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IRS International Tax Audit and Voluntary Disclosures & How to Save Taxes

IRS International Tax Audit and Voluntary Disclosures are the two most important tax issues facing the global small business.

When you are audited by an IRS tax auditor, he (or she) is going to hunt for any type of unreported financial account or unreported foreign assets.   The IRS  wants penalities first and taxes second.

The form 5471 (the information return for a controlled foreign corporation) has many sub-schedules.  If you forget to include a sub-schedule not only do you get a tax penalty.   More importantