January 2012

2011 Tax Filing Season – Important Reporting Information for CPAs

5 min

Tax Preparation
The 2011 tax filing season is now upon us! This is a good time to recall all of the international information returns that your clients with international operations may have to file.  The IRS has increased its scrutiny of businesses with international operations – witness the recent change in name from the Large and Mid-Size Business Division to the Large and International Division.  In addition, the IRS has established a specialized group of auditors to focus on high net-worth individuals, with a significant focus on international reporting and compliance. Lastly, a new form, Form 8938, Foreign Specified Assets became effective for the 2011 tax year; this form significantly expands the reporting by individuals of their foreign financial assets, including interests in foreign corporations, partnerships and trusts.

The IRS has aggressively expanded their scrutiny of tax return preparers looking at their client's compliance in this area. So, this is a good time to review your client information questionnaire and client engagement/transmittal letters to ensure that you have asked your clients to tell you about all of their international operations, overseas vacation homes, foreign accounts (bank, securities, mutual funds, etc.), and interests in foreign entities and trusts.  Doing so will protect you in the event that a client does not tell you about all of their international operations and the IRS questions you about your client intake procedures. 

Potential Penalties
There are significant penalties for failure to file the appropriate international information returns. The IRS no longer takes a lenient view on the application and collection of penalties. Since the penalties range from $10,000 per late form, up to 50% of the highest balance during the taxable year in the case of foreign bank accounts and up to 10% of the fair market value of property transferred to a foreign corporation or partnership, the amounts due can add up very quickly. While many of the returns have a reasonable cause exception to avoid the penalties, the IRS has recently become much more restrictive in granting a reasonable cause exception.  In certain cases there are criminal penalties for failure to file the required forms.  Lastly, failure to file a required information return, or filing what the IRS views as an incomplete return, could result in the statute of limitations not starting, and thus never expiring.

International Requirements
In our experience, taxpayers frequently miss reporting their investments in foreign corporations, partnership and disregarded entities, which have foreign bank accounts.  This results in failure to file two separate information reporting forms, with two separate sets of penalties.

The following is a summary of the international information returns that your clients may be required to file or collect:

  • Form 90-22.1 – filed if the aggregate of reportable foreign financial accounts exceeds $10,000.  This is a US Treasury Department form due by June 30, 2011, with no extensions; it is not filed with the tax return.
  • Form 926 – filed if a US taxpayer transfers property to a foreign corporation.
  • Forms 1042-S – filed if a US taxpayer makes payments to foreign vendors or recipients of dividends, interest, rents, royalties, service fees, etc. to the extent that the payments are US source income to the foreign recipient.  Similar to, yet quite different from, Form 1099 in a domestic context.  Due no later than March 15, 2011, with a short 30 day extension available upon request, with copies sent to the income recipients and the IRS.
  • Form 3520 and 3520-A – filed if a US taxpayer is a grantor with respect to a foreign trust, or a beneficiary receiving distributions from a foreign trust or bequests from a foreign decedent. It is filed separately from the tax return.
  • Form 5471 – filed if a US taxpayer (individual, corporate or partnership) owns 10% or more of the stock of a foreign corporation. Due with the tax return (including extensions.)
  • Form 5472 – filed if a US corporate taxpayer has a greater than 25% foreign shareholder.  The IRS puts the burden on each US corporate taxpayer to know who its shareholders are, and whether they are foreign.  Due with the tax return (including extensions.)
  • Form 8858 – filed if a US taxpayer has an interest in a foreign entity which is classified as a disregarded entity for US tax purposes.  Due with the tax return (including extensions.)
  • Form 8865 – filed if a US taxpayer has a greater than 10% interest in a foreign entity which is classified as a partnership for US tax purposes. Due with the tax return (including extensions.)
  • Form 8938 – filed if an individual has more than $50,000 in specified foreign financial assets during a taxable year.  Due with the tax return (including extensions.)
  • Forms W-8BEN, W-8ECI and W-9IMY – these forms are not filed with the IRS, but must be collected from the foreign payee if your client is withholding tax at a rate of less than 30% due to a claim that the foreign payee is eligible for a reduced rate under an income tax treaty.  Your client must have the appropriate form ON HAND when the payment is made to be able to withhold at the reduced rate.  The IRS can collect any under-withheld tax from your client as the withholding agent.

Amnesty Programs
The IRS established amnesty programs in 2009 and 2011, and recently announced a new 2012 amnesty program for taxpayers who have not filed the Form 90-22.1 (although the prior programs also covered taxpayers who failed to file international information returns as well).  Taxpayers who have not filed the required international information returns should be carefully advised about the pros and cons of participating in the new 2012 amnesty program.

If you have questions on the requirement to file a particular form, on how to complete part or all of a particular form, or on the pros and cons of participating in the 2012 amnesty program, please contact one of the authors or a member of Venable’s Tax and Wealth Planning Group.