If you have foreign financial accounts overseas, or engage in other financial activity abroad, you might have to file several international information returns (IIRs) with the IRS. Such reporting requirements apply to all taxpayers, even expatriates.
International information returns must be filed by certain taxpayers to inform the IRS about their financial activities overseas, whether personal or business related. Penalties for not filing these international information returns typically equate to thousands of dollars. Depending on your reporting liability, you might even face jail time for failing to submit an IIR to the IRS. International information return forms are used for informational purposes. This means that you will not be paying taxes by submitting these forms. Most IIR forms are due on Tax Day and can be submitted with a taxpayer’s annual tax return. Careful preparation of IIR forms is important, as submitting inaccurate information can also result in penalties for taxpayers.
For help filing international information returns, call the tax CPAs at US Tax Help at (541) 362-9127 today.
Tax Penalties for Failure to File Common International Information Returns
When American taxpayers engage in financial activity overseas, they may have to inform the IRS and other similar entities of such activity. While you might not have to pay taxes to the IRS for certain foreign financial activity, you may have to file an international information return. If you do not file the proper forms, you could face serious penalties and be investigated for foreign financial crimes.
Foreign Financial Assets
The IRS and the Financial Crimes Enforcement Network (FinCEN) pay close attention to Americans that hold foreign assets overseas. If you, at any time, have an aggregate of $10,000 across all of your foreign financial accounts, including bank and investment accounts, you must file a Report of Foreign Bank and Financial Accounts, or FBAR. Our tax CPAs can help you do this using FinCEN Form 114. You must file the FBAR annually if you meet the reporting requirements. Both expats and domestic citizens have an FBAR reporting liability. Annual FBAR reports are due on Tax Day. This is necessary for informational purposes only so that FinCEN can monitor American money overseas and look out for possible instances of money laundering.
If you do not file the FBAR when required, you will be penalized by the IRS. The initial penalty for acts of non-willful non-compliance is $10,000. If the IRS finds that you intentionally did not file the FBAR when required to, you can be fined upwards of $100,000 or half the amount held in your foreign financial accounts, whichever amount is greater.
In addition to the FBAR, you must file IRS Form 8938, Statement of Specified Foreign Assets, if you are unmarried, live in the U.S., and had specified foreign financial assets of more than $50,000 on the last day of the tax year or more than $75,000 at any point during the tax year. If you are married, filing a joint return, and live in the U.S., the reporting threshold is having more than $100,000 in specified foreign assets on the last day of the tax year or $150,000 in assets at any point during the tax year.
If you are an expatriate, you must file IRS Form 8938 if you are filing alone and your specified foreign assets are valued at more than $200,000 on the last day of the tax year or more than $300,000 at any point during the tax year. For expatriates filing jointly, the reporting threshold is having $400,000 in specified foreign assets on the last day of the tax year or $600,000 at any point during the tax year. In general, the penalty for not filing Form 8938 is $10,000 per year. Penalties can continue to be levied, up to $60,000. Criminal charges might also be applied to those that do not file this international information return with the IRS.
Interest in Foreign Companies or Partnerships
If you have an interest in a foreign corporation, you may have to submit an international information return to the IRS. For example, taxpayers must submit Form 926 to report a property transfer or exchange with a foreign corporation. This form must be filed alongside your normal tax return. The penalty for not filing Form 926 is 10% of the market value of the property transferred, up to $100,000.
American companies that are at least 25% foreign-owned must file Form 5472 when reportable transactions are made. Failure to file Form 5472 can result in a financial penalty of $25,000. Foreign companies engaged in a business or trade in the U.S. must also file Form 5472 when necessary.
Form 8858 must be filed by American taxpayers, corporations, estates, and trusts that own a non-U.S. entity separate from its owners for tax purposes. To determine if your entity meets the definition of a foreign disregarded entity or foreign branch, consult with our tax CPAs. If you do not file international information return IRS Form 8858 and its corresponding schedules, you will be subject to a $10,000 financial penalty.
American taxpayers with interest in foreign partnerships may have to file Form 8865 with the IRS. The same is true for those who have recently transacted with a foreign partnership. The penalty for not filing Form 8865 when necessary is, again, $10,000. For each month that you fail to file Form 8865, you might be fined an additional $10,000, up to $60,000.
Interest in Foreign Trusts
Suppose a foreign relative passed away and left you as the owner of a foreign trust. In that case, you may have to file Form 3520-A as an information return with the IRS. This will contain information about the trust itself and any listed trustees or beneficiaries. Property transfers or money transfers to the trust should also be reported using Form 3520-A. The penalty for failure to file Form 3520-A is $10,000 or 5% of the value of the foreign trust’s assets, whichever amount is greater. If you receive a financial gift from a foreign relative, you may have to file Form 3520. The penalty for not filing this form is 5% of the value of the foreign financial gift, up to 25% of its value.
