Tax Remediation

The U.S. taxes its permanent residents, citizens, and substantial resident aliens (collectively residents) on a worldwide basis. For permanent residents and citizens this is regardless of how much time they spend within the U.S.

The U.S. also has the most invasive information disclosure laws in the world and requires its residents to disclose extensive amounts of foreign financial information and attach that information to their income tax returns. Failure to comply with these information reporting requirements can trigger liability for substantial penalties.

In situations where a taxpayer has fallen out of compliance with their U.S. obligations over multiple years, they may qualify for either the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures.

The number one pre-condition to acceptance into these programs is whether the actions of a taxpayer are non willful.

Determining whether a taxpayer’s actions are non willful requires a careful analysis of all the facts and circumstances.

In circumstances where a taxpayer does not qualify for an IRS program extra care needs to be taken on the best way to bring the taxpayer into compliance. This initial assessment is critical because if a taxpayer makes a submission to the IRS and the IRS does not accept that the taxpayer’s actions were non willful, the taxpayer could be liable for the maximum penalties.

A consolidated overview of those penalties are set out in the table below.

IRS Penalties for non-compliance
Form Penalty Notes
5471  $10,000 IRS may asset a $10,000 penalty for each failure for annual period, plus an additional $10,000 for reach month failure continues up to a maximum of $60,000
5472  $10,000 IRS may asset a $10,000 penalty for each failure for annual period, plus an additional $10,000 for reach month failure continues up to a maximum of $60,000
8865  $10,000 IRS may asset a $10,000 penalty for each failure for annual period, plus an additional $10,000 for reach month failure continues up to a maximum of $60,000
3520 and 3520-A  $10,000 or up to 5% of the value of all trust assets The initial penalty is the greater of $10,000 or:
‘- 35% of the gross value of any property transferred to a foreign trust if a U.S. person fails to report the creation of or transfer to a foreign trust;
– 35% of the gross value of the distributions received from a foreign trust by a U.S. person who fails to report receipt of the distribution; and
5% of the gross value of all of a foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules if the U.S. owner fails to report required information.
– The owner is also subject to an additional 5% penalty if the foreign trust itself fails to file a timely Form 3520-A [“Annual Information Return of Foreign Trust With a U.S. Owner”; if the owner does not provide all required information, or provides incorrect information.

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