When a business owes payroll taxes to the Internal Revenue Service the liability or exposure goes beyond the business owing the payroll taxes.  When employment taxes are owed to the IRS, the IRS can personally assess individuals from within the business a portion of the employment taxes known as the Trust Fund Recovery Penalty (TFRP).  To assess individuals the TFRP, the IRS conducts a trust fund investigation.  This article has been prepared by a tax attorney to provide information relating to the trust fund investigation process. Contact the McGuire Law Firm to speak with an attorney about the trust fund investigation process.

What is the 941 Trust Fund?

Prior to discussing how the IRS goes about their trust fund investigation, it is important to understand what the trust fund is.  The trust fund amount is the amount of social security and Medicare tax and the federal withholding tax withheld from an employee’s paycheck.  This amount is deemed to be held in “trust” by the IRS to be paid over to the Department of Treasury so the individual receives credit for the withholding.   The IRS takes the trust fund amount very seriously, hence why they can personally assess and collect the trust fund separately from the corporation, LLC or entity that has accrued the underlying the 941 or payroll tax debt.

When is the Trust Fund Investigation Conducted by the IRS?

First and foremost, for the IRS to conduct the trust fund investigation there must be a 941 tax liability.  That being said, once a revenue officer is assigned to collect the employment tax debt from the business entity, one of the first steps the revenue officer takes is to begin the trust fund investigation.  Thus, the trust fund investigation will generally be initiated within a few weeks to a month of when the IRS revenue officer is assigned whether or not known to the business owners. 

What Does the Trust Fund Investigation Consist Of?

The investigation will consist of the revenue officer reviewing corporate or partnership documents such as tax returns, articles of incorporation or organization, bylaws or partnership agreements, bank statements, cancelled checks and any other information or document that may shed light as to who within the business has the necessary authority and control to be personally assessed.  The IRS revenue officer will also conduct what is called the 4180 Interview.

What is the 4180 Interview?

The 4180 Interview is an interview conducted by the IRS with individuals within the business of which the IRS feels may be willful and responsible parties.  The 4180 Interview asks questions relating to an individual’s role, position and duties within the company, their knowledge and actions taken relating to the payroll tax debt and who else, if anyone could conduct certain actions within the business.  The 4180 Interview provides significant information to the IRS about the individual taking the interview and others within the business who may also need to be interviewed.  Generally, any owner, officer or director within a business would be asked to conduct the 4180 Interview.  The failure to conduct the interview may lead to the IRS proposing the personal assessment of the trust fund to the individual if other information, such as the tax returns or the bank signature cards show the individual held a certain position of control of authority within the business.

What are Common Documents Requested or Obtained by the IRS During the Investigation?

The IRS will almost always request the bank statements, cancelled checks and bank signature cards for the business for the tax quarters whereby the 941 taxes were accrued.  Additionally, the IRS will generally request and review the employment tax returns and income tax returns for the business as well as internal business documents and agreement depending upon what the business may or may not have. 

What Happens After the IRS Has Conducted the Trust Fund Interview?

After the revenue officer has conducted their trust fund investigation, the revenue officer will propose the personal assessment of the trust fund to the individuals the revenue officer has determined is a willful and responsible party for withholding and paying over the withholding taxes.  The IRS can propose the trust fund assessment to one or more individuals within the business and the debt is a joint and several liability meaning that the IRS can collect the full amount of the trust fund from one individual even when multiple individuals have been assessed.  

Can the Assessment of The Trust Fund be Appealed?

Yes, you can appeal the proposed decision of the trust fund.  When the IRS proposes the assessment, you have 60 days from the date of the notice to appeal the assessment.  The appeal will be held with an IRS Appeals Officer and the appealing individual needs to show why they do not have the requisite power, authority and knowledge to be held responsible.  

What Happens Once an Individual is Assessed the Trust Fund?

Once assessed, the trust fund becomes a personal liability to the IRS.  The IRS can file a federal tax lien attaching to the individual’s assets and take collection action against the individual such as bank levies, wage garnishments and the potential seizure of other personal assets.

How Can I Get Assistance with an IRS 941 Trust Fund Investigation?

If a business you own, manage or have any control over owes payroll taxes (941 taxes) to the IRS it is likely you could be subject to the trust fund investigation.  It is recommended you speak with a tax attorney regarding your personal exposure to the trust fund.  A tax attorney can represent you before the IRS prior to and during the 4180 Interview as well as appealing the assessment or resolving the tax due if assessed.  You can contact The McGuire Law Firm for a free consultation with a tax attorney regarding the above matters.

This article will discuss the reasons why the IRS may conduct an FBAR audit and will give an overview of the audit process. If you are a US taxpayer and you have any accounts in foreign countries, you need to be aware of the requirements for filing the FBAR. If you are being audited for your FBAR filings, The McGuire Law Firm can help. Contact us for help with an FBAR Audit or other tax issue.

Does the IRS audit people or entities for their Report of Foreign Bank and Financial Accounts (FBAR) Form 114 compliance?

Yes they do! The IRS will audit a person or entity for their FBAR compliance. In many respects that audit is like any other audit where the IRS is looking for substantiation.

How does the IRS determine who they will audit for FBAR compliance?

The answer to the question is relatively mysterious outside of the IRS, but it seems like the IRS has a reason to audit as opposed to an FBAR audit being perfectly random. In our experience, it seems as though something has raised a question in the eye of the IRS with respect to an FBAR. Here are a few reasons the IRS might conduct an FBAR audit:

• Perhaps the IRS is conducting a standard income tax audit and the question about foreign bank account reporting comes up. Assuming there is reason to dig deeper, the IRS may conduct an audit. Case law points to this being an outcome.
• In the case where a person has marked an FBAR question “No” on their form 1040 (Schedule B questions), 1065 (Schedule B questions), 1041 (Other Information) and then the person has actually filed an FBAR, the IRS may audit the FBAR.
• In the case where a person or entity files an FBAR in one year, but not the following year, the IRS may audit the FBAR.

Keep in mind this is a speculative list of reasons and there could be any number of other reasons the IRS may choose to pursue an audit, but it generally seems there is something that kicks off the audit. If there are any auditors out there reading this and want to provide some insight, we welcome the feedback!

What happens when the IRS audits a taxpayer for FBAR compliance?

IRS Initial contact:

In a recent example of an FBAR audit we assisted with, the taxpayer was contacted by the IRS through Department of the Treasury Internal Revenue Service Small Business/Self Employed – BSA group. The taxpayer was sent a 6639 letter (as outlined in IRM 4.26.17).

This initial letter advises the taxpayer that “You’ve been selected for a Report of Foreign Bank and Financial Accounts (FBAR) examination.”

The letter advises the taxpayer to call the IRS agent listed to discuss:

• FinCEN Form 114, Report of Foreign Bank and Financial Accounts, (FBAR) filings, 
• Types of documents you will be asked to provide,
• The examination process, and
• Any concerns or questions you may have.

Appointing a representative to assist with the FBAR audit:

Even at this early stage in the process you should consider hiring an attorney to be the point of contact with the IRS to help through the audit process.  When you hire an attorney, you should appoint them as representative by filing a Form 2848 authorizing the party to discuss the matter with the IRS. The 2848 should be completed by filling in Line 3, “Acts Authorized” as follows:

• For “Description of Matter” – enter “Matters relating to Report of Foreign Bank and Financial Accounts” or “FBAR examination”
• For “Tax Form Number” – enter “FinCEN Form 114”
• For “Year(s) or Periods(s)” – enter the calendar years you are authorizing.

