com for more information.
What is IRS Form 8938?
IRS Form 8938 is one the primary forms used to satisfy U.S. taxpayers’ reporting obligations under the Foreign Account Tax Compliance Act (FATCA). Under FATCA, individual taxpayers must report their “specified foreign financial assets” to the IRS, and failure to file can trigger civil fines as well as criminal penalties. Form 8938 allows taxpayers to take advantage of the IRS’s streamlined compliance procedures, which reduce (or potentially eliminate, in some cases) taxpayers’ penalties in circumstances involving non-willful violations.
When Should IRS Form 8938 Be Filed?
There are three basic criteria for determining whether a taxpayer must file IRS Form 8938. The taxpayer must (i) be a specified individual, (ii) have an interest in specified foreign financial assets, and (iii) own specified foreign financial assets that exceed the IRS’s reporting threshold:
1. A Specified Individual Taxpayer
For purposes of IRS Form 8938, a “specified individual” is a U.S. citizen, a resident alien of the United States, a non-resident alien who elects to be treated as a resident alien, or a nonresident alien who is a bona fide resident of American Samoa or Puerto Rico.
2. An Interest in Specified Foreign Financial Assets
“Specified foreign financial assets” include financial accounts maintained by foreign financial institutions and any other foreign financial assets that are “held for investment [and]are not in an account maintained by a [U.S.] or foreign financial institution.” This includes:
- Stocks and securities of non-U.S. entities,
- Any other ownership interest in a non-U.S. entity, and
- Any financial instrument or contract obtained from a foreign person (individual or entity).
3. Aggregate Value in Excess of the IRS’s Reporting Threshold
The reporting thresholds for specified foreign financial assets vary depending upon an individual taxpayer’s filing status and country of residence. For taxpayers residing in the U.S., the thresholds are:
- Unmarried taxpayers – Total value in excess of $50,000 on the last day of the tax year or in excess of $75,000 at any time during the tax year.
- Married taxpayers filing jointly – Total value in excess of $100,000 on the last day of the tax year or in excess of $150,000 at any time during the tax year.
- Married taxpayers filing separately – Total value in excess of $50,000 on the last day of the tax year or in excess of $75,000 at any time during the tax year.
For U.S. taxpayers living abroad, the thresholds are:
- Individual returns – Total value in excess of $200,000 on the last day of the tax year or in excess of $300,000 at any time during the tax year.
- Joint returns – Total value in excess of $400,000 on the last day of the tax year or in excess of $600,000 at any time during the tax year.
What Are the Penalties for Failing to File IRS Form 8938?
The penalties for failing to file IRS Form 8938 depend on a multitude of factors, including whether the taxpayer seeks to make use of the IRS’s streamlined filing procedures. To learn more about the penalties for FATCA violations (i.e. failure to file IRS Form 8938), you can read: IRS (Domestic or Foreign) Streamlined Filing Procedures of Compliance for Offshore Bank Account Reporting: IRS Voluntary Disclosures (IRS Offshore Tax Amnesty).
Should I File IRS Form 8938 or an FBAR?
Many taxpayers struggle to understand the differences between the reporting requirements under FATCA and the disclosure requirements under the Bank Secrecy Act. While there are numerous key differences between these statutes, they also overlap significantly in coverage; and, as a result, taxpayers will often be required to file IRS Form 8938 to comply with FATCA and file a Report of Foreign Bank and Financial Accounts (FBAR) using FinCEN Form 114.
Due to the potential consequences of failing to comply with FATCA or the Bank Secrecy Act, taxpayers who own foreign financial accounts or other overseas financial assets should discuss their obligations with an experienced federal tax attorney. If you have questions about your reporting or disclosure obligations and would like a confidential consultation, you can call our firm at 202-349-4033 or email the Managing Partner of Thorn Law Group, Kevin E. Thorn directly at email@example.com. Visit thorntaxlaw.com for more information.
What is IRS Form 926?
IRS Form 926 is the information return used to report exchanges and transfers of property involving foreign corporations. Individual taxpayers, domestic corporations, domestic estates and domestic trusts can all face reporting obligations under Form 926 – and they can all face penalties for non-compliance. These penalties include up to 10 percent of the fair market value (FMV) of the property at the time of exchange or transfer, subject to a maximum penalty of $100,000 in cases involving unintentional violations. However, taxpayers can avoid penalties for non-compliance if they can effectively demonstrate that their failure to file is the result of “reasonable cause and not  willful neglect.”
Similar to Form 8938, the obligation to file Form 926 may also coincide with the obligation to file FinCEN Form 114. Once again, taxpayers should consult with their legal counsel to determine all applicable reporting obligations and mitigate their risk for substantial penalties.
When Should IRS Form 926 be Filed?
