Using Streamlined Domestic Offshore Procedures to Correct Forms 3520 and 3520-A (Part II)

 Posted on October 22, 2021 in Taxation Law

There are many different issues that can lead to tax penalties, including failing to file the correct forms and report certain information to the IRS. In a recent blog, we looked at the potential penalties that may apply if a taxpayer fails to file Forms 3520 and/or 3520-A. These forms are used to report transactions involving foreign trusts, and in some cases, a taxpayer may be required to pay a penalty of 35% of the amount that was transferred to or distributed from a trust. For those who have not filed these forms as required, it may be possible to mitigate this issue by using the Streamlined Domestic Offshore Procedures, which is commonly known as streamlined compliance.

What Are the Streamlined Procedures?

Individual taxpayers who meet the standards of being “U.S. persons” may use the Streamlined Domestic Offshore Procedures to fulfill all of their reporting requirements and correct any errors that may have led to an underpayment of the taxes owed. While these taxpayers will be required to pay a penalty, it will often be lower than the penalties that would apply otherwise.

The streamlined procedures will only be available for taxpayers who acted non-willfully when they failed to meet their requirements. Negligence, ignorance of tax laws, inadvertent errors, or other actions taken in good faith may be considered to be non-willful conduct. Deliberate attempts to avoid paying taxes or purposeful failure to report income or assets is considered willful conduct that will disqualify a person from using the streamlined procedures. 

When using the Streamlined Domestic Offshore Procedures, a taxpayer will be required to file amended tax returns for the 3 most recent years, along with any required additional forms. They must also file any necessary Report of Foreign Bank and Financial Accounts (FBAR) for the 6 most recent years. Finally, they will be required to pay a miscellaneous offshore penalty of 5% of the aggregate value of their foreign financial assets that were not reported correctly during the high balance year covered by the submitted tax returns and FBARs.

The Streamlined Domestic Offshore Procedures can be used to submit any Forms 3520 or 3520-A that a taxpayer failed to file or to correct any errors on forms that had been submitted. The streamlined procedures can also be used to address issues with other forms, including:

• FBARs (Form 114)

• Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations

• Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

• Form 8938, Statement of Specified Foreign Financial Assets

• Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

• Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund

Contact a San Jose Foreign Tax Compliance Attorney

If you own foreign assets and you are concerned that you may be subject to tax penalties because you have not reported these assets correctly, John D. Teter Law Offices can help you understand your options. We will work with you to determine whether you can use the streamlined procedures, and we will help you resolve your tax issues in a way that minimizes the penalties that you will be required to pay. Contact our San Jose, CA tax compliance lawyer at 408-866-1810 to set up a confidential consultation today.

Sources:

https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures

https://www.irs.gov/individuals/international-taxpayers/u-s-taxpayers-residing-in-the-united-states