Due Diligence

by Brian Mahany

Although 99% of the people that contact us about the IRS’ Offshore Voluntary Disclosure Program (called “OVDI” or “OVDP”) have unreported foreign accounts, the program can be used to come into compliance with other foreign reporting problems. The program can be used for people with unreported foreign entities and for people who have failed to file IRS Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Form 3520 is used to report ownership in certain foreign trusts, transactions with foreign trusts and gifts from foreign persons.

The penalty for not filing a form 3520 is the greater of $10,000 or 35% of the gross reportable amount. Different rules apply for foreign gifts.

Simply failing to file a form 3520 to report a foreign gift probably does not require an amnesty application. But if you have both failed to file the form 3520 and have unreported foreign income, OVDI may be the better route to take. Similar rules apply for those who failed to file IRS form 3520-A Information Return of Foreign Trust With a U.S. Owner; IRS form Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business; and IRS Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation.

The penalties for an unfiled form 926 can be quite harsh;  ten percent of the value of the property transferred, up to a maximum of $100,000 per return, with no limit if the failure to report the transfer was intentional.

The largest penalties are reserved for those with unreported foreign bank and brokerage accounts. Those penalties can be the greater of $100,000 or 50% of the highest account balance for each the account is not reported! For folks with missing FBARS, amnesty may be a better deal.

The purpose of this article isn’t to confuse anyone. Offshore reporting requirements can be quite complex and the rules on foreign accounts and the IRS’ offshore amnesty program change frequently. We recommend that you consult with a good CPA before navigating these waters. If you have unfiled or missing returns for offshore real estate, partnerships, corporations or gifts, consult a tax lawyer before doing anything else.

The tax attorneys at Mahany & Ertl have helped many taxpayers with unreported accounts and assets. From the OVDI / OVDP program to the new FATCA law, we have helped many people.

If you have questions or need help with foreign accounts or unified FBARs, give us a call. For more information, contact attorney Bethany Kroes at bckroes@mahanyertl.com or by telephone at (414) 223-0464. All inquiries are protected by the attorney – client privilege and kept in strict confidence.

Mahany & Ertl – America’s Tax Lawyers. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine; Minneapolis, Minnesota and San Francisco, California. IRS tax services available worldwide.

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