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.
Global transactions can involve 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 be 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. 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)
The IRS offers the Domestic and Expat versions of the Streamlined Filing Compliance Procedures (SFCP) for those with non-willful conduct characterized by honest mistakes or inadvertence. 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 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.
Suppose 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 by an IRS or state tax authority audit, eggshell audit, reverse eggshell audit, or criminal tax investigation. In that case, 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.
Note: As long as a taxpayer that has willfully committed tax crimes (potentially including non-filed foreign information returns coupled with affirmative evasion of U.S. income tax on offshore income) self-reports the tax fraud (including a pattern of non-filed returns) through a domestic or offshore voluntary disclosure before the IRS has started an audit or criminal tax investigation/prosecution, the taxpayer can ordinarily be successfully brought back into tax compliance and receive a nearly guaranteed pass on criminal tax prosecution and simultaneously often receive a break on the civil penalties that would otherwise apply.
You must hire an experienced and reputable criminal tax defense attorney to take you through the voluntary disclosure process. Only an Attorney has the Attorney-Client Privilege and Work Product Privileges that will prevent the very professional that you hire from potentially being forced to become a witness against you, especially where they prepared the returns that need to be amended in a subsequent criminal tax audit, investigation or prosecution.
Moreover, only an Attorney can enter you into a voluntary disclosure without engaging in the unauthorized practice of law (a crime itself). Only an Attorney trained in Criminal Tax Defense fully understands the risks and rewards involved in voluntary disclosures and how to protect you if you do not qualify for a voluntary disclosure.
As uniquely qualified and extensively experienced Criminal Tax Defense Tax Attorneys, KovelCPAs, and EAs, our firm provides a one-stop shop to efficiently achieve the optimal and predictable results that simultaneously protect your liberty and net worth. See our Testimonials to see what our clients have to say about us!
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 the delay 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
Taxpayers need 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 under scrutiny follow standard administrative channels to address penalty determinations.
Common Pitfalls in International Information Return Filing
Several mistakes can be made concerning 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 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 valuable, 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 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 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 face 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.
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