Foreign assets are always tricky for U.S. tax reporting. A recent court decision also shows that differentiating a foundation from a trust is pivotal.
The levying of tax penalties stood in a recent federal appeals court decision on whether a private foundation was a foreign trust subject to such penalties.
In the Rost v. U.S., the U.S. Court of Appeals for the Fifth Circuit upheld tax penalties against U.S. citizen John Rebold, who failed to report his personal-use Liechtenstein “Stiftung” (a non-charitable private foundation) as a foreign trust.
The decedent Rebold formed the Enelre Foundation in 2005 for the general support and education of him and his children. He transferred $2 million to the foundation in 2005 and $1 million in 2007 and did not disclose the transactions to the IRS.
Rebold later learned that the IRS would consider his foundation a foreign trust with the associated reporting requirements. He filed the reports belatedly, in 2013, and the IRS assessed penalties.
Under IRC Sec. 6048, a U.S. person must report creation of a foreign trust, transfers to a foreign trust and distributions received by a foreign trust; ownership of the trust must also be disclosed. Annual filing forms are 3520 and 3520-A, and penalty for failing to file is the greater of $10,000 or 35% of the gross value of property contributed to a foreign trust.
Rebold paid the penalties and then filed a refund action, arguing that the penalties were improper because the reporting requirements for the private foundation were unclear, even though he’d been told as early as 2010 (a year before the IRS announced a new Offshore Voluntary Disclosure Initiative, aka OVDI) that his tax-reporting position was obvious.
He was assessed $1,380,252.35 in penalties and negotiated to reduce these penalties by half. He paid the reduced penalties and filed for an administrative refund claim, which was ultimately taken over by his estate after his death. The estate argued that the foundation wasn’t a foreign trust, claiming that the rules defining trusts are vague and that the IRS never designated that a Stiftung was a foreign trust.
Taxpayers who don’t meet their tax obligations may owe a penalty.
The IRS charges a penalty for various reasons, including if you don’t:
- File your tax return on time
- Pay any tax you owe on time and in the right way
- Prepare an accurate return
- Provide accurate information returns
We may charge interest on a penalty if you don’t pay it in full. We charge some penalties every month until you pay the full amount you owe.
Understand the different types of penalties, what you need to do if you get a penalty and how to avoid getting one.
The IRS is aggressively targeting high net-worth individuals and businesses. The reason is simple, there is more meat on the bone when the government catches a big fish. Technology has also made it much easier for the government to catch a big fish.
Even the most benign non-compliance can lead to unfair penalty assessments. Large penalty assessments have become the norm in cases involving foreign non-compliance. The IRS routinely assesses significant penalties in cases involving Forms 3520, 3520-A, 5471, 8938, and FinCen 114 (FBAR). Other significant penalties assessed by the IRS include: Failure-to-File (FTF), Failure-to-Pay (FTP), Accuracy-Related Penalty, and Civil Fraud.
Some of these penalties are generated automatically while others are assessed by an examiner. Regardless of the assessment process, all the penalties mentioned above may be challenged by taxpayers. The key to penalty relief is demonstrating to the IRS that the taxpayer has “reasonable cause” for their non-compliance.
TaxConnections is calling out to tax professional members who will tell real-life stories of clients impacted by the changes in tax laws, tax increases and tax audits. Our digital tax platform is one where tax experts and taxpayers connect around the world. More than ever, people are affected by tax increases in local, state, federal and international tax jurisdictions. Last November 2019, a blog titled “Shocking Behind The Scenes Story: Tax Professionals Advocating For Taxpayers On 3520-A Penalties” which created hundreds of comments on the topic of taxpayers being treated unfairly. If you read the comments you will discover the unwanted and difficult positions taxpayers were faced with on this issue. The point is we know there are many tax stories in the hands of TaxConnections Members that we need to bring to the attention of taxpayers.
The miscellaneous offshore penalty under the Streamlined Procedures is five percent of the highest aggregate account balance during the disclosure period. A number of factors can influence exactly how this penalty will be calculated in your case.
Asset Balances That Are Counted
The balances in all of your foreign financial accounts will generally be counted for the penalty calculation. The year-end balances will be reviewed and the highest aggregate balance will be used to determine your penalty amount.
Any asset that should have been reported will count for these purposes. Even if assets were reported on an FBAR, but the income from these accounts wasn’t reported on your tax return, they will also be counted for the penalty calculation.
Simply find the highest aggregate account balance and multiply it by five percent to determine your penalty amount under the Streamlined Procedures. This is the penalty that applies to domestic taxpayers.
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April 18 was this year’s deadline for most people to file their federal tax return and pay any tax they owe. If you are due a refund there is no penalty if you file a late tax return. If you owe tax, and you failed to file and pay on time, you will most likely owe interest and penalties on the tax you pay late. To keep interest and penalties to a minimum, Read More