The Information Document Request:

After the initial discussion with the IRS examiner, the IRS will likely issue an Information Document Request (IDR). A recent IDR our client received made the following document requests:

For the XXXX calendar year:

1. Copies of all offshore financial account statements reflecting all account activity for each of the years mentioned above. This includes all accounts in which you consider yourself an owner or co-owner and which you had Signature or Other Authority, and/or over which You Exercised Control during the years mentioned above.
2. Produce all financial statements prepared by you, for you, or on your behalf for any purpose.
3. Complete copies, for my records, of previously filed Report of Foreign Bank and Financial Accounts (FBAR) for foreign accounts maintained during calendar years XXXW & XXXY.
4. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, please provide documentation showing that all income earned by the accounts was properly reported for income tax purposes.
5. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, please provide documentation showing that you properly notified the Commissioner of the Internal Revenue Service on your annual tax return that you had a financial interest in said foreign account.
6. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX that were owned, controlled, or otherwise titled in the name of a foreign entity, please provide documentation showing that all international information returns (i.e. Forms 5471, 8865, 3520-A, etc.) were properly filed for such foreign financial entity.
7. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, and for which you also had a FATCA Form 8938 reporting requirement, please provide all documentation showing that you properly complied with your FATCA reporting requirements.
8. For all foreign accounts that you were required to report on a FinCEN Form 114 (FBAR) for the year(s) XXXX, please provide documentation showing that the funds used to open the account(s) were properly reported as income to the Commissioner of the Internal Revenue Service. To the extent the funds were non-taxable, such as a gift, please provide all documents showing that the funds were properly reported to the Commissioner of the Internal Revenue Service (such as on Forms 3520), as applicable.

As you can see, the request is fairly expansive and covers more than just the FBAR. Gathering the documentation requested can take a lot of time depending on the number of accounts and the taxpayer facts. Certainly, not every question is always applicable.

Taxpayer Interview:

After submission of the documentation, the examiner may request an interview with the taxpayer, either in person, or a remote (online) meeting may also be allowable.

The interview is another thorough set of questions for the taxpayer covering a number of topics. While the questions of the interview are likely specific to each taxpayer, you can expect questions covering the following topics:

• Detailed questions about the taxpayer (and spouse as applicable) inquiring:
  • Where the taxpayer lives or visits,
  • Which passports the taxpayer has,
  • How much time do you spend abroad and for what reason,
  • Details on your educational background,
  • Details on your profession or job,
  • Information about other assets you may own such as real estate and safe-deposit boxes,
  • How financial affairs are managed by you and/or your spouse (if applicable),
  • If you are using any non-US credit cards, and/or
  • Who are the other members of your immediate family?

• Detailed information about your foreign accounts including 
  • Details about why the account was opened, 
  • When the account was opened, 
  • How the account was opened, 
  • Who has access to the account, 
  • and, the purposes of the account.

• Questions about the FBAR filed
  • Has the FBAR been amended?
  • How was the FBAR prepared?
  • Did you research FBAR filing requirements, if so what kind of research?
  • What steps were taken to file the FBAR?

• Information about your tax return preparer (if you used one)
  • How do you communicate with your tax preparer?
  • Do you consider them just a preparer or also an advisor?
  • Do you pay for anything besides tax preparation, such as tax advice?
  • How long have you used this tax preparer?
  • What did you believe the tax preparer’s qualifications were?
  • Did you research the tax preparer prior to hiring your tax preparer?
  • Do you receive a tax organizer or questionnaire from the preparer?
  • Did you fill out the organizer/questionnaire?
  • Did they explain 8938 filing requirements?
  • Did they ask about foreign bank accounts?
  • Did you disclose to them that you had foreign financial accounts?

Like other audits, the IRS can be very thorough and is looking for lots of detail.

After the interview, the IRS may issue additional document requests and may expand the audit to additional tax years, as has been our experience.

Post Interview and additional IDR steps:

At this point, the IRS should be done collecting information from the taxpayer, unless, of course, they have reason to make additional requests. 

The IRS should have enough information at this point to make a determination about the audit and can issue their audit report detailing their findings and any consequential action.

Overview:

While distilled to a few pages here, the audit can take several months to complete, depending on the issues found and reported. The documentation requests can be onerous as well, as it can be challenging to access data from prior years with non-US institutions. The audit can even feel invasive. 

A good tax attorney should be able to help you through the audit process and manage the relevant disclosures through the audit process and advise on potential outcomes. The consequences and implications of the answers given in the audit can lead to significant penalties if the taxpayer is found to have willfully failed to file their FBAR or not filed accurate FBARs. The audit is designed to help the IRS assess the taxpayer filing shortcomings and dictate any penalty action.

If you have been selected for an FBAR audit, contact one of our tax attorneys at The McGuire Law Firm to discuss how we can help.

Although, the current status of the Kurotaki v. The United States of America case stands with the US District Court for the District of Hawaii determination on the government’s motion for summary judgment, the Kurotaki case is an interesting analysis of willfulness and other standards relating to the failure to file an FBAR.  This article recaps the facts of the case and the courts recent determination of whether to grant summary judgment to the government.  

Do you know if you need to file an FBAR? Are you a US Citizen or permanent resident living abroad and confused about your tax liabilities in the US? As this case shows, not filing can result in steep fines, even if they might eventually be forgiven. Get in touch if you need help meeting your filing obligation. 

Facts of the Case

Osamu Kurotaki was born in Japan in 1965 and in 1997 obtained a US Permanent Residence Card of which he held for tax years 2011, 2012 and 2013, which are the years at issue.  Kurotaki resided primarily in Japan and spoke absolutely no English.  Kurotaki had used Tomohiko Kokuso, a certified public accountant who spoke both English and Japanese to prepare his US Individual Income Tax Returns for the applicable tax years and had used Kokuso since 2007.  

The Internal Revenue Service was alerted that Kurotaki had unreported income on his individual income tax returns by the Japanese taxing authorities for tax periods 2008 through 2012.  Upon the IRS’ examination of Kurotaki’s failure to report all income, the IRS determined that Kurotaki had failed to file his FBARs and properly report foreign accounts and/or assets.  The United States assessed Kurotaki $10 Million in civil penalties alleging the failure to file the FBARs was willful for tax years 2011, 2012 and 2013.  Kurotaki paid a portion of the penalty to the IRS for each applicable tax year and then filed his complaint against the United States requesting a refund.  The United States, as defendant filed an answer to Kurotaki’s complaint and counterclaimed to reduce the assessed FBAR penalties to a judgment in favor of the United States.  Additionally, the United States filed a Motion for Summary Judgment in July of 2023 and Kurotaki filed an opposition to the motion in September of 2023.  

Quick Background on Summary Judgment

What is summary judgement? Summary judgment is requested and properly granted when a party believes there is no genuine issue of a material fact and thus the party requesting the motion (the “moving party”) should be entitled to a judgment as a matter of law.  The key terms here are “genuine” and “material.”  Courts have held that an issue is genuine only if or when a sufficient evidentiary basis exists whereby a reasonable fact finder could find for the nonmoving party (Kurotaki in this case).  Further, a dispute is material only if it could impact or affect the outcome of the suit under governing law.  The United States as the moving party would initially bear the burden of proof to show an absence of a “genuine issue of material fact.”  It is important to note that courts view the facts and draws reasonable inferences in the light most favorable to the nonmoving party when considering a motion for summary judgment.  

FBAR Penalties

What are the penalties for failing to file the FBAR?  The Bank Secrecy Act was enacted to fight what was perceived as “serious and widespread use of foreign financial institutions, located in jurisdictions with strict laws of secrecy as to bank activity, for the purpose of violating or evading domestic criminal, tax and regulatory enactments.”  Cal. Bankers Ass’n v. Shultz, 416 U.S. 21, 27, 94 S. Ct. 1494, 39 L. Ed 2d 812 (1974).  It was believed that the use of foreign bank accounts and foreign financial investments had caused the loss of millions of dollars to the United States government in tax revenues.  Thus, the treasury regulations promulgated under the Bank Secrecy Act allow for a civil penalty of $10,000 for each violation for the failure to file an FBAR.  Further, if the failure to file the FBAR is “willful” the penalty is increased to $100,000 or 50% of the value of the account at the time of the violation.  Thus, the penalties for failing to file the FBAR are substantial!  That being said, although the BSA requires the filing of the FBAR, the term “willful” is never defined within the BSA or the treasury regulations.  Therefore, one must look to court determinations and language in terms of determining a definition for willfulness.  In Safeco Ins. Co. of Am. V. Burr, 551 U.S. 45, the Supreme Court provided that, “where willfulness is a statutory condition of civil penalty…. It… cover(s) not only knowing violations of a standard, but reckless ones as well.”  Many other courts have also held that willfulness as it relates to filing or failing to file an FBAR includes both a knowledge and reckless component.  Thus, one could be so reckless in failing to file or disregarding an obvious risk so as to be willful in terms of the penalty. 

The Application of Willfulness in the Kurotaki Case

Kurotaki did not speak English and relied on his CPA to take care of his tax related matters and act as his interpreter.  Kurotaki was provided a tax questionnaire that provided an explanation of the FBAR filing requirement in both Japanese and English, but Kurotaki only read the Japanese version, which when translated into English stated, “U.S. resident taxpayers are required to report their world-wide income from both U.S. and foreign sources.  In addition, taxpayers who have an interest in, are signatories of, or have other authorities over financial accounts in a foreign country, such as bank accounts….. are required to file Form TD F 90-22.1 (FBAR)….”

Kurotaki claimed he did not think the FBAR requirement applied to him because he was not a U.S. resident as he did not reside in the United States and did not know the FBAR filing requirements applied to U.S. green card holders.  Furthermore, Kurotaki believed the FBAR requirement did not apply to him because he had a Japanese passport, he lived or resided in Japan, he worked in Japan etc.  

The Court found that Kurotaki’s understanding of the word “resident” was reasonable and therefore whether applying an objective or subjective standard, there was a genuine issue or material fact as to whether Kurotaki was acting willfully when he failed to file his FBARs.  The Court, in Kurotaki, thus denied the government’s request for summary judgment.

The end-all outcome of the Kurotaki is yet to be determined as of the date of this article but the facts and circumstances led to an interesting analysis of  willfulness in the context of failing to file an FBAR.  

If you have questions or issues related to foreign bank accounts, foreign assets or foreign businesses, you can speak with an international tax attorney at the McGuire Law Firm. Get in touch with us.

IRS Notice LT 11: Intent to Levy

If you owe taxes to the Internal Revenue Service you have likely received many notices.  While some notices issued by the IRS may be more benign in nature, certain notices issued by the IRS  require immediate attention.  One such notice that should require immediate attention is the notice LT 11.  This article has been prepared by a tax attorney to provide additional information relating to Notice LT 11 from the IRS and the options a taxpayer has if or when an LT 11 is issued by the IRS.

If you’ve received Notice LT 11 and you have questions, get in touch with us to discuss your situation.

What is Notice LT 11?

An LT 11 is a final notice of intent to levy that is issued by the Internal Revenue Service.  The LT 11 is issued after the Internal Revenue Service has issued multiple notices to the taxpayer on a tax balance due and the taxpayer has not satisfied the tax debt or has not established a formal agreement with the IRS.

What Does the Notice LT 11 Mean?

The LT 11 is issued by the IRS as part of the due process afforded to the taxpayer when a tax balance is due.  The LT 11 tells the taxpayer that the tax balance needs to be paid, a formal agreement entered into or a hearing requested by the taxpayer to prevent enforcement action such as bank levies, wage garnishments or the seizure of assets by the IRS to collect the past tax due.  The LT 11 explains that if action is not taken, the taxpayer will be legally open to enforcement action by the IRS on the past due tax balances.

Who Issues the LT 11 or How is the LT 11 Issued by the IRS?

The Notice LT 11 can be issued by automated collection even if a revenue officer is not assigned to your case.  The Notice LT 11 can also be issued by an acting revenue officer if a revenue officer has been assigned and is generally one of the first notices issued to the taxpayer if a revenue officer has in fact been assigned to collect on the tax debt.  A revenue officer may also issue a Notice 1058, which is a very similar notice to the LT 11 and gives both the taxpayer and IRS similar rights.

Can an LT 11 Be Issued to Both an Individual or Business?

An LT 11 can be issued to either an individual or business depending upon who or what owes the tax liability to the Internal Revenue Service.  

What Should I Do If I Have Received an LT 11 From The IRS?

First, you may want to consider speaking with a tax attorney about your tax liabilities and current tax issues.  If you owe a relatively small amount and would have no problem paying the tax debt, it could be best to just pay the tax bill and move on, but again, you may want to speak with a tax attorney or tax professional to better understand the situation.  If you are unable to pay the tax debt in full, you could establish an installment agreement with the IRS and this agreement would act as a hold on enforcement and thus negate the threat of enforcement the LT 11 is issued for.  If you are unable to get under an installment agreement for whatever reason or wish to have more time to consider resolution alternatives, the LT 11 does give the taxpayer the right to request a hearing.  The hearing is known as a Collection Due Process Hearing and if filed within 30 days of the date the LT 11 was issued, the hearing request acts as a hold on enforcement for the tax periods stated on the LT 11 under most circumstances.

What Happens if I Request a Collection Due Process Hearing in Response to an LT 11?

If you request a Collection Due Process Hearing, there should be an automatic hold on enforcement for the tax periods stated on the LT 11 that you are requesting the hearing on.  The hearing request will be sent to the IRS Appeals Office and you will be contacted by an IRS Appeals Officer.  It generally takes 3- 4 months to be contacted by an appeals officer from the date you submit the hearing request.  The appeals officer will establish a hearing or conference date whereby you will be able to submit information such as financial information to propose a resolution to the tax liabilities as opposed to the IRS needing to enforce collection of the tax debt through the seizure of assets.  If you submit an installment agreement request, the appeals officer can make a determination on the installment agreement proposal.  If you decide to submit an offer in compromise, the appeals officer can hold the file in appeals while the IRS Offer in Compromise Unit makes a determination on the offer.  After the hearing has been conducted with the appeals officer, the appeals office will issue a determination as to the outcome of the hearing, which will likely state the alternative collection action that has been agreed upon or that an agreement was unable to be reached at that IRS levies and enforcement action is sustained.

What If I Do Not Respond to the LT 11?

If you do not respond to the LT 11 within the 30 days from the date issued, you are open to enforcement action such as bank levies, wage garnishment and the seizure of assets.  The IRS would not need to provide you any further notice to seize a bank account, take wages or seize other assets.  Thus, it is extremely important to properly respond to the LT 11 and work to have a plan in place to resolve the tax debt or have an agreement established.

If you have received a Notice LT 11 from the IRS, please feel free to contact The McGuire Law Firm to speak with a tax attorney.  The tax attorneys at The McGuire Law Firm have responded to many LT 11s issued by the IRS and assisted many taxpayers in resolving their tax liabilities without unnecessary enforcement action by the IRS. 

You may have heard the ads on the radio, maybe seen them on TV, or companies
have even called you about receiving tax relief by settling your tax debts through the IRS Offer
in Compromise Program. Are these ads true?

Can you settle your tax debts with the IRS through an offer in compromise?