Since the obligation to file Form 926 is based upon a general obligation to report transactions involving foreign corporations, the best way to determine whether a filing is necessary is to look at the exceptions to the general obligation. Transactions that do not trigger an obligation to file Form 926 include:
- Distributions by domestic corporations under Section 355 of the Internal Revenue Code,
- Section 354 and Section 356 exchanges involving certain recapitalizations,
- Certain transactions involving U.S. transferors who own less than five percent of the total voting power and value of the transferee foreign entity, and
- Certain transactions involving U.S. transferors who own five percent or more of the total voting power and value of the transferee foreign entity where the transferor is tax-exempt or reported the transfer on its own federal return.
Are you required to file IRS Form 926? What is at risk if you have failed to file for prior tax years? To discuss your situation with expert tax attorney and the Managing Partner of Thorn Law Group, Kevin E. Thorn in confidence, call 202-349-4033 or email Mr. Thorn at firstname.lastname@example.org. Visit thorntaxlaw.com for more information.
Which Foreign Reporting Form Should You Use?
With so many options, which foreign reporting form should you use? As you can see from the discussion above, while each individual form is designed to address a discrete set of circumstances and to satisfy taxpayers’ reporting obligations under separate provisions of the Internal Revenue Code, it will not always be clear what filing (if any) is required. Combine this with the separate FBAR filing requirements, and taxpayers with foreign holdings will often face a quagmire of reporting and disclosure obligations along with the potential for significant ramifications in the event that they misinterpret or misapply the applicable law.
That said, complying with the foreign financial reporting requirements is not impossible and an experienced tax attorney such as the Managing Partner of Thorn Law Group, Kevin E. Thorn, can help you meet your obligations to the IRS. The following are some basic considerations to keep in mind as you begin to examine your reporting obligations:
Use Form 3520 if . . .
You are a U.S. individual or corporate taxpayer and you have received a gift from a foreign individual, estate or business entity. This includes gifts of money or other forms of tangible or intangible property; however, it is subject to thresholds of (i) $100,000 for gifts from foreign individuals and estates, and (ii) $16,076 for gifts from foreign corporations, partnerships and LLCs.
Use Form 3520 A if . . .
You hold an interest in a foreign trust that has at least one U.S. owner. While the foreign trust is primarily responsible for filing Form 3520 A, if the trust fails to do so, each U.S. owner must complete Form 3520 A and include it with their Form 3520 filing.
Use Form 5471 if . . .
You fall into one of the four “categories of filers” listed above with respect to your role with or ownership interest in a foreign business entity. Filing is generally (though not exclusively) required with respect to entities in which a U.S. person (individual or business entity) owns a 10-percent or greater interest during the tax year.
Use Form 5472 if . . .
You own an interest in a foreign corporation that owns a 25-percent or greater interest in a domestic business entity or that has engaged in U.S. trade or business during the tax year. However, before you prepare Form 5472, check to see if one of the statutory exceptions to the filing requirement applies.
Use Form 8938 if . . .
You are an individual taxpayer who owns certain foreign financial assets, such as bank accounts held at foreign financial institutions or securities held outside of a foreign financial account. If you need to file Form 8938, make sure you know whether you need to file FinCEN Form 114 as well.
Use Form 926 if . . .
You are an individual taxpayer or hold an interest in a domestic corporation, estate or trust and you engaged in an exchange or transfer involving a foreign business entity. If you conducted the exchange or transfer using a foreign financial account, you may also need to file FinCEN Form 114.
Key Takeaways: Understanding Your Foreign Financial Reporting Obligations to the IRS
Taxpayers’ reporting obligations with respect to foreign financial assets, entities and transactions are complicated; and, in some cases, taxpayers will need to examine multiple transactions to determine if they have an obligation to file one or more forms with the IRS. Here are some of the key takeaways from the discussion above:
- Multiple Obligations – U.S. taxpayers who have involvement with foreign entities have multiple potential reporting obligations, and they may need to make multiple filings within a single tax year.
- Challenging Determinations – Determining whether you have an obligation to file is not easy and will generally require the advice of an experienced federal tax attorneys.
- Steep Penalties – Even though the forms discussed above are informational returns, failure to file still carries the potential for steep civil financial penalties and even criminal prosecution.
Speak With Former IRS Attorney and Managing Partner of Thorn Law Group, Kevin E. Thorn
If you would like to discuss your foreign financial reporting obligations or need legal advice regarding next steps in the event of a delinquent filing, you can contact our firm for a confidential initial consultation. The Managing Partner of Thorn Law Group, Kevin E. Thorn is a widely-recognized expert in this area who is highly sought after by individual and corporate taxpayers across the country and around the globe. He has successfully represented numerous clients in complex federal tax matters involving the Internal Revenue Service, the Department of Justice and other federal authorities. To request an appointment with the Managing Partner of Thorn Law Group, Kevin E. Thorn, please call 202-349-4033 or email Mr. Thorn directly at email@example.com. Visit thorntaxlaw.com for more information.