March 7th, 2023
Great Time to Consider IRS Streamlined Submission Programs
Author: Jeremy M. Vaida
Now that the Supreme Court has clarified the maximum exposure for penalties related to a nonwillful failing to file the annual Report of Foreign Bank and Financial Accounts (colloquially known as an FBAR), taxpayers should seize the opportunity to come into compliance, either through one of the IRS’s Streamlined Submission programs or otherwise.
On February 28, 2023, the United States Supreme Court, in the case of Bittner v. United States, conclusively determined that the $10,000 penalty for taxpayers’ failure to file their annual FBAR can only be imposed on a per form basis (i.e. maximum once per year), as opposed on a per account basis. This came as welcome new to Mr. Bittner, who held dozens of foreign accounts and who had been confronted with over $2 million in penalties, but wound up only owing $50,000 for the five years he had failed to file his FBARs.
This ruling provides a unique opportunity for taxpayers who, after learning of their obligation to file FBARs (required for all U.S. persons holding at least $10,000 in a foreign financial institution at any time during the tax year), may have been too afraid to come into compliance for fear of being hit with penalties reaching into the six or seven figures. With the specter of such draconian penalties lifted, taxpayers can feel secure that coming into compliance will not bankrupt them.
In certain circumstances, such as when a taxpayer has failed to file any of the other U.S. international income tax forms, individuals can be eligible for participation in either of the IRS’s Streamlined Submission programs (one program for U.S. persons living in the United States and another for U.S. persons living abroad). These programs can often substantially reduce, or even completely eliminate, the penalties for failing to file any U.S. international forms (each of which comes with its own $10,000 per year penalty). U.S. international forms include, but are not limited to:
- Form 8938 – required when a U.S. person holds $50,000 ($75,000 in the case of married U.S. persons) in foreign assets on December 31st or $100,000 ($200,000 in the case of married U.S. persons) in foreign assets at any point during the year;
- Form 3520 – required when receiving a foreign gift or inheritance valued over $100,000;
- Form 8621 – required when a U.S. person holds an interest in a foreign mutual fund, index fund, or similar type of asset;
- Form 5471 – generally required when a U.S. person holds a significant interest in a foreign corporation;
- Form 8865 – generally required when a U.S. person holds a significant interest in a foreign partnership;
- Form 8858 – generally required when a U.S. person holds a significant interest in a foreign disregarded entity (i.e. the foreign equivalent to a single member LLC).