The answer is – maybe. The IRS Offer in Compromise Program may allow you to settle your tax debt, but your financial circumstances and other circumstances must make you eligible for the OIC Program. The information below provides a comprehensive look at settling your tax debts through the IRS Offer in Compromise Program.

What is an IRS Offer in Compromise?

In short, this is a tax settlement. You offer the IRS an amount of money to settle your tax debt. Upon payment of the settlement amount, your tax debts
are cleared, tax liens are released, and you owe no tax.

Who is Eligible to Participate in the Offer in Compromise Program?

Technically, anyone can submit an offer in compromise to the IRS. However, the taxpayer must comply for the IRS to process an offer in compromise. Compliance means that all tax returns required to have been filed are actually filed and that any tax payments due have been paid in full. If you are not compliant, the IRS will return your offer in compromise. Additionally, to have a good chance of the IRS accepting your offer in compromise, your recent and current financial circumstances must be in an overall position where the IRS would agree to a settlement.

How Much Will it Take for the IRS to Settle my Tax Debt?

Your IRS offer in compromise, or “settlement amount” is based more on your ability to pay than the total amount of tax you owe. To calculate your offer in compromise amount, the IRS will look at your income and expenses, and your equity in assets. Generally, the IRS will only accept an offer in compromise when, based on your income and expenses and equity in assets, you cannot satisfy your tax liability. There are exceptions and conditions whereby the IRS may accept an offer in compromise even if you have the ability to pay the tax debt in full. These exceptions are discussed in greater detail below.

IRS will initially calculate your offer amount using the following equation: Your disposable income multiplied by 12 or 24 plus your equity in assets. Let’s look at equity in assets first. All of your assets from homes and cars to retirement accounts and bank accounts (and other assets) are considered when the IRS looks at your ability to pay. When considering equity, the IRS will allow reductions of the fair market value of assets and debts on assets. For example, the IRS allows for a 20% reduction when calculating the equity in your home. Thus, if your home had a fair market value of $350,000 and you owed $250,000 on the mortgage for your home, you would have $30,000 in equity for purposes of the offer in compromise calculated as follows: $350,000 x .8 = $280,000 – $250,000 (mortgage) = $30,000 in equity. You also receive a reduction of 20% in the fair market value of retirement accounts, investment accounts, and other assets when calculating the equity for purposes of the offer. Your disposable income is calculated by totaling all income from all sources and subtracting your allowable expenses. Thus, you would include income such as wages, interest, dividends, business income distributions, and other sources in your total income.

Your allowable expenses (also referred to as the national standard for allowable living expenses) are set by the IRS and can be found on the IRS website. The allowable living expenses are dictated primarily by where you live and the number of individuals in your household. Allowable living expenses include food, clothing, housing, utilities, car payments, car operating expenses, and out-of-pocket healthcare expenses. You can claim your actual healthcare expenses if your allowable out-of-pocket healthcare expenses exceed the allowable standard. Once you have calculated your total income and all allowable expenses, the difference is your disposable income, and the figure is multiplied by either 12 or 24 and then added to your equity in assets for the offer in compromise amount. For example, if your disposable income was $600 per month and the only equity you had was in your house per the example above, your over amount would be $37,200, calculated as $600 x 12 + $30,000.

What Forms and Documents Do I need to Submit with my Offer in Compromise?

The IRS has specific forms you need to submit when proposing an offer in compromise. As an
individual, you would complete Form 433A OIC, which is the financial statement whereby you
provide your asset, income and other financial information. In addition to Form 433A OIC, you
would submit Form 656. Form 656 is the form whereby you state your personal information, the
tax years or liabilities you are proposing to settle and the offer in compromise terms (offer
amount and payment terms). The attachments and documents you need to submit with the offer
in compromise will be determined by the items and issues on your financial statement primarily
and perhaps whether or not you are claiming any extenuating circumstances on your offer. For
example, you need to provide your most recent bank statements for all bank accounts, current
statements for any retirement account or investment accounts, current mortgage statement for
any real estate you own, current statement for any vehicle payment showing the monthly
payment and total loan amount and documents such as pay stubs or profit and loss statements to
verify your income. Please note, if you own a business, you may have the requirement to submit
a business financial statement on Form 433B and attach related documents and substantiation for
the business.

Once I Submit My Offer in Compromise What is the Process?

Generally, you will receive a notice from the IRS that the offer has been received and that you will receive contact within 90 days. However, it usually takes about 6 months for an IRS offer examiner to make contact with you with anything material. When the offer examiner does contact you, they may make a request for additional documentation and have a list of questions or issues to discuss to with you. Eventually, the examiner will provide a determination with an equity in asset table and an income and expense table. The equity in assets table will list each asset, the fair market value applied to the asset, the reduction to fair market value (if any), any loan or encumbrance on the asset, and then the equity allocated to the asset. Then all of the equity amounts are totaled. The income and expense table will state the income you claimed and the income as allocated by the IRS, and then all of the expenses you claimed on the 433A OIC financial statement versus the expenses allowed by the IRS to thus calculate your disposable income. The equity in assets and the disposable income are then applied to provide your offer amount.

What Determinations Can The IRS Make on My Offer?

Based upon the figures in your equity in asset table and income & expense table, the IRS can accept the offer as you submitted, reject the offer amount you offered but agree to accept an increased offer amount or reject the offer because your equity in assets and disposable income show that you can full pay the liability. If the IRS does reject your offer, you have the right to request an appeal of the rejection and work with the IRS Appeals Office to see if an agreement on a settlement can be reached.

What Happens When I Appeal The Offer Rejection?

When the offer rejection is appealed, you are assigned an appeals officer to consider the items and issues you disagree with. The appeals officer assigned to your case will send you a notice calling for an initial conference. You are allowed to provide additional information and documentation to the IRS Appeals Officer and the appeals officer will consider all information and make a determination to accept an offer or sustain the IRS’ rejection of your offer. Many offers are accepted through the appeals process and thus one should not lose hope if their offer is initially rejected by the IRS offer examiner.

If the IRS Accepts My Offer in Compromise What Other Obligations Do I Have?

Beyond paying the agreed-upon offer amount, the IRS requires that you remain in compliance by timely filing all returns and paying all taxes for the five years after the offer. If you fail to remain in compliance, the IRS can default the offer and settled liabilities would be due and owed again.

If you have any questions about your offer in compromise, please get in touch with a tax attorney at The McGuire Law Firm or schedule a Free Consultation with one of our 24/7 live agents.

What is the FBAR?

The U.S. government requires individuals to file a document called the Foreign Bank Account Report (FBAR) with the Financial Crimes Enforcement Network (FinCEN). It is designed to ensure that foreign assets and income are correctly reported, helping the Department of Treasury track the activities of U.S. citizens, residents, and businesses and ensure that foreign income is accurately taxed in the United States.

Who Must File an FBAR?

A U.S. person, which includes citizens, residents, corporations, trusts, partnerships, limited liability companies, and estates, must file an FBAR under certain circumstances. This situation occurs when a person in the US has a financial stake in or control over a financial account located outside of the country, and the combined worth of all the foreign accounts is over $10,000 (in US dollars) at any point during the year.

It’s important to note that the foreign financial account does not need to generate income or taxable income for the account to trigger the need to file the FBAR. If the balance of all foreign financial accounts exceeds the $10,000 threshold, each foreign account or asset must be reported, regardless of whether you received income from the foreign account and no matter how small or low the account’s value may be.

FBAR Compliance and Filing

Ensuring compliance with FBAR filing requirements is crucial. The FBAR report must be submitted annually by April 15th for the previous year. In case you miss the due date, you can get an extension until October 15th without having to make a request for it. There’s no need to file for an extension separately for the FBAR.

