From the Tax Law Offices of David W. Klasing - Navigating IRS Programs for Late-Filed International Information Returns

IRVINE, Calif., Dec. 21, 2023 /PRNewswire/ -- Filing errors in international transactions can inadvertently lead to accusations of tax evasion, especially when reporting obligations are not met accurately. Mistakes or omissions may be misconstrued as intentional misconduct, triggering serious consequences.

Engaging in global transactions can come with particularly complex filing obligations, like reporting foreign trusts, entities, and financial accounts. The IRS has programs for honest mistakes, like the program for Streamlined Filing Compliance Procedures. They also offer relief for intentional failures through the program for Voluntary Disclosure. Fortunately, our legal team can help determine if one of these programs is right for you.

If you need assistance with a domestic or offshore tax or information reporting issue, get help from our Dual-Licensed Tax Lawyers & CPAs by calling the Tax Law Offices of David W. Klasing at (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.

International Information Return Filing Obligations

Taxpayers engaging in global investment, trust, gift, or business transactions may find themselves entangled in a complex web of international information return filing obligations. The scope of reporting rules has expanded significantly, covering diverse transactions such as foreign gifts, ownership of foreign corporations, contributions to foreign trusts, and financial interests abroad.

Wide-ranging Reporting Obligations

The breadth of these reporting obligations extends to various forms, including Form 5471, Form 8865, and Form 3520-A, depending on the nature of the international transaction. Notably, failure to comply with these offshore information reporting obligations results in significant late-filing penalties. However, the Internal Revenue Service (IRS) allows qualifying non-compliant taxpayers to rectify their situation and avoid / limit the most severe civil and criminal penalties.

Streamlined Filing Compliance Procedures (SFCP)

For those with non-willful conduct characterized by honest mistakes or inadvertence, the IRS offers the Domestic and Expat versions of the Streamlined Filing Compliance Procedures (SFCP). Eligible taxpayers under this program may sidestep international information return penalties in exchange for a more manageable penalty based on undisclosed foreign asset values. Non-willful conduct, often arising from reliance on misguided professional advice, is a key criterion for qualification.

Voluntary Disclosure Program (VDP)

Contrastingly, taxpayers with willful failures to file international information returns should consider the Voluntary Disclosure Practice (VDP). This program allows the submission of late returns, amended income tax filings, and payment of associated taxes to mitigate criminal prosecution.

If you have failed to file a tax return for one or more years or have taken a position on a tax return that could not be supported upon an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation, it is in your best interest to contact an experienced tax defense attorney to determine your best route back into federal or state tax compliance without facing criminal prosecution.

Additional IRS Programs

Beyond SFCP and VDP, the IRS provides alternative routes. The Delinquent International Information Return Submission (DIIRS) procedures involve filing late international information returns, often requiring a reasonable cause statement. Meanwhile, the Delinquent FBAR Submission procedures focus specifically on late-filed FBARs, where the taxpayer submits explanations for tardiness to the Financial Crimes Enforcement Network (FinCEN), with penalties waived if the foreign income associated with undisclosed accounts has been reported and taxed.

Seeking Professional Guidance

It is important for taxpayers to seek advice from our Dual-Licensed International Tax Lawyers & CPAs while navigating the nuanced requirements and assessing the risks and benefits of these IRS programs. Additionally, adhering to timeliness requirements is vital, as submissions must occur before any notice of an IRS civil or criminal tax investigation, ensuring that individuals already under scrutiny follow standard administrative channels to address penalty determinations.

Common Pitfalls in International Information Return Filing

Several mistakes can be made in regard to international information return filing. For instance, the following are common pitfalls faced by American taxpayers:

Misunderstanding Reporting Requirements

A frequent pitfall involves taxpayers misunderstanding or being unaware of the specific reporting requirements for their international transactions. This lack of clarity can result in overlooking necessary forms or providing inaccurate information, triggering penalties.

Inadequate Record-Keeping

Failure to maintain comprehensive records of international transactions is another common pitfall. Accurate reporting relies on having detailed and organized documentation, and the absence of such records can lead to errors, delays, and potential penalties.

Ignoring Changes in Regulations

International tax regulations are dynamic and subject to change. Failing to stay informed about reporting rules and requirements updates can lead to outdated filing practices, exposing taxpayers to penalties for non-compliance.

Relying Solely on Tax Software

While tax software is a valuable tool, relying solely on it without a thorough understanding of international tax laws can be problematic. Automated systems may not capture the nuances of certain transactions, leading to inaccuracies in filing.

Overlooking Foreign Account Reporting

Many taxpayers overlook reporting foreign financial accounts, such as bank accounts or investment assets. This oversight can result in non-compliance with FBAR (Report of Foreign Bank and Financial Accounts) requirements, leading to significant penalties.

Failing to Consider Subsequent Reporting Obligations

Establishing foreign trusts or engaging in international transactions can trigger reporting obligations that extend into subsequent tax years. Ignoring these ongoing requirements can compound penalties over time.

Underestimating the Complexity of Forms

Various international information return forms, such as Form 5471 or Form 8865, can be intricate and require a nuanced understanding. Filing errors often occur when taxpayers underestimate the complexity of these forms or misinterpret their requirements.

Importance of Seeking Professional Tax Advice

The importance of seeking professional tax advice in the realm of international information return filing cannot be overstated. Navigating the intricate landscape of global transactions and the associated reporting obligations demands a nuanced understanding of evolving tax laws and regulations. Our international tax professionals bring can help interpret complex requirements, ensuring accurate and timely compliance. Our insight is particularly crucial in addressing the subtleties of various international information return forms, such as Form 5471 or Form 8865, which can be intricate and carry significant consequences for inaccuracies.

Moreover, in cases where taxpayers find themselves facing non-compliance issues, our team can help navigate the available IRS programs, such as the Streamlined Filing Compliance Procedures or Voluntary Disclosure Program, guiding them toward the most suitable resolution based on their specific circumstances. Ultimately, we will work to minimize risks and ensure peace of mind for our clients.

Contact Our Domestic and International Tax Lawyers for Assistance with Your Case

If you need help with a tax-related issue, seek guidance and support from our Dual-Licensed Tax Lawyers & CPAs at the Tax Law Offices of David W. Klasing by dialing (800) 681-1295 or clicking here to schedule a reduced rate initial consultation.

We Are Here for You

Regardless of your business or estate needs, the professionals at the Tax Law Offices of David W. Klasing are here for you. We are open for business and our team will help ensure that your business is too. Contact the Law Offices of David W. Klasing today to discuss your business with one of our professionals.

In addition to our fully staffed main office in downtown Irvine California,  the Tax Law Offices of David W. Klasing has unstaffed (conference room only) California based satellite offices in Los Angeles, San Bernardino, Santa Barbara, Panorama City, Oxnard, San Diego, Bakersfield, San Jose, San Francisco, Oakland, Carlsbad, Sacramento. We also have unstaffed (conference room only) satellite offices in Las Vegas Nevada, Salt Lake City Utah, Phoenix Arizona & Albuquerque New Mexico, Austin Texas, Washington DC, Miami Florida and New York New York that solely handle Federal & California Tax issues.  

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SOURCE Tax Law Offices of David W. Klasing, PC