U.S. citizens or residents who are officers or directors of a foreign corporation (e.g. a Canadian corporation) often overlook their U.S. filing obligations, and it is important to understand the stiff penalties for not properly disclosing foreign interests.
If a U.S. citizen or resident is an officer or a director of a foreign corporation in which a U.S. person has: 1) acquired 10% or more of votes or value of the corporation during the year or 2) acquired an additional 10% or more of votes or value of the corporation during the year, the officer/director is required to report as a Category 2 filer on Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations). Reporting is required whether or not the officer/director owns shares in the foreign corporation and regardless of whether the foreign corporation is a controlled foreign corporation (“CFC”).
Failure to file, or filing an incomplete Form 5471, can result in penalties of $10,000 per foreign corporation, unless a reasonable cause defense exists. At any time, the IRS may issue a written request to file Form 5471 within 90 days. If not filed, the continuous penalty applies at $10,000 per month to a maximum of $50,000. The combined penalty is capped at $60,000.
Other information returns that are either filed late or incomplete may attract initial and similar continuous penalties and are summarized as follows:
|Form||Initial Penalty||Continuous Penalty||Maximum Penalty|
|Form 8938, Statement of Foreign Financial Assets||$10,000 per return||Additional $10,000 penalty per month that the failure continues, beginning 90 days after initial notice||Maximum continuous penalty of $50,000 for a combined penalty of $60,000|
|Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts||Greater of $10,000 or 35% of the gross reportable amount
In the case of greater than $100,000 of foreign gifts received, the penalty is 5% of the value of the gift per month.
|Additional $10,000 penalty per 30-day period, or a fraction thereof, that the failure continues beginning 90 days after initial notice||Gross reportable amount plus initial penalty
Maximum penalty of 25% of the value of the gift
|Form 3520-A, Information Return of a Foreign Trust with a U.S. Owner||Greater of $10,000 OR 5% of the gross value of trust assets owned by the U.S. person||Additional $10,000 penalty per 30-day period, or a fraction thereof, that the failure continues beginning 90 days after initial notice||Gross reportable amount plus initial penalty
|Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation||10% of the value of the property transferred||Not applicable||$100,000
No maximum if due to intentional disregard
|Form 8865, Return of U.S. Persons with Respect to Foreign Partnerships||$10,000 for failure to file
Plus, 10% of the value of any unreported transferred property
|Additional $10,000 penalty per month that the failure continues beginning 90 days after initial notice||Maximum continuous penalty of $50,000 for a combined penalty of $60,000
|Form 5472, Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business||$25,000 per foreign corporation ($10,000 prior to 2018)||Additional $25,000 penalty per month that the failure continues beginning 90 days after initial notice||NO MAXIMUM PENALTY|
|Form 114, Foreign Bank Account Report||Willful penalty of the higher of $100,000 or 50% of the total balance of the foreign financial account per violation
Non-willful penalty of up to $10,000 per account per year
|Not applicable.||Aggregate of all accounts that does not exceed $50,000, penalty is greater of $1,000 per violation on 5% of the maximum account balance in the calendar year
Aggregate balance of more than $50,000 but no more than $250,000, penalty is the greater of $5,000 per violation or 10% of the maximum account balance
Maximum aggregate balance is greater than $250,000 and less than $1,000,000, penalty is greater of 10% of the maximum account balance or 50% of the closing balance in the account on the last day for filing the FBAR
If the account exceeds $1,000,000, the penalty is the greater of $1,000,000 or 50% of the closing balance of the account
In most cases, the total penalty amount for all years under examination will be limited to 50% of the highest aggregate balance. Although penalty may be higher or lower, the total penalty should not exceed 100% of the highest aggregate balance.
Aggregate of all accounts that does not exceed $50,000, penalty is $500 per violation not to exceed $5,000
Aggregate of all accounts that exceed $50,000 but less than $250,000, penalty is lesser of $5,000 or 10% of the highest balance in the account during the year
For violations regarding an account exceeding $250,000, the maximum penalty is $10,000 per violation.
In no event will the penalties for non-willful violations exceed 50% of the account balances.