The FBAR is not filed with your individual tax return. Instead, you file the FBAR electronically through FinCEN’s E-filing system. You may be able to paper file the FBAR, but to do so, you must receive an exemption to E-filing from FinCEN. You are allowed to have a third-party file your FBAR on your behalf.

To properly file your FBAR, you will need the following information:

• The taxpayer’s name, address, date of birth (if an individual), social security or employer identification number
• Name on the foreign account
• Name and address of the foreign bank or financial institution
• Account number or identifying number for the foreign account
• Type of account or foreign asset
• The maximum value in U.S. dollars of the account during the year.

All foreign financial accounts are generally reported on one FBAR, even if the accounts are held only by you or jointly.

While the law does not require any specific record-keeping for the FBAR, it is highly recommended that you keep all of your forms or statements to verify the information stated on the FBAR and the exchange rate you used if you converted foreign currency into U.S. dollars.

Penalties for Non-compliance

Failure to comply with FBAR filing requirements can lead to severe penalties. Both civil and criminal penalties can apply when an FBAR is not timely filed.If you fail to file the FBAR, you may be penalized up to 50% of the account or asset value that was not reported.This means you could lose up to half of the value of your foreign account or asset by not filing the FBAR.

Other Foreign Compliance Forms

If you are reporting foreign assets on the FBAR, you may also have the requirement to report these assets elsewhere. If you have a foreign bank account, there are boxes on Schedule B that may need to be checked. Additionally, you may have income to report on your Schedule B. Other common forms to report foreign assets include Form 8938, Form 3520 or Form 3520A, or Form 5471. The specifics surrounding your foreign asset reporting will dictate the form or forms you need to file and how and where the forms need to be filed.

What If I Have Failed to File FBARs for One Or Multiple Years?

If you have not filed your FBARs and are not already under an investigation by the Department of Treasury, you may be able to file your FBARs and other foreign compliance forms and unreported foreign income through specific programs with a lesser penalty. These programs include the Streamlined Offshore Voluntary Disclosure Program (Streamlined OVDP), and the IRS has a Delinquent International Information Return Submission Program. These programs differ, and weighing your options and potential outcomes with your specific facts and circumstances is essential.

Taxation on Foreign Income from FBAR Accounts or Assets

Foreign income is taxable and would be included on the appropriate form or schedule on your tax return and thus subject to U.S. tax. For example, interest from a foreign bank account would be reported just like interest from a U.S. bank and subject to ordinary income tax.

What If I Have Already Paid Tax To A Foreign Country?

If you paid taxes to a foreign country, you might be eligible for the foreign tax credit. This credit allows you to apply all or part of the tax you have already paid to your total tax bill. Form 1116 is completed to claim the foreign tax credit.

FBAR Updates

As of July 1st, 2013, the electronic version of the FBAR is currently available and must be filed electronically. This is part of FinCEN’s efforts to streamline the filing process and make it more efficient.

In addition, FinCEN has provided some relief to victims of recent natural disasters, allowing them more time to meet their FBAR filing obligations. This is a reminder that the government considers extraordinary circumstances that may affect taxpayers’ ability to file on time.

Conclusion

If you have any questions about whether you have an FBAR filing requirement or have the FBAR filing requirement and have not filed, it is highly recommended that you speak with a tax professional, preferably one specializing in international tax compliance, to determine your compliance requirements and options. FBAR compliance is critical and can lead to hefty civil and criminal penalties.

Form 5471 is an information reporting form the must be filed with a taxpayer tax return when they meet certain ownership amounts of foreign corporations.

Broadly speaking, the form reports who owns the foreign corporation, the current year financial information of the foreign corporation, information related to subpart F and GILTI inclusions (discussed below), and the characterization of earnings impact of the corporation on the U.S. Shareholders.

Who has to file form 5471:

Generally speaking, U.S. Shareholders have to file form 5471. The annual filing requirements depend on how much of the foreign corporation is owned. There are instances where a person who owns no interest in a foreign corporation must file a form 5471, for that discussion, see Category 2 filer below.

Who is a U.S. Shareholder?

A U.S. Shareholder is a U.S. Person (individual, corporation, partnership, trust, estate) who owns 10% or more of the voting rights of a foreign corporation and/or who owns 10% or more of the value of a foreign corporation.

There is a separate rule when the foreign corporation is an insurance company. In that instance, a person will be a U.S. Shareholder if it owns ANY shares of the foreign corporation.

Do all U.S Shareholders have to file a form 5471?

The fast and terrible answer to this question is: it depends.

The form 5471 is required when a person (again individual, corporations, partnership, trust, estate) meets the requirements of one of several categories of filers for form 5471.

The current form 5471 category filers are broken out into the following categories:

• Category 1a, 1b, 1c
  • Dealing with persons who are U.S. Shareholders of foreign corporations who were a Section 965 specified foreign corporation during the tax year including instances of constructive ownership.
• Category 2
  • Dealing with U.S. individuals who are officers or directors of a foreign corporation in a year when a U.S. Person acquires 10% of the foreign corporation or acquires enough shares to exceed the 10% ownership threshold to become a U.S. Shareholder (as defined above).
  • Notably, the director or officer does not have to own any interest in the foreign corporation for the filing obligations to exist and mee the requirements of a Category 2 filer.
• Category 3
  • Dealing with U.S. persons when they acquire or dispose of shares in a foreign corporation such that that person becomes a U.S. Shareholder, stops being a U.S. Shareholder or adds 10% to their current holdings. It also covers when someone owing 10% or more becomes a U.S. person.
• Category 4
  • Dealing with U.S. persons who are in control of a foreign corporation. That means they own, directly, indirectly or constructively 50% or more of the foreign corporation.
• Category 5a, 5b, 5c
  • Dealing with U.S. persons who are U.S. Shareholder of a controlled foreign corporation. This includes certain constructive owners of controlled foreign corporations.

A U.S. person can fall into multiple categories per year.

There is a larger discussion of the category filers in this article (Link to other 5471 article) that also discusses constructive ownership rules.

There are several exceptions to the form filing obligations, so ensure you are taking those into account when making filing determinations.

If you meet one or more category filers, do you have to file every year you own the interest in the foreign corporation?

Not all U.S. Shareholders will need to file a form 5471 every year they are U.S. Shareholders. In any year that you meet the requirements of any of the Category filers, you will likely have a filing obligation if you don’t meet any of the exceptions.

As an example, in year 1 you (a U.S. individual) bought 15% of a foreign corporation. You are the only U.S. person who owns shares in the company. You are not related to any other shareholders. Since you now own more than 10% of the foreign corporation you are a U.S. Shareholder. In year 1 you have a form 5471 filing obligation as a Category 3 filer.

In year 2, you have not bought any more shares, and all the shareholders are the same. In year 2 you do not meet any of the category filer requirements and do not have a form 5471 filing obligation.

In continuation of the above example, if in year 3 you purchase an additional 15% of the foreign corporation (brining your total ownership to 30%) AND two other U.S. persons each bought 15% of the foreign corporation (30% total), you become a Category 1a, 3 and Category 5a filer. Thus, you will have a form 5471 filing obligation in year 3.

If in year 4 none of the facts change and the foreign corporation has three U.S. shareholders owning a collective 60%, the entity is considered a controlled foreign corporation and the form 5471 is required to be filed by U.S. Shareholders.

The important point to remember when owning shares in a foreign corporation is that you must review your holdings and the holdings of other shareholders annually to determine if you have a form 5471 filing requirement.

Why do you have to file form 5471?

The form 5471 is required to be filed as outlined in the U.S. tax code. The information provided allows the IRS to make determinations on a U.S. persons offshore investments and if any income should be included in the taxpayer U.S. tax base.

