Importance of Timely Filing Required Foreign Reporting

By: Richard Walker, CPA - Partner (Posted: 12/03/2013)

Dear Clients:

Year end tax planning should include determining whether or not any foreign reporting will be required. Although the tax laws requiring timely reporting have been in place for several years, we have seen the IRS assessing penalties for late filing of 2012 income tax returns with required foreign financial information reporting. The penalty for failure to furnish the required information in a timely return generally is equal to $10,000 for each failure and can increase if the failure continues after notification by the IRS. With respect to Form 3520, the initial penalty is equal to the higher of $10,000 or 35% of the gross value of yearly distributions from or into the foreign trust, or 5% of the gross assets owned by the U.S. person in the foreign trust. In addition to the civil penalties mentioned above, there are criminal penalties for willful violations that can include a fine of not more than $250,000, or imprisonment for not more than five years, or both.

No penalties will be imposed if the Taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

A list of the more common required foreign reporting is as follows:

  1. Form TDF 90-22.1 (Report of Foreign Bank and Financial Accounts "FBAR"). A U.S. person that has a financial interest in or signature authority over foreign financial accounts must file an FBAR if the aggregate value of the foreign financial accounts exceeds $10,000 at any time during the calendar year.
  2. Form 3520 (Annual Return to Report Transactions with Foreign Trust and Receipt of Certain Foreign Gifts). A U.S. person that has a reportable event, outstanding obligations with or certain ownership in a foreign trust, received distributions from or to a foreign trust during the calendar year is required to file this annual return. In addition, a U.S. person that receives over $100,000 as a gift or bequest from a foreign person or foreign estate, or receives more than $14,723 (threshold for 2012) from a foreign corporation or foreign partnership during the calendar year is required to file this annual return.
  3. Form 5471 (Information Return of U.S. persons with respect to Certain Foreign Corporations). A U.S. person who owns or acquired, during the year 10% or more stock in a foreign corporation is required to file this annual information return.
  4. Form 5472 (Information return of a 25% Foreign-owned U.S. Corporation or Foreign Corporation Engaged in a U.S. Trade or Business). The purpose of the form is to report related party transactions with the U.S. Corporation and transactions with the U.S. Corporation from other related foreign entities and persons.
  5. Form 8938 (Statement of Specified Foreign Financial Assets). A U.S. person who meets certain dollar thresholds any time during the calendar year is required to report on the following specified foreign financial assets: Financial accounts maintained by a foreign financial institution and other assets not held in accounts maintained by financial institutions, such as stock or securities issued by non-U.S. persons, financial instruments or contracts with issuers or counterparties that are non-U.S. persons, and interest in certain foreign entities.

A U.S. person, as mentioned in items 1 through 3 above, includes a citizen or resident of the U.S., a domestic partnership, a domestic corporation, and an estate of certain trusts. Please contact Burton McCumber & Cortez, LLP by visiting our website at with any questions regarding the above.