International Reporting Requirements for CPAs and Their Clients
IMGCAP(1)]With the tax filing season underway, this is a good time to review the filing requirements for your clients with international interests.
The IRS has increased its scrutiny of individuals and businesses with international interests. Recently the IRS changed the name of its Large and Mid-Size Business Division to the Large Business and International Division. In addition, the division has established a specialized group of auditors to focus on high-net-worth individuals, and has announced that it will focus on international reporting and compliance. It should be noted that reviewing the compliance with the Form 1042-S filing requirements is among the division’s top issues.
There are significant penalties for failure to file the appropriate international information returns. While the IRS may have taken a more lenient position on the application and collection of penalties in the past, that has changed. Since the penalties range from $10,000 per late form, to up to 50 percent of the highest balance during the taxable year in the case of foreign bank accounts, and to 10 percent of the fair market value of property transferred to a foreign corporation or partnership, the amounts can add up very quickly.
While many of the returns have a reasonable cause exception, our recent experience is that the IRS has become much more restrictive in approving a reasonable cause exception. In addition, in certain cases there are criminal penalties for failure to file the required forms. Lastly, failure to file a required return, or filing what the IRS views as an incomplete return, could result in the statute of limitations not starting, and thus never expiring.
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.
[IMGCAP(2)]In addition, the IRS has expanded its scrutiny of tax return preparers looking at their clients’ compliance in this area. So, this is a good time to review your client information questionnaire and client engagement and transmittal letters to ensure that you have asked your clients to tell you about all of their international operations, overseas vacation homes, and foreign accounts (bank, securities, mutual funds). Doing so will protect you in the event that a client does not tell you about all of their international operations.
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 U.S. Treasury Department form due by June 30, 2011 with no extensions. It is not filed with the tax return.
• Form 926 – filed if a U.S. taxpayer transfers property to a foreign corporation. Due with the tax return, including extensions.
• Forms 1042-S – filed if a U.S. taxpayer makes payments to foreign vendors or recipients of dividends, interest, rents, royalties and service fees to the extent that the payments constitute U.S. source income. Similar to 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 U.S. 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 U.S. taxpayer (individual, corporate or partnership) owns 10 percent or more of the stock of a foreign corporation. Due with the tax return, including extensions.
• Form 5472 – filed if a U.S. corporate taxpayer has a greater than 25 percent foreign shareholder. The IRS puts the burden on each U.S. corporate taxpayer to know who its shareholders are, and whether they are foreign. Due with the tax return including extensions.
• Form 8288 – filed if a buyer purchases a U.S. real property interest, including a partnership interest, from a foreign seller. Due no later than 20 days after the date of sale.
• Form 8833 – filed if a foreign taxpayer is taking a position that income is not taxable because of a provision of an income tax treaty. Due with the tax return, including extensions.
• Form 8858 – filed if a U.S. taxpayer has an interest in a foreign entity which is classified as a disregarded entity for U.S. tax purposes. Due with the tax return, including extensions.
• Form 8865 – filed if a U.S. taxpayer has a greater than 10 percent interest in a foreign entity which is classified as a partnership for U.S. tax purposes. Due with the tax return, including extensions.
• Forms 8233, 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 percent 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.
The IRS recently announced a new amnesty program for taxpayers who still have not properly reported their offshore bank and other accounts. The 2011 Offshore Voluntary Disclosure Initiative largely follows the 2009 Offshore Voluntary Disclosure Program, but with higher penalties (25 percent rather than 20 percent) and covering eight years rather than six years.
You should strongly advise clients who have not yet reported their offshore accounts to participate in the 2011 OVDI, since this may be the last amnesty offered by the IRS for such taxpayers.
Charles Kolstad, of counsel with the law firm Venable LLP in Los Angeles, focuses his practice on international tax, corporate, and partnership matters. He assists clients in tax planning relating to the acquisition, dispositions and restructurings of businesses, corporations and partnerships; as well as asset financing strategies, including gain-deferral strategies and tax-advantaged financings. Michael Foster, a partner with Venable LLP, practices in the areas of tax and corporate law with a focus on international tax planning, individual and partnership taxation, estate planning, corporate and business law, and real estate matters.