February 21, 2020 – Software Won’t Catch Often-Omitted International Tax Forms [7:15]

SUMMARY: You can no longer plead innocence or ignorance when it comes to international tax forms you’re required to file. Firm founder, Cecil Nazareth, CPA, MBA walks you through the basic forms you must file if you have many types of investments or ownership interests overseas.

It’s no secret that this tax season has been pretty rough. There are many, many issues for practitioners and their clients to wrestle with. I’m going to focus one very important, but frequently overlooked area: “Often Omitted International Tax Forms. 

Let me walk through a few forms that can often get you and your advisors in trouble if you overlook them. Telling yourself “You don’t know what you don’t know” is no longer an excuse. The penalties for failing to file the right forms can be VERY steep.

The IRS has been sending out a lot of notices lately for non-compliance. Again, the penalties can be in the range of $10,000 to $25,000. You really don’t want to sweep this client obligation under the rug.

So, let’s talk about a few of the most important forms you need to file if you have clients with ownership interests or other assets overseas.

1. Form 5471 (ownership of a foreign entity). If your client is a 10% owner or director of a foreign entity, then they are required to file Form 5471 annually or risk paying a $10,000 penalty for each year of non-compliance. Talk about steep!
2. Form 5472 (Foreign ownership of a U.S. entity). If your client is a non-resident of the United States and they own 25% or more of a U.S. entity, then they are required to file Form 5472 annually or risk paying a $25,000 penalty for each year of non-compliance. Ouch!

5471 and 5472 are two of the most serious non-compliance issues. Don’t take them lightly. 

3. Form 8802 (Certificate of Residency). If your client wants to get credit for U.S. taxes paid in a foreign country, you want to file Form 8802 in a timely manner.
4. Form 8621 (Foreign Mutual Funds). Better known as PFIC (Passive Foreign Investment Companies).
   Example: If your client owns stock of Deutsche Bank mutual funds in Germany and you don’t report those holdings, then you are liable for the highest rate of tax. That’s because Deutsche Bank Germany is a PFIC and they’re handling your mutual funds and so you must use the mark-to-market valuation method. 
5. Form 3520 (Gift & Estates). This form must be filed if your U.S. client receives gifts or inheritance from a foreign person, trust or other entity. Here again the penalties are steep—I’ve seen anywhere from $10,000 to over $100,000 for each violation.
6. Form 8938 (Specified Foreign Financial Assets). This is a duplicative effort from Foreign Bank Account Reporting (FBAR). If your client or their signatory authority owns more than $10,000 in a foreign bank account, then you need to report that via FBAR form and send it to the U.S. Treasury. 

Example: Your U.S. client owns an interest-bearing $20,000 certificate of deposit in a foreign country such as Canada, Mexico or India. The interest is taxable because U.S. persons must pay tax on worldwide income, but you have to report that CD in the foreign country on your U.S. tax return. Since $20,000 is below the $150,000 threshold, you don’t have to file Form 8938, but you still have to file FBAR.

Cecil Nazareth presenting at a state CPA Society near you

Trust me, the IRS notices that have been going out this year are very strict. It’s very important to keep track of all these forms because your tax software may not highlight them. Tax software doesn’t know what is required and not required.

To that end, I’ll be visiting lots of state CPA societies this spring doing online training sessions and seminars about International Tax Forms. I urge you strongly to attend one of them.

To book Cecil Nazareth, CPA, CA for your next conference of event, please contact:
Hank Berkowitz
(203) 852-9200  | hberkowitz@HBPubDev.com

Conclusion

As a CPA, you could be held liable for negligence if you fail to ask your clients about international holdings. If you client doesn’t volunteer the information, usually they are the one held responsible, but why take the chance on facing professional liability? 

When going through your tax planning checklist, make sure you ask your individual and corporate clients whether or not they have foreign entities or own foreign accounts. That way you’re complying with FBAR, 5471 and 5472 and you have documentary evidence that you’ve done your job.

When we’re in the peak of Busy Season, it’s tempting to focus only on domestic issues, but trust me, you don’t want to let those important international tax forms slip through the cracks. 

All of these forms and implications are outlined in my book International Tax & Compliance Handbook with special emphasis on India-US Taxation.