"Big Brother" wants more Financial and Information Reporting

We complain about the NSA, and how Democrats love to tax, but under both parties Congress the IRS penalties for noncompliance range from little or nothing,  even if the IRS accepts your explanation that there was "reasonable cause" for your noncompliance is relatively painful $10,000 for a non-willful mistake, to exorbitant $3 million of assessed penalties for willful failure to file FBAR returns, which penalties were wholly separate from and in addition to the assessment of income taxes, interest and income-tax penalties. 

So lets talk about just "Information" reporting, a quick list of some of the most prominent IRS information reporting forms, and the related penalties.

FinCEN Form 114: Report of Foreign Bank and Financial Accounts (FBAR)

Filing Requirements. An FBAR must be filed if a “U.S. person,” had a “financial interest” in, or “signature authority” over, or “other authority” over one or more “financial accounts” located in a “foreign country,” and the aggregate value of such account(s) exceeded $10,000, at any time during the calendar year. 

Penalty for Non-Compliance.  The penalty for a non-willful failure to file is an amount of up to $10,000; but this non-willful penalty does not apply if the filer can demonstrate “reasonable cause” for the non-compliance (which is not very easy to do – mere ignorance of the filing obligation is not likely to get you off the hook). In the case of a willful failure to file, the penalty can be a whopping amount: the greater of $100,000 or 50-percent of account balances. Criminal penalties may also apply.  

Form 8938: Statement of Specified Foreign Financial Assets 

Purpose of Form.  This form is used to report specified foreign financial assets if the total value of all the specified foreign financial assets in which you have an interest is more than the specified threshold.

Filing Thresholds.  Form 8938 applies if the taxpayer has specified foreign financial assets that exceed $50,000 on the last day of the tax year or $75,000 at any time during the tax year (higher threshold amounts apply to married individuals filing jointly and individuals living abroad). 

Assets Covered by FBAR but Not Form 8938.  FBAR picks up a few categories of assets that Form 8938 does not cover, including the following:

• Financial accounts in a foreign branch of a U.S. bank or financial institution.
• Bank accounts over which a person has signature authority, even if the account is owned by or belongs to someone else.

Form 8938 Penalties Compared to FBAR Penalties.  Under Form 8938, the applicable penalties are up to $10,000 for failure to disclose and an additional $10,000 added for each 30 days of non-filing beginning 90 days after the taxpayer receives an IRS notice of a failure to disclose, up to a potential maximum penalty of $60,000; criminal penalties may also apply. 

Form 3520: Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

Taxpayers must report must report various transactions involving foreign trusts, including creation of a foreign trust by a United States person, transfers of property from a United States person to a foreign trust and receipt of distributions from foreign trusts. This return also reports the receipt of gifts in excess of $100,000 from foreign persons or entities.

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 35 percent of the gross reportable amount, except for returns reporting gifts, where the penalty is five percent of the gift per month, up to a maximum penalty of 25 percent of the gift.

Form 3520-A: Information Return of Foreign Trust with a U.S. Owner

Taxpayers must also report ownership interests in foreign trusts, by United States persons with various interests in and powers over those trusts.

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.

Form 5471: Information Return of U.S. Persons with Respect to Certain Foreign Corporations

Certain United States persons who are officers, directors or shareholders in certain foreign corporations, including IBC are required to report information.

The penalty for failing to file each one of these information returns 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. The reporting should be done even if its "dormat" company.

Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Taxpayers may be required to report transactions between a 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 reporting should be done even if its "dormat" company.

The penalty for failing to file each one of these information returns, or to keep certain records regarding reportable transactions, 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.

Form 926: Return by a U.S. Transferor of Property to a Foreign Corporation

Taxpayers are required to report transfers of property to foreign corporations .

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.

Form 8865: Return of U.S. Persons with Respect to Certain Foreign Partnerships

United States persons with certain interests in foreign partnerships use this form to report interests in and transactions of the foreign partnerships, transfers of property to the foreign partnerships, and acquisitions, dispositions and changes in foreign partnership interests. The reporting should be done even if its "dormat" entity.

Penalties include $10,000 for failure to file each return, 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, and ten percent of the value of any transferred property that is not reported, subject to a $100,000 limit.

Form 8621: PFIC Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

A U.S. person that is a direct or indirect shareholder of a passive foreign investment company (PFIC) or qualified electing fund (QEF) files this form:

• When they receive certain direct or indirect distributions from a PFIC,
• Recognize a gain on a direct or indirect disposition of PFIC stock, or
• Are making an election reportable in Part II of the form.

A U.S. person who fails to disclose a "PFIC" ownership interest on either Form 8621 or Form 8938 is therefore subject to the $10,000 penalty.

Form BE-10A

The Benchmark Survey of U.S. Direct Investment Abroad is conducted to secure current economic data on the operations of U.S. parent companies and their foreign affiliates.

During 2014, the Bureau of Economic Ana;ysis US Department of Commerce established a mandatory reporting for 2014 Benchmark Survey of US Direct Investment Abroad. Many people disregarded the reporting, however, recently penalties have been assessed for the lack of reporting the BE-10A.

Penalties – Whoever fails to report shall be subject to a civil penalty of not less than $2,500, and not more than $25,000

So this list goes on and on with information reporting, and unfortunately US taxpayers face severe civil and criminal penalties.