Currently, the US government has 5 solutions to correct Form 3520 errors.
According to the Form 3520 instructions, a person who previously filed a Form 3520 but mistakenly provided incomplete or inaccurate information on the form can file an amended Form 3520.
Filing an amended or delinquent Form 3520 outside one of the IRS’s penalty relief programs provides NO penalty protection and therefore requires very careful consideration. The IRS may impose penalties if it later determines that the Form 3520 error was willful or due to negligence. On the other hand, no penalties may be imposed under the law if the error was due to reasonable cause (i.e., an innocent mistake). This approach is not recommended due to the lack of penalty protection. Legal advice is strongly recommended.
File Pursuant to the IRS’s Delinquent International Information Return Submission Procedures (DIIRSP)
A person who has not previously filed a Form 3520, but who has properly filed federal income tax returns that fully reported the income from any foreign source(s), may be eligible for the IRS’s DIIRSP. Under the DIIRSP, the IRS will not impose a penalty for the failure to file the delinquent Form 3520s if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign sources reported on the delinquent Form 3520, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent Form 3520 are submitted. Therefore, there can be NO previously unreported income. If any unreported income, then you cannot use this solution.
Under the DIIRSP, the U.S. person must file the delinquent Form 3520 and include a statement that persuasively explains why the Form 3520 is being filed late. Legal counsel is recommended for drafting such statement. Although not required by the procedures, the explanation should also reference that the Form 3520 is being filed pursuant to the “IRS’s Delinquent International Information Return Submission Procedures.”
File Pursuant to the IRS’s Streamlined Filing Compliance Procedures: Streamlined Domestic Offshore Procedure (SDOP)
The IRS’s Streamlined Domestic Offshore Procedure (SDOP) is available for a resident U.S. person who non-willfully failed to file an Form 3520 and/or failed to report on a U.S. tax return income related to foreign financial account(s). Note that a taxpayer currently under examination is not eligible for the streamlined program.
In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or Form 3520 was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) with Form 3520 for 3 prior years and applicable FBARs for 6 prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, Form 3520 and information return penalties, as well as criminal liability. The IRS carefully reviews and scrutinizes every certification. Legal counsel is recommended for drafting such certification.
The IRS will also impose a penalty equal to 5% of the maximum aggregate balance in the unreported foreign financial account(s) during the 6 year period.
File Pursuant to the IRS’s Streamlined Filing Compliance Procedures: Streamlined Foreign Offshore Procedure (SFOP)
The IRS’s Streamlined Foreign Offshore Procedure (SFOP) is available for a nonresident U.S. person who mistakenly failed to file an Form 3520 and/or failed to report on a U.S. tax return income related to foreign financial account(s). These procedures are also available for a nonresident U.S. taxpayer who failed to file a federal income tax return (i.e., Form 1040). Note that a taxpayer currently under examination is not eligible for the streamlined program.
In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or Form 3520 was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) with Form 3520 for 3 prior years and applicable FBARs for 6 prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, Form 3520 and information return penalties, as well as criminal liability. The IRS carefully reviews and scrutinizes every certification. Legal counsel is recommended for drafting such certification.
In general, the IRS will not impose any penalties on a participating nonresident taxpayer. Hence this is a 0% penalty solution.
Apply to Participate in the IRS’s Voluntary Disclosure Program (VDP)
In general, the VDP requires a taxpayer to file 6 prior years’ amended tax returns with applicable correct international reporting forms (including Forms 3520, 8938, 5471, 8621, etc.) and FBARs, provide detailed information regarding any unreported foreign financial account(s), and pay all taxes and interest due for the 6 year period.
In addition, the IRS imposes a civil penalty equal to 75% of the single year maximum tax liability and 50% of the single maximum aggregate balance in the unreported foreign financial accounts during the 6-year period. The penalties may be decreased to 20% and $10,000, respectively, in certain cases.
This program remains a potentially attractive option for a U.S. person otherwise exposed to even greater civil penalties or possible criminal prosecution. Our firm has handled hundreds of cases with the IRS’ various voluntary disclosure programs.