As US tax reporting becomes increasingly more involved, it can be difficult to keep up with all the tax forms and tax deadlines. If you fail to timely file and pay your US taxes, you could be subject to significant penalties. However, there is good news: the IRS offers programs to help you get back into compliance and sometimes even abate all penalties!.
TYPE OF PENALTIES
Below the most common tax penalties assessed by the IRS:
1/ Failure to file / Late filing of a US income tax return
The IRS assesses a penalty for each month a tax return is filed late. Overseas taxpayers often fail to file their tax return because they are unaware of their US tax obligations while being overseas (Accidental Americans).
To know more on accidental Americans: L’americain accidentel: 3 conseils pour bien gerer sa fiscalite
2/ Failure to pay tax / to make estimated tax payments
The IRS assesses a penalty when a taxpayer does not pay his taxes by withholding or by estimated tax payments – before the deadline.
To know more on the US tax deadlines: https://www.kbfinancials.biz/tax-calendar/
3/ Failure to file / late filing of a foreign bank account return
The IRS might assess a penalty for failing to report foreign financial accounts.
To know more about foreign accounts: Foreign Assets
4/ Failure to file an international tax form
The IRS will assess penalties for failing to report ownership and transfer of foreign assets – such as foreign pension account, foreign gift, foreign inheritance or shares in foreign entities.
To know more about international gift – La donation internationale
To know more about international estate – Succession Internationale
SUMMARY TABLE OF PENALTIES
| Failure to: | Amount of the penalty: |
| File an individual tax return on time (1040(NR)) | 5% of unpaid tax for each month late |
| Pay income tax on an individual tax return | 0.5% of unpaid tax for each month late |
| File a business tax return on time (1065) | $210 per month late & per partner |
| File international tax forms for US ownership in foreign entity (5471) | $10,000 per year |
| File international tax forms for foreign ownership in US entity (5472) | $25,000 per year |
| File international tax forms for foreign gift / inheritance (3520) | Greater of $10,000 or 35% of value of gift/inheritance |
| File a foreign bank account return (Fincen114) | Starting at $10,000 per bank account per year |
| File international tax form for foreign ownership in Single member LLC (FDE) | $25,000 per year |
DEFENSES AGAINST PENALTIES
The IRS offers numerous programs for taxpayers to regain compliance and sometimes even abate penalties.
1/ First time penalty abatement
The IRS will administratively waive certain penalties the FIRST year of non-compliance. To benefit from this program, the taxpayer must have a clean history of compliance: ie NO penalties assessed in the last 3 years and all tax due paid.
2/ Reasonable cause
The IRS may consider a “reasonable cause” to waive penalties. To benefit from this program, the taxpayer must show that he exercised ordinary business care and prudence but yet was unable to comply with his US tax obligations.
3/ SDOP / SFOP procedure
US taxpayers who failed to file their tax returns or foreign financial assets can use the Streamline Domestic offshore program (SDOP) or the Streamline Foreign offshore program (SFOP) to get back in compliance. To benefit from this program, the taxpayer must certify that his conduct was not “willful”.
4/ DIIRSP procedure
US taxpayers who failed to file certain international information returns can use the Delinquent International Information Return Submission procedure (DIIRSP) to get back in compliance. To benefit from this program, the taxpayer must provide a reasonable cause statement.
5/ COVID penalty relief (NEW in August 2022)
In August 2022, the IRS issued a penalty relief for tax years 2019 & 2020: the IRS will automatically refund some tax penalties for the years 2019 & 2020. To benefit from this program, taxpayers must have filed their tax returns by September 2022.
For assistance with your international tax needs, please contact Karine Bauer, EA, JD – HERE
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Updated: December 19th, 2022