The Cost of Non-Compliance With IRS Form 926

The 16th amendment of the U.S. Constitution empowers Congress to collect taxes from U.S. persons from whatever source, with no limitations on the collections of taxes or worldwide income. All United States tax laws and regulations apply to every U.S. Person whether he/she is working in the United States or in a foreign country and entities formed under U.S. law. The IRS takes this opportunity increasingly seriously, and taxpayers need to do the same.

IRS Form 926 is the form U.S. citizens and entities including estates and trusts must file to report certain exchanges or transfers of property to a foreign corporation. This would include transfers of cash over $100,000 to a foreign corporation, or situations in which the transfer of cash resulted in owning more than 10% of the foreign corporation’s stock.  This reporting requirement applies to outbound transfers of both tangible and intangible property. 

The primary purpose of Form 926 is to ensure that taxable gain is recognized and tax is paid. The reason for the complexity is the attempt of U.S. tax law to formalize distinction between legitimate business operations outside the U.S. and transactions considered to avoid tax.  

It is also designed to equalize the taxation between transactions within the U.S. and outside the U.S.  In that way there are no significant advantages to transactions and operations outside the U.S..

Form 926 must be complete, accurate, and filed with the taxpayer’s income tax return by the due date of the return (including extensions). 

Penalties are Severe and Limitless

In an attempt to prevent taxpayers from hiding assets offshore or earning unreported income overseas, the IRS has recently begun increasingly aggressive enforcement of cross-border corporate reorganizations, divisions, and liquidations.

 The rules surrounding Form 926 are extremely complex, therefore, correct filing of the form requires a high level of scrutiny. There are literally dozens of stipulations and technical details that must be followed. 

The failure to file, fully meet the filing requirements, or misrepresentation of assets can result in the levying of substantial penalties. For example, the statute of limitations doesn’t end until three years after the date Form 926 is filed.  However, if the form was never filed to begin with, the statute of limitations clock hasn’t started yet. This means the IRS could assess a penalty at any time, even 20 years after the missed mandatory deadline. 

Returns that are filed but that are not substantially complete and accurate are considered “un-filed” and may result in penalty assessments. Criminal penalties may apply to U.S. and foreign taxpayers who willfully fail to file a return (IRC 7203) or file a false or fraudulent return (IRC 7206 and IRC 7207).

Certain international information returns are also considered un-filed if the taxpayer does not provide required information when requested by the IRS, and penalties may be assessed even if the required return has been submitted.

 If a taxpayer under-reports on Form 926 and that leads to a tax underpayment, they can  receive a 40% penalty. Sometimes a tax penalty may be avoided if the filer can show that the misrepresentation was due to reasonable cause and they acted in good faith – but don’t count on it. 

IRS: Ignorance of the Requirements is No Excuse

The IRS maintains that taxpayers who conduct business or transactions offshore or in foreign countries have a responsibility to exercise ordinary business care and prudence in determining their filing obligations and other requirements. The IRS’s position is that lack of information or misinformation is not grounds for dismissal of taxes and penalties; therefore, it’s incumbent on the individual taxpayer or entity to learn and comply with the rules related to Form 926. Engaging the services of a qualified tax consultant-CPA and law firm specializing in international tax and business transactions will ensure compliance is met.

For more information on U.S. tax rules as they apply to U.S. taxpayers that are foreign investors or hold foreign assets, refer to the following articles on the International Wealth Tax Advisors website:

Foreign Asset and FBAR Reporting

Foreign Trusts, Estates and Gift Tax

Foreign Assets and Foreign Trusts

IWTA Answers to Foreign Trust FAQs

IRS Voluntary Disclosure

GILTI Tax and Controlled Foreign Corporations

FATCA Filing: What U.S. Citizens Need to Know