Failure To Report Foreign Trust Results In 35% Penalty Against The Owner/Beneficiary

The 35% penalty under I.R.C. section 6677 for failing to report a distribution from a foreign trust applies against a person who is both the beneficiary and grantor/owner of a foreign trust.  At least, that is now the rule for taxpayers in the second circuit.  This draconian penalty for failing to properly report a foreign trust is applicable even if the taxpayer and trust paid all required taxes, if any, with respect to the trust.

In the case before the court, the taxpayer (Wilson) was the sole owner and beneficiary of a foreign trust.  He received a distribution from the foreign trust.  He filed his tax return late.  The IRS assessed a penalty equal to 35% of the amount of the distribution for failing to timely disclose the distribution.

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Nassim Kadem reports in today’s Australian Financial Review that recently appointed Commissioner Chris Jordan has mooted a new amnesty for disclosure of hidden offshore assets and income. A Tax Office official has confirmed the proposal and apparently, Treasurer Joe Hockey has indicated support for the idea.

The amnesty would cap the retrospective tax and penalty period to four years, making it relatively attractive for Australian taxpayers wanting to come clean and avoid later criminal prosecution and unlimited back taxes. It would be particularly attractive to second and third generation members of wealthy families who have “inherited” the problem of secret offshore caches. Read More

TaxConnections Picture - Money MagnetThe IRS has begun applying automatic penalties to late-filed Form 5472’s. We knew that since 2009 the IRS has automatically assessed a $10,000 penalty for late-filed Forms 5471’s – Information Return of US Persons With Respect to Certain Foreign Corporations.

However, we have been receiving a lot of calls from businesses who have recently received penalty notices regarding late filed or non-filed Form 5472’s.Upon further investigation, we discovered that the IRS has updated its IRM 20.1.9, Penalty Handbook, International Penaltieson March 21, 2013 to now include and Automatic Assessment of this $10,000 Penalty for Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

The Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code), is filed as an attachment to the U.S. income tax return by the due date of that return, including extensions. If the reporting corporation’s income tax return is not timely filed, Form 5472 nonetheless must be timely filed at the campus where the return is due. When the income tax return is ultimately filed, a copy of Form 5472 must be attached.The IRM 20.1.9, Penalty Handbook, International Penalties also provides: Read More