Many taxpayers and most all tax professionals have heard about “FBARs” (Foreign Bank Account Reports, on Form TD F 90-22.1). Some taxpayers and most tax professionals are now also familiar with the Form 8938 Statement of Specified Foreign Financial Assets. However, virtually every taxpayer and most tax professionals are completely unaware of the top eight other IRS foreign information forms. In an increasingly interconnected international world, these forms are called for in a surprising number of situations. In fact, they may be all around you if you are not paying attention. Given the potential penalties, you must become aware of them.
In January, 2016, your client Igor receives a $75,000 gift from his mother Olga, who lives in the Ukraine. In October, 2016, Igor receives a $30,000 gift from his brother Alex, who lives in Canada. You must help your client Igor file an IRS Form 3520 with his 2016 tax return. If that form is late, the penalty is 5% of the amount of the gifts ($105,000 X 5% = $5,250) for each month it is late up to a maximum of 25% ($105,000 X 25% = $26,250).
Those few that have any knowledge of Form 3520 think it is a tax reporting form instead of what it is, which is a tax information form. In 2010, the most recent year for which statistics are available, 2,800 returns were filed reporting $5 billion of gifts and bequests, with most of the transfers coming from Bermuda, Canada, the Cayman Islands, the Cook Islands, Guernsey, Jersey, Lichtenstein, Mexico, Puerto Rico, Switzerland and the U.K. IRS Form 3520 is required every time a U.S. person receives more than $100,000 from a nonresident alien individual (and siblings, ancestors and descendants of the donor) or a foreign estate as a gift or bequest.
In February, 2016, your client Dr. Jones becomes convinced that domestic asset protection trusts are not protective enough of his liquid assets. Therefore, he uses an on-line service to set up a trust in the Cook Islands. Dr. Jones must file IRS Form 3520-A by March 15, 2017, to report that he is the owner of the trust. Failure to do so will cause a penalty of the greater of $10,000 or 5% of the gross value of the trust’s assets. In 2012, there were 7,000 Forms 3520-A reporting $2 billion of income and $35 billion of assets.
Your client Al, a resident of Washington state, is the director of a Canadian corporation in which Joe, a Canadian citizen resident in Palm Springs, is a 10% shareholder. Al must file IRS Form 5471 – Information Return of U.S. Persons With Respect to Certain Foreign Corporations – with his IRS Form 1040. The failure to file triggers a $10,000 penalty which increases by $10,000 for each additional 90 day period. There were 14,000 IRS Forms 5471 filed in 2012 representing corporations with $19 trillion in assets.
Your client Alice owns 75% of the stock of Windows & Doors, Inc. The other 25% is owned by her Uncle Fred, a U.K. citizen. Fred has licensed to Windows & Doors, Inc. the mold for the top line of windows used by the corporation, resulting in significant licensing fees being paid to Fred. Windows & Doors, Inc. must file IRS Form 5472 with its tax return. The failure to do so will cause a $10,000 penalty to be assessed. The penalty is increased by $10,000 for each 90 day period it is late. In 2012 there were 1,140 IRS Forms 5472 filed reflecting $10 trillion in assets.
Those are just four of the top eight overlooked IRS foreign information forms. The others include Form 926 (Return by a U.S. Transferor of Property to a Foreign Corporation; Form 8865 (Return of U.S. Persons With Respect To Certain Foreign Partnerships); From 8858 (Information Return of U.S. Persons With Respect To Foreign Disregarded Entities); and Form 8621 (Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund). Spend some time studying the forms, the instructions and the penalties. Be prepared for when the situation arises in your practice and join us on Thursday, April 28, 2016 where I, in associate with The Ultimate Estate Planner, Inc., will present a special, 90-minute teleconference entitled, “The Top 10 Preparer (and Advisor) Tax Penalties”. For more information or to register, click here.
ABOUT THE AUTHOR
Bruce Givner, Esq. is an estate and tax planning attorney of the Law Firm of Givner and Kaye, located in Los Angeles, California. Mr. Givner graduated from U.C.L.A., Columbia University Law School, and N.Y.U.’s Graduate Tax Law Program and specializes in the area of asset protection and advanced estate planning. He has personally worked with Mr. Philip Kavesh for over 30 years and continues to serve “of counsel” to Mr. Kavesh’s law firm, Kavesh, Minor and Otis, Inc.
Mr. Givner has been cited as a “tax expert” by the U.S. Tax Court, the California Court of Appeals, and the Wall Street Journal. He’s also written books on estate tax planning for the California CPA Society and the AICPA, and has co-authored three for the California Bar Association. He represented the winning taxpayers in the 1994 Tax Court case L&B Pipe and Supply, in which the IRS sought almost $2,000,000 in back taxes and interest due to alleged unreasonable compensation. The U.S. Tax Court awarded the IRS nothing.
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