Broadly speaking, the form 5471 and the requirement to file the 5471 has no direct impact on a U.S. taxpayers taxable income. That being said, the form does require the taxpayer to report their proportionate share of Subpart F income and tested income.

What is Subpart F income and what is the point of computing tested income?

A detailed discussion of Subpart F income and tested income are beyond the scope of the article, but each play a key role with respect to form 5471.

Subpart F income is income earned by the controlled foreign corporation (Category 5a, b, c filing for U.S. Shareholders) that is not able to be deferred from U.S. income inclusions by U.S. shareholders. Very loosely, it is passive types of income and income earned in a company whereby that company hasn’t done any of the work to earn that income. Net earnings and profits of that type is required to be treated as if it were earned by the U.S. shareholders directly and is included in the U.S. shareholder taxable income.  When a controlled foreign corporation has this type of income, it needs to be reported on the form 5471 and allocated appropriately to the U.S. Shareholders. Subpart F income is reported on Schedule I, J, P, and Q of the form 5471.

Tested income is used in computing the U.S. Shareholder amounts of Global Intangible Low Tax Income (GILTI). GITLI is another anti-deferral mechanism that prevents the earnings of a controlled foreign corporation from not being included in U.S. Shareholder taxable income. GILTI broadly treats all income of a controlled foreign corporation as if it were earned by the U.S. Shareholders directly and thus includable in their taxable income. Tested income is computed on Schedule I-1 of the form 5471.

Subpart F and GILTI are complicated topics that deserve their own discussions. There are numerous rules that impact the calculation and requirements of each. Suffice to say, if the entity you own an interest in is a controlled foreign corporation and you are U.S. Shareholder, careful attention must be paid to Subpart F income and GILTI income.

Do you have to file form 5471 if the entity you own is inactive or loses money?

Yes, mere ownership of the entity creates the filing obligation.

How do you file form 5471?

If you meet one of the categories of filers for the form 5471, you will need to complete the sections that are required of that specific category filer and attach it to your timely filed tax return. The form will be considered timely filed if it attached to your tax return which was timely filed including extensions. The form 5471 will need to be substantially complete to be considered timely.

If you fall into multiple category filer status, you need to file just one form 5471 per entity reporting all the information for each category you meet.

What happens if you don’t/didn’t file form 5471 or you file it late?

Failure to file form 5471 is subject to penalty. There is a monetary penalty of $10,000 for failure to file the form 5471. With this form, late filing is considered failure to file and subject to penalty. There is an additional $10,000 penalty for failure to file form 5471 Schedule O as well.

If you have not filed form 5471 and are required to do so you should contact our firm to discuss your options and the application of any penalties. We work with clients on their delinquent filings to assist with preventing or abating the penalty on late filings of form 5471.

Other considerations?

If you have a form 5471 filing obligation you may have other information reporting forms to file as well. Additional filings that may apply could be:

• Foreign Bank Account Reporting (FBAR)
• Form 8938 foreign financial asset reporting
• Form 8865 foreign partnership reporting
• Form 926 contributions to foreign corporations
• Form 8858 foreign branch and disregarded entity reporting
• Form 8992 GILTI reporting
• Form 8621 Passive Foreign Investment Company (PFIC) reporting

Updates on Form 5471

In recent years, there have been some updates to Form 5471 that are worth noting. The IRS has made revisions to the form and its instructions to ensure that they remain current and accurate. These changes are designed to make the form easier to understand and fill out, and to ensure that it accurately reflects the current tax laws and regulations.

One of the key updates is the revision of Form 5471 and its separate Schedules E, G-1, H, I-1, and M in December 2021. The separate Schedules J, P, Q, and R were revised in December 2020, and the separate Schedule O was revised in December 2012. These revisions are part of the IRS’s ongoing efforts to keep the form and its schedules up to date with the latest tax laws and regulations.

Another important update is the requirement to report all information in functional currency in accordance with U.S. generally accepted accounting principles (GAAP). Each amount must also be reported in U.S. dollars translated from functional currency using GAAP translation rules. This change is designed to ensure that all financial information reported on Form 5471 is accurate and consistent.

The IRS has also updated the instructions for Form 5471. These instructions provide detailed guidance on how to fill out the form and its schedules. They include information on who needs to file Form 5471, what information needs to be reported, and how to report it. The instructions also provide examples to help taxpayers understand how to fill out the form correctly.

It’s important to note that these updates are part of the IRS’s ongoing efforts to improve the tax filing process and ensure that all taxpayers are reporting their foreign investments accurately. If you’re a U.S. person with ownership in a foreign corporation, it’s crucial to stay up to date with these changes to ensure that you’re meeting your tax reporting obligations.

Tax-exempt and/or nonprofit organizations may be required to file form 5471. There are several instances where form 5471 would be required. Often, detailed analysis and thorough understanding of the tax rules are required to determine if there is a filing obligation. Failing to file (including late filing) for form is subject to a $10,000 penalty on a per form per year basis. The penalty may be abated if the taxpayer has reasonable cause for the failure to file the form 5471.

Please consult with a qualified professional when making determinations of form 5471 filing obligations. As you might expect, I am such a qualified professional. Please reach out with any form 5471 questions. Please see my contact information below.

When is a tax-exempt and/or nonprofit entity or organization required to file form 5471?

On its face, it seems unlikely that tax-exempt (TE) and/or a nonprofit (NP) entity or organization would ever be required to file form 5471, but there are a number of occasions where the form 5471 is required to be filed by a TE and/or NP entity .

To understand the form 5471 filing requirement, it helps to know who is required to file form 5471? In a very condensed summary, US persons (individuals, corporations, partnerships, trusts) are required to file form 5471 if they own or control certain percentage amounts of a foreign corporation. Specifically, if a US person owns, controls, purchases or disposes of 10% or more of a foreign corporation, there is a strong likelihood of a form 5471 filing obligation at some point in the lifecycle of the investment. US entities or people who own 10% or more of a foreign corporation are considered US Shareholders for definitional purposes of form 5471 filing obligations. For a more thorough discussion on when a form 5471 is required to be filed, please read this discussion.

US TE and NP organizations are generally organized in one of two ways: either as a state corporation or a trust. Both corporations and trusts are subject to the rules for filing form 5471 as they are specifically considered US persons as defined by the Internal Revenue Code (IRC). As such, TE and NP organizations would be considered US persons for purposes of applying the form 5471 filing rules.

There are a couple reasons why a TE and/or NP organization would own shares in a foreign corporation. First, and the most obvious, is the organization has established an entity in foreign country to carry out its mission. For the vast majority of TE and/or NP organizations, this scenario won’t arise, but could be a possibility. Second, the TE and/or NP has invested in a foreign corporation either directly or indirectly through its fund investments. The most likely instance a TE and/or NP organization would have a form 5471 filing obligation arises when that organization has made investments in non-open market vehicles such as hedge fun or private equity fund investments. Hedge fund, private equity fund and special purpose investments can give rise to form 5471 filing obligations depending on how the investment is structured.

Why should a TE and/or NP organization care if had or has a form 5471 filing obligation?

In short, penalties. Failure to file form 5471 may result in a $10,000 penalty per form per year. Additional penalties may apply depending on category filer the shareholder falls into for form 5471. Filing the form 5471 late is considered a failure to file the form and subject to penalty.

For a large organization, the failure to file penalties can add up to a large amount if it is determined the organization has failed to file multiple forms 5471 over several years.

What can be done to prevent the form 5471 penalty?

Timely filing the from 5471 will prevent a penalty. If the 5471 is already delinquent, the organization may be able to avoid the penalty if it has reasonable cause for its failure to file. Note, reasonable cause is ill defined and a fairly subjective standard in the hands of an IRS examiner.

Where does form 5471 get filed?

