Accuracy Penalty For Undisclosed Income From Missed 3520-A
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Undisclosed Foreign Asset Understatement Penalty Under 6662(j)
The Internal revenue code section 6662 penalty (imposition of accuracy-related penalty) relates to accuracy-related penalties for taxes due. For example, if a US Taxpayer files a tax return that has an underpayment of tax due to negligence (Fraud is handled separately under Sec. 6663) resulting in the imposition of an accuracy-related penalty under section 6662 there will be a 20% penalty of the portion of the underpayment. Depending on the amount of underpayment, this can be a significant penalty. In a situation in which there is a disclosed foreign financial asset, the amount of the penalty may increase substantially. As a result, whether or not a Form 3520-A (Reporting of Foreign Trust) was required can have a significant impact on a 6662 penalty – especially since the filing requirements for form 3520-A are ambiguous, along with the introduction of Revenue Procedure 2020-17. Let’s take a brief look at how the code section works:
26 U.S.C. 6662
(a) Imposition of penalty
If this section applies to any portion of an underpayment of tax required to be shown on a return, there shall be added to the tax an amount equal to 20 percent of the portion of the underpayment to which this section applies.
(j) Undisclosed foreign financial asset understatement
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In general
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For purposes of this section, the term “undisclosed foreign financial asset understatement” means, for any taxable year, the portion of the understatement for such taxable year which is attributable to any transaction involving an undisclosed foreign financial asset.
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Undisclosed foreign financial asset
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For purposes of this subsection, the term “undisclosed foreign financial asset” means, with respect to any taxable year, any asset with respect to which information was required to be provided under section 6038, 6038B, 6038D, 6046A, or 6048 for such taxable year but was not provided by the taxpayer as required under the provisions of those sections.
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Increase in penalty for undisclosed foreign financial asset understatements
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In the case of any portion of an underpayment which is attributable to any undisclosed foreign financial asset understatement, subsection (a) shall be applied with respect to such portion by substituting “40 percent” for “20 percent”.
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Increase in 6662 Penalty to 40%
Essentially, what the code section is saying is that if there are any undisclosed foreign financial assets that generate income and that income should have been reported on Form 3520-A (or other forms as well, but we are only focusing on 3520-A), it may lead to an increase in penalty if there is underpayment attributable to the undisclosed foreign financial asset. And, the penalty jumps up from 20% to 40%.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to streamlined procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead of the Streamlined Procedures. But, if a willful Taxpayer submits an intentionally false narrative under the streamlined procedures (and gets caught), they may become subject to significant fines and penalties.
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