Currently, the US government has 5 solutions to correct Form 8938 errors.
Participation in the two formal disclosure programs is permitted only if the funds held in the foreign financial account(s) are from a legal source (and not the proceeds of an illegal activity) and if the IRS is not already in a position to know of the person’s noncompliance.
1. File an Amended Form 8938
According to the Form 8938 instructions, a person who previously filed a Form 8938 but mistakenly provided incomplete or inaccurate information on the form can file an amended Form 8938.
Filing an amended or delinquent Form 8938 outside one of the IRS’s penalty relief programs provides NO penalty protection and therefore requires careful consideration. The IRS may impose penalties if it later determines that the Form 8938 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.
2. File Under the IRS’s Delinquent International Information Return Submission Procedures (DIIRSP)
A person who has not previously filed a Form 8938 but has properly filed federal income tax returns that fully reported the income from any foreign account(s) may be eligible for the IRS’s Delinquent International Information Return Submission Procedures. Under the Delinquent International Information Return Submission Procedures, “the IRS will not impose a penalty for the failure to file the delinquent Forms 8938 if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent Forms 8938, 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 Forms 8938 are submitted.” Therefore, there can be NO unreported income.
Some commentators have incorrectly stated that the DIIRSP program is closed or no longer working. That has not been our experience; we have successfully filed hundreds of DIIRSP submissions with the IRS.
The U.S. person must file the delinquent Form 8938 and include a statement that persuasively explains why the Form 8938 is being filed late. Although not required by the procedures, the explanation should also reference that Form 8938 is being filed under the “IRS’s Delinquent International Information Return Submission Procedures.”
3. File Under 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 a Form 8938 and failed to report on a U.S. tax return income related to the foreign financial account(s). Note that a taxpayer under examination is not eligible for the streamlined program.
In general, a taxpayer is eligible to participate in the streamlined program if their failure to file a U.S. tax return and Form 8938 was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) with Forms 8938 for three prior years and FBARs for six prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that their failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, Form 8938 information return penalties, and criminal liability. The IRS carefully reviews and scrutinizes every 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 3-6 year period.
4. File Under 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 Form 8938 and failed to report on a U.S. tax return income related to the 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 under examination is not eligible for the streamlined program.
In general, a taxpayer is eligible to participate in the streamlined program if their failure to file a U.S. tax return and Form 8938 was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) with Forms 8938 for three prior years and FBARs for six prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that their failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, Form 8938, information return penalties, and criminal liability. The IRS carefully reviews and scrutinizes every certification.
The IRS will not impose any penalties on a participating nonresident taxpayer.
5. Apply to Participate in the IRS’s Voluntary Disclosure Program (VDP)
In general, the VDP requires a taxpayer to file six prior years’ amended tax returns with applicable, correct international reporting forms (including Forms 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 six years. In addition, the IRS imposes a civil penalty equal to 75% of the single-year maximum tax liability and 50% of the 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 some instances. Nevertheless, this program remains attractive for a U.S. person otherwise exposed to even more significant civil penalties or possible criminal prosecution. Our firm has handled hundreds of cases with the various voluntary disclosure programs of the IRS.