Generally, the form 5471 is attached to an income tax return. For a TE and/or NP entity, the form 5471 is generally attached to form 990-T, whether or not the organization has any unrelated business taxable income.

How can a TE and/or NP organization tell if they have a form 5471 filing obligation?

The only sure way to tell if the organization has a form 5471 filing obligation is through a thorough analysis of its investments. Often, it is not obvious that an investment has been made in a foreign corporation, but taking the following steps could help make the determination:

• Step 1
  • Analyze each of the investments the TE and/or NP has made to determine if it is a foreign or US formed entity.
• Step 2
  • If the entity is foreign, determine what type of entity it is and if there have been any US choice of entity elections made.
• Step 3
  • If the foreign entity is a corporation for US tax purposes, determine how much of the entity is owned by the organization. This ownership analysis includes determining the percentage owned of value of the foreign corporation and the percentage owned of voting rights of the foreign corporation.
• Step 4
  • If the organization owns between 10% and 50%, determine how much of the entity is owned by other US Shareholders (those owning vote or value of 10% or more). This analysis helps determine if the entity was a controlled foreign corporation while the organization owned its interest.
• Step 5
  • Determine if the entity owns an interest in other foreign entities.
• Step 6
  • If you have owned this investment longer than the current tax year, analyze when the investment was made and make determinations as to whether there was a filing obligation in the past as well.

What is the point of all these steps?

The point of these steps is to gather enough information to determine if there is, or should have been, a form 5471 filing obligation.

Step 1 details:

In step 1, the entire list of the alternative investments made by the organization should be reviewed to determine if the entity is US or foreign. The best way to make that determination is to work through your investment consultant or inquire directly with the investment company.

Step 2 details:

In step 2, determining what type of entity will help direct what US tax forms may be required. With respect to form 5471, the entity in question would be a corporation for US tax purposes. There are a few ways to get an indication of the type of entity, but the best way is to inquire of the fund. Sometimes reliance on common sense will result in the wrong answer. For example, the fund may be organized as a limited partnership in the Cayman Islands. It seems clear the entity is a partnership in the Cayman Islands. For Cayman Islands legal (and tax) purposes, that entity is in fact, a partnership. What can’t be determined just by the name of the entity is if the US owner (current or past) has made a check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes. Certain entities are eligible to choose how they will be treated in the US for US income tax purposes, either as an association taxable as a corporation, a partnership, or a disregarded entity. If the owner made the check-the-box election to treat that Cayman Islands partnership as a corporation for US tax purposes, it should be considered a corporation for determining form 5471 filing obligations.

Inquiry to the fund asking specifically about any check-the-box elections is preferred.

Step 3 details:

At this point the form 5471 determinations can start to be made. Understanding the ownership percentages will allow the owner to determine if they are considered a US Shareholder or not. If the TE and/or NP organization is a US Shareholder then at some point a form 5471 should have been filed with respect to that ownership of the foreign corporation. If the TE and/or NP owns more than 50% of the foreign corporation, there is a clear form 5471 filing obligation for the TE or NPF organization.

Step 4 details:

If the TE and/or NP owns between 10% and 50% of the foreign corporation, certain annual form 5471 filing obligations will be required if the foreign corporation is considered a Controlled Foreign Corporation (CFC). A foreign corporation is a CFC when US Shareholders (US people that own 10% or more) own more than 50% of the foreign corporation. Thus, in the instance a TE and/or NP organization is consider a sub-50% US Shareholder of a foreign corporation, it will need to understand if there are other US Shareholder such that the foreign corporation is considered a CFC in order to determine how to file form 5471.

Step 5 details:

In step five, a determination or inquiry should be made to understand if the foreign corporation owned by the TE and/or NP organization owns an interest in other foreign corporations as subsidiary companies. If so, the TE and/or NP organization may be required to file form 5471 for those lower tier entities as the TE and/or NP organization is deemed to own what its investment owns in proportionate share.

Step 6 details:

Step 6 ensures that the TE and/or NP organization either has or doesn’t have delinquent form 5471 filing obligations.

What happens if a TE and/or NP is required to file form 5471?

If the discovery is made for the current tax year filing and the tax return is still timely and not late, then prepare and file the form 5471. That’s an easy thing to say, but the form 5471 is a relatively complicated form and understanding what needs to be completed on the form should be addressed. Generally, it is best to seek professional advice.

If it is determined that the form 5471 filing should have occurred in a prior year, the prior year return should be amended to attach the form 5471. As discussed earlier, late filed form 5471 is subject to penalty. The penalty may be abated if the failure to file was due to reasonable cause. Work with a qualified professional to determine how best to proceed.

Christopher Stroh, J.D. & LL.M (Taxation)

chris@jmtaxlaw.com

720-784-3296

Christopher has spent the majority of his career focused on the international tax implications for businesses, tax-exempt organizations and individuals who engage in some form of cross-border activity, either knowingly or not!  Christopher advises entities and individuals who need help or advice with the US international tax implications of structuring businesses (US or foreign) or has any sort of non-US activity that may require US tax reporting. In addition to planning and consulting on US international tax items, Christopher helps prepare and advise on all manner of US international tax forms.

There are many legitimate reasons United States persons may maintain foreign bank accounts or foreign assets. Perhaps an individual owns real estate in a foreign country, making payments via a foreign bank account easier. Alternatively, an individual has come to the United States for education and remained or married a United States citizen. 

While many US Citizens, US Residents, or US Persons may maintain foreign bank accounts and assets, many are unaware of their obligations to report their foreign bank and financial statements and learn of these reporting and compliance obligations after the time to report has passed. 

While there are stiff penalties for failing to report foreign accounts and financial assets, programs are available whereby an individual can register their foreign accounts and unreported foreign income and receive a much lesser penalty than what the IRS could assess under current tax laws. 

This article discusses the Streamlined Offshore Voluntary Disclosure Program, an option for individual taxpayers. Initially, the Internal Revenue Service started the Offshore Voluntary Disclosure Program, which required a 27.5% penalty on the highest foreign asset balance over the look-back period on unreported foreign bank accounts and financial assets. To many, the 27.5% penalty was excessive when considering the offense, and in 2012, the Streamlined Offshore Voluntary Disclosure Program was initiated, which applies a 5% penalty to the highest account balance.

The Streamlined Offshore, Voluntary Disclosure Program, is for United States Persons whose failure to timely report all foreign assets is deemed non-willful.

What is the Procedure for the IRS Streamlined Offshore Voluntary Disclosure Program?

An individual applying for the Streamlined OVDP must: file amended tax returns for each of the most recent three years whereby the tax return due date has passed along with all informational returns (Forms 8938, 3520, 5471 are examples); file FBARs (Form 114) for each of the most recent six years whereby the FBAR due date has passed; and, pay the 5% miscellaneous offshore penalty. In addition to paying the 5% penalty, any amount of tax and penalty from the amended tax returns should be paid.

How is the 5% Streamlined OVDP Penalty Calculated?

The 5% offshore penalty is applied based on the highest aggregate year-end balance of the foreign financial assets during the covered tax periods. It is important to remember that the penalty is based on year-end balances of all accounts and not just the highest balance during the year. If the highest balance during the year was used, you could calculate a higher penalty if money were transferred from one foreign account to another. For example, if an individual had three foreign bank accounts and the highest year-end balance over their 6-year look-back period was $40,000, the offshore penalty would be $4,000.

What is “Non-Willful” for Purposes of the IRS Streamlined OVDP?

For purposes of Streamlined OVDP, the IRS has deemed “non-willful” to mean that your correct mistake in reporting all foreign assets and income was due to an error, inadvertence, negligence, or good faith misunderstanding the law. Given that you were not turning a blind eye to your reporting requirements, this could mean that you did not know you had a reporting requirement and had no real reason to know.

Perhaps your foreign accounts are already taxed abroad, and thus it could be logical to think you would have no reporting requirement in the US because you had already paid tax. Perhaps you inherited a foreign bank account from a family member or friend and only had the account open for a short period. The more an account or asset appears to have a useful purpose, or you have a tie to the foreign asset apart from tax avoidance, the better the failure to report appearing “non-willful.”

What is Form 14654?

Form 14654, Certification by US Person Residing in the US, is an additional form that is submitted through the Streamlined OVDP process. Form 14654 certifies that:

• you are eligible for the Streamlined Domestic Offshore Procedures; 
• you have filed all required FBARs;
• your failure to report all income and pay all tax was due to non-willful conduct; 
• that the 5% offshore penalty you have calculated is correct. 

Form 14654 is filed with your amended tax returns and related forms and schedules through the OVDP process.

Where do I File FBARS When Going Through the Streamlined OVDP Process?

FBARS or Form 114 are filed directly with FinCEN (the Financial Crimes Enforcement Network) and may be filed online. It is important to note that current Streamlined OVDP procedures request that when filing a late FBAR through the Streamlined OVDP process, you report that you are filing the FBAR late and state “Streamlined Filing Compliance Procedures.”

How Do I Know if I Had or Have a Requirement to File the FBAR?

A US Person (defined below) has an FBAR requirement if they have a financial interest or signatory authority over a foreign bank account or reportable foreign asset and the total amount of all foreign assets exceeds $10,000 (in US Dollars) at any time during the year. Thus, it is essential to remember two key items.

First, the threshold of $10,000 applies to the total of all accounts, not each account. Therefore, you may have multiple foreign bank accounts or reportable foreign assets less than $10,000, but if they total more than $10,000, you likely have a reporting requirement.

Second, the reporting requirement applies even if you have an account or asset for a short period. Having signature authority or a financial interest over a foreign account for even a day would still require an individual to file an FBAR.

Who is a “US Person” for Purposes of FBAR Filing Requirements?

A US Person is defined as, (i) a citizen or resident of the United States, (ii) an entity that is formed, organized, or created in the United States or under the laws of the United States (or certain territories), and would include but not be limited to corporations, LLCs, partnerships, and trusts or (iii) an estate formed under the laws of the United States.

Based upon the definition of a US Person, businesses can have FBAR reporting requirements. Furthermore, because the definition considers a US Resident to be a US Person, you do not have to be a US Citizen to have an FBAR filing requirement.

What Are Common Forms Filed With Amended Tax Returns When Filing Streamlined OVDP?

Beyond the FBAR, Form 14654, and amended tax returns, we commonly see the following forms that need to be filed. 

Schedule B is typically filed with a 1040X because the individual may not have appropriately claimed foreign interest or dividends and may need to check the appropriate boxes relating to foreign assets on Schedule B. 

Form 8938, Statement of Specified Foreign Financial Assets, is another common form filed with an individual’s 1040X. Form 8938 is similar to the FBAR, whereby certain foreign assets and income are reported. The dollar threshold for filing Form 8938 is higher than the FBAR and changes based upon filing status and citizenship issues.

Form 3520, Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, is another relatively common form. If you have received a foreign gift or inheritance over certain amounts, you have a Form 3520 filing requirement.

Other forms may need to be filed depending upon the circumstances, but Forms 8938, 3520, and Schedule B are some of the common forms and schedules you may be likely to see on a 1040X being filed pursuant to Streamlined OVDP.

Does the IRS Acknowledge the Streamlined OVDP Filing or Provide a Closer Letter?

No. While you should always track the filing of your Streamlined OVDP and the cashing of your checks is reasonable verification that IRS is in receipt, you do not receive any specific acknowledgment or acceptance by the IRS when going through Streamlined OVDP procedures.

When your applicable amended returns are processed, you may receive a notice for interest or penalty based upon any additional assessment of tax, which again is reasonable verification of receipt. Still, the IRS does not provide any further acknowledgment or acceptance letter.

Have More Questions? Contact Us

The above article has been provided for informational purposes only and should not be considered tax or legal advice. If you have unreported foreign financial assets, you should discuss your specific facts and circumstances with an international tax attorney. If you have questions regarding foreign investments or international tax matters, you can speak with an international tax attorney by contacting The McGuire Law Firm at 720-833-7705.

Are you considering establishing a corporation? Perhaps you have considered contributing property as consideration for your interest while another member would like to contribute cash. You may even find yourself in a situation where a third person would like to donate his services in exchange for an interest in the corporation. Each of these situations can have significant tax consequences, so you must plan to maximize the benefit of the formation. This article was drafted by a Denver Business Attorney and Denver tax attorney to provide information related to the contribution of a property when you form a corporation.

Features of IRC Section §351 

One of the most attractive features of forming a corporation is in §351 of the tax code. This provision allows persons to contribute property to a corporation without recognizing gain if done correctly. 

Alternatively, §351 may stop some members from recognizing a loss, which may be a negative factor. As a general rule, the exchange of stock for property creates a §1001 event taxable. However, Congress wanted to make a way where taxpayers could still contribute property to a corporation without getting hit with a huge tax liability. This resulted in §351, but this code section does create requirements for it to apply.

Requirements in IRC Section §351 

Many requirements must be met, and the whole transaction may trigger immediate tax consequences if the conditions are not met. Remember that simply contributing property to a corporation does not eliminate the gain nor create a step-up basis, similar to §1014. Instead, the tax consequences will linger in the background until any realized gains or losses must be recognized in the future. 

Section §351 of the Internal Revenue Code applies only to the contribution of property, which does not include services. However, there are exceptions, but you must be careful when creating a corporation with someone who plans to provide any services in their interest. The contribution of services may completely ruin a §351 transaction, depending on the value.

Requirements in IRC Section §368(c)

Under Section §368(c) of the Internal Revenue Code, members must also acquire control of the corporation’s formation. This section requires that the members contributing to the property possess 80% of the voting power and 80% of shares of all other classes of stock issued by the corporation.

Non-Recognition and IRC Section §351

Additionally, the non-recognition portion of Internal Revenue Code Section §351 applies only to situations where the members receive solely stock for their interest. However, in cases where members receive boot, or something other than stock, in exchange for their contribution, they may recognize gain or loss. Receiving something different than stock does not always ruin the §351 transaction entirely, but it may trigger profit or loss, which could defeat the entire purpose of the transaction.

Liabilities and IRC Section §351

Liabilities also create issues with IRC Section §351 transactions where the corporation assumes the debt. It is not uncommon to have machines or other equipment carrying a note or obligation to consider one’s interest. As mentioned above, the courts did not want to discourage taxpayers from transferring property to a corporation simply because a liability encumbered it. Instead, the whole purpose of §351 was to encourage entity formations.

As a general rule, if liabilities are incurred on a property for legitimate business purposes, these will not trigger gain or loss upon formation. Instead, the penalties will be accounted for on the member’s basis in the corporation. However, there is an exception where the liabilities exceed the basis of the property. Under §357(c), there will be gain recognition, but only to the extent that the liabilities exceed the basis.

Forming a corporation can have many benefits, but you must consider all the contributions made before determining the overall tax consequences to the newly formed corporation and its shareholders. 

In Summary

Consider speaking with a Denver business attorney and Denver tax attorney regarding the business and tax implications of forming a corporation and contributing property to the corporation. Planning the contributions in the beginning can help avoid significant tax liability in the future.

You can contact The McGuire Law Firm to speak with a Denver Business Attorney or Denver Tax attorney. Call us at 720-833-7705 or John@jmtaxlaw.com