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Reducing Failure to File Penalties

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Client Stories

Background

Recently, a new client with a significant amount of foreign holdings chose to move all of their respective tax reporting and compliance needs to AGH. Upon review of the client’s prior year tax returns, we found that the client’s previous CPA firm failed to file the requisite foreign reporting documents with both their corporate and individual prior year’s tax return. To make matters worse, it quickly came to light that the requisite foreign reporting documents had not been properly filed for not just one year, but for 7 years; thus, leaving the client susceptible to a $150,000 dollar penalty, and a prolonged statute of limitations period where the IRS could audit their tax returns.

Response

After fully assessing the situation, we suggested that the client file amended returns following the Streamlined Domestic Offshore Procedures. If you meet the eligibility requirements, Streamlined Domestic Offshore Procedures allow taxpayers to pay a 5% penalty based on the highest total value of their foreign financial assets subject to the miscellaneous offshore penalty during the years in the covered three year tax return period and the covered six year FBAR period. Although the client is still subject to a penalty, the 5% penalty can be significantly less than the aggregate penalty accrued over multiple years – especially when the failure to file penalty can be a whopping $10,000 per form. The other potential option was having the client file a first time offense abatement; however, the mere fact that the client had not filed any of the requisite foreign reporting documents for 7 years made it unlikely that the IRS would accept that the taxpayer had reasonable and supportable cause for a failure to file – or a favorable history of tax compliance. As a result, the client could then find themselves subject to paying the full penalty. In the end, we proceeded with filing amended returns by following the Streamlined Domestic Offshore Procedures, which resulted in the client paying an overall penalty, including interest, of $61,000 dollars instead of $150,000.

Key Takeaways

1. Make sure your foreign reporting needs are being met by your CPA
2. If you find yourself facing a penalty, it is important to discuss all of your options with your tax advisor
3. If eligible, filing amended returns via the Streamlined Domestic Offshore Procedures can potentially significantly reduce the penalty you are subject to.
For more information on Streamlined Domestic Offshore Procedures and how they may apply to you, contact Craig Thompson at craig.thompson@aghllc.com or (404) 835 – 1897.

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