Interest in Passive Foreign Investment Companies
U.S. shareholders of passive foreign investment companies (PFIC) that get direct or indirect distributions must file IRS Form 8621. This form also applies in other situations involving a gain on the direct or indirect disposition of a PFIC’s stock and to taxpayers with ties to a qualified electing fund. There is no penalty for not filing international information return Form 8621. However, if you do not submit this form on time, your tax return for that year may stay open indefinitely, which could lead to larger problems in the future.
What is the Purpose of an International Information Return?
International information returns are not used for tax purposes. They are instead used to inform the IRS of your financial activity in foreign countries around the world. The IRS can check the information you provide on an IIR against its own records to confirm that no criminal financial activity is occurring.
Information returns are used for informational purposes. For example, just because you file an FBAR does not mean the IRS will tax you on foreign financial holdings overseas. Simply put, the IRS wants to keep tabs on what American taxpayers do with their money in foreign countries. Although you may not be taxed when submitting international information returns, you can be severely penalized if you do not file the necessary paperwork with the IRS.
In addition to international information returns, expat taxpayers might have to report their worldwide incomes and submit additional forms if they wish to claim tax credits or deductions available to them.
When Should You Submit an International Information Return to Avoid Penalties?
In general, most international information return tax forms are due on Tax Day. While this date can change yearly, often because of extenuating circumstances, it typically falls in mid-April.
If you have an international information return liability to the IRS, you will have to submit the necessary information, often by Tax Day. In some cases, taxpayers can file for extensions for certain IIR forms. For example, if you are an expatriate, you will get an automatic two-month extension for most tax forms.
Other international information returns must be filed in a timely fashion, meaning as soon as possible after a sale or transaction occurs. This is somewhat flexible and will depend on your specific situation.
If you need more time to prepare your tax return and the additional international information returns required by the IRS, you can file for an extension through the IRS website. Doing this will provide you with a six-month extension, giving you, in most cases, until mid-October to file your taxes and any additional corresponding information.
Taxpayers who do not apply for extensions and fail to file international information returns alongside their tax returns will likely be penalized by the IRS. Even if you file an IIR, you could be penalized if the information you provide is incorrect.
Where Should You Submit an International Information Return to Avoid Penalties?
Most international information returns are submitted to the IRS, except for a Report of Foreign Bank and Financial Accounts.
In most cases, you will attach any pertinent IIRs with your annual tax returns. These forms will then be sent to the IRS so that they can confirm the information you have provided. This is generally the case for all international information returns, apart from the FBAR.
The FBAR is sent to FinCEN directly using Form 114. The Financial Crimes Enforcement Network has an online portal through which individuals can report the holdings in their foreign bank accounts and other foreign financial accounts.
Depending on where you live, your state of residence might also be interested in your financial activity abroad. Confirm that you do not have to submit information returns to your state in addition to the IRS. If you do, you could be penalized for non-compliance.
How Can You Prepare an International Information Return to Avoid Penalties?
Preparing your international information returns is important. Careful preparation will allow you to avoid costly financial penalties from the IRS for not reporting your foreign financial activity when necessary.
Start by consulting with our tax accountants. You might be responsible for submitting an IIR even if you are not aware that your foreign financial activity is of concern to the IRS. While the IRS more harshly penalizes individuals for acts of willful non-compliance, it still places consequences on those who were unaware of their reporting responsibility.
While penalties for failing to submit international information returns most often impact expatriates, they can also impact domestic citizens living in the IRS who engage in foreign financial activity overseas.
Once you have confirmed your reporting liability, send over the necessary information to our tax accountants. Depending on the forms you must file, that might include foreign bank statements, updated information on a foreign trust, or any other financial details. Once we have the necessary information, we can prepare your international information returns so that they are ready to submit alongside your normal U.S. tax return.
If you live overseas but are still an American citizen, you must report your worldwide income to the IRS. While exemptions for expats might reduce your tax liability, they will not erase your reporting liability, whether for your income or other financial activity that occurs in another country.
By consulting with our tax accountants, filers can more easily understand their reporting responsibilities so that they are not unnecessarily penalized by the IRS. The IRS will levy financial penalties against those who do not submit international information returns when required, whether out of willful non-compliance or ignorance.
Call Our Tax Accountants to Learn More About IIRs Today
You can call our tax CPAs at (541) 362-9127 to get help filing your international information returns from US Tax Help.