Importance of Filing Timely and Correct International IRS Forms

When a US Person has to file United States tax returns to report their income, Form 1040 may just be the tip of the iceberg. That is because when a US taxpayer has various foreign assets, accounts, investments, and income tax returns, their tax filings can become infinitely more complicated due to all the different international information reporting forms a taxpayer may have to file. And, when submitting an international tax return form, it is important for the taxpayer to do their best to try to file an accurate form (although ‘perfection’ is not required), because if the Taxpayer files a form that is incorrect, the IRS can take the position that no form has been filed — since the proper form was not reported. In turn, the Taxpayer may still become liable for significant IRS fines and penalties. For example, in the recent US Tax Court case of Fairbank, Taxpayer filed a Form 5471 to disclose their foreign asset –Form 5471 is used to report foreign corporations — but the court ruled that Taxpayers should have filed a Form 3520 or Form 3520-A instead to report the foreign entity as a trust. The reason this is so important is that the Court affirmed the IRS’ position that the taxpayer was on the hook for taxes, penalties, and interest associated with the unreported forms.

Common International Tax Forms

There are many different types of international information reporting forms that a taxpayer may have to file. Which specific tax form a person has to file is based on the type of asset or assets that they have.

Some of the more common types of reporting forms include:

Due Date for Filing International Reporting Forms

The due dates for filing vary depending on which form a taxpayer must file. For example, the FBAR is due on April 15 — but it is currently an automatic extension through October. The Form 3520 to report for the gifts is due on April 15, but in order to extend the time file, the Taxpayer must file an extension form. Meanwhile, Form 3520-A is usually due March — but in order to extend the time to file, the Taxpayer must file ‘business’ extension Form 7004.

Penalty for Additional Extension of Time 6501(c)(8)

Here is where the water starts to get a bit murky. In general, the IRS has three years to go after taxpayers to assess their penalties for late or missed international form filing – similar to the process of assessing tax return penalties. The difference is that if a person does not file the proper international reporting form (even if they filed a timely tax return), then the statute of limitations may not begin to run to assess international reporting penalties. Thus, even several years after filing an accurate and timely tax return as to the domestic issues, if there are missing international information reporting forms that should have been included in the tax filing, the Taxpayer may still be on the hook for those penalties. This is true, even if the taxpayer filed a timely international reporting – but filed the incorrect foreign tax reporting form.

A good example of this is the recent US tax court case of Fairbank. Let’s take a look at how and why the court ruled the way it did:

Fairbank Tax Court Case

- - “Upon the advice of counsel, petitioners filed Forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, reporting Xong Services for tax year 2009 through 2010. Respondent received Forms 5471 regarding Xong Services on June 18, 2015. Additionally, on February 11, 2014, petitioners filed FBARs, reporting Mrs. Fairbank’s NPB account for tax years 2009 through 2011. During the tax years at issue (or thereafter), petitioners never filed Forms 3520 or 3520–A regarding Xavana Establishment.
  - The Code requires disclosures regarding foreign trusts. See I.R.C. § 6048. Pursuant to section 6048(b), each United States person26 who is treated as the owner of any portion of a foreign trust, under the grantor trust rules of sections 671 through 679, is responsible for ensuring that the trust annually “makes a return . . . which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe.” I.R.C. § 6048(b)(1)(A). This prescribed information is provided by filing Form 3520–A. See Rost v. United States, 44 F.4th 294, 298 (5th Cir. 2022); Wilson v. United States, 6 F.4th 432, 434 (2d Cir. 2021). Moreover, any United States person who is a beneficiary of a foreign trust and receives any distribution from that foreign trust must file an information return that includes the name of the trust, the aggregate amount of the distribution received from the trust during the taxable year, and such other information as the Secretary may prescribe. I.R.C. § 6048(c)(1). Per IRS guidance, this mandatory reporting requirement is satisfied when the U.S. beneficiary files Form 3520. See I.R.S. Notice 97-34, 1997-1 C.B. 422; see also Wilson, 6 F.4th at 434.”

Statute of Limitations

- - “In general, section 6501(a) provides that any tax imposed under the Code shall be assessed within three years after the return was filed (whether or not the return was filed on or after the date prescribed) and no proceeding in court without assessment for the collection of the tax shall be begun after the expiration of that period. For a timely filed return, the three-year period begins to run as of the due date of the return. See I.R.C. § 6501(b).28 It is undisputed that petitioners timely filed their Forms 1040 for the years at issue and it is also undisputed that more than three years had passed between these tax return filings and the time respondent issued the notice of deficiency at issue.29
  - In fact, eight or more years had passed since the filings of petitioners’ Forms 1040 for the years at issue. Subsection (c) provides for a number of exceptions to the general three-year period of limitations rule found in section 6501(a). In this case, respondent asserts subsection (c)(8), entitled “Failure to notify Secretary of certain foreign transfers,” is applicable. Section 6501(c)(8) provides as follows: In the case of any information which is required to be reported to the Secretary under section 6038, 6038A, 6038B, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any event or period to which such information relates shall not expire before the date which is 3 years after the date on which the. Secretary is furnished the information required to be reported under such section.[30]”

Incorrectly Filed Forms Does Not Start the Statute of Limitations

- - Petitioners contend that no specific form is required under section 6501(c)(8) and argue that they provided the IRS the “information required to be furnished” under section 6048 pursuant to a request by the IRS in 2014; therefore, the period of limitations is closed, and the assessment is time barred. Petitioners further argue that had they filed Forms 3520–A and 3520, they would “simply be transposing the information already provided to the IRS onto an IRS form.” Respondent argues that section 6501(c)(8) is not satisfied “unless and until a taxpayer has filed the required information returns [Forms 3520–A and 3520].”
  - Petitioners’ citation of section 6501(c)(8) and their argument on brief that the period of limitations has run is incomplete.31 Section 6501(c)(8) refers the reader to the requirements under section 6048; therefore, a detailed analysis of a taxpayer’s statutory obligations under section 6048 is necessary. We conclude that Mrs. Fairbank, as the deemed U.S. owner of Xavana Establishment, has failed to provide any written return to respondent setting forth a full and complete accounting of Xavana Establishment’s activities for the years at issue. See I.R.C. § 6048(b)(1). Similarly, we conclude that Mrs. Fairbank, as Xavana Establishment’s U.S. beneficiary, has failed to make any return that includes the name Xavana Establishment and which outlines the aggregate amount of distributions she received during each of the tax years at issue from Xavana Establishment. See I.R.C. § 6048(c)(1). Finding that petitioners have not complied with section 6048(b) and (c), we similarly find that the period of limitations has not expired under section 6501(c)(8). Our conclusion is consistent with those of other courts that have considered this issue. See Rost, 44 F.4th at 298; Wilson, 6 F.4th at 434. Accordingly, we are constrained to conclude that the period of limitations has not expired for the tax years at issue since petitioners
  - [*25] neither filed IRS Form 3520–A or Form 3520 nor satisfied their reporting obligations under section 6048, assuming those obligations could be satisfied without the filing of the forms prescribed by the IRS.32 Consequently, we find respondent’s notice of deficiency in this case was timely issued.33

Current Year vs Prior Year Non-Compliance

Once a taxpayer has missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.

Contact our firm today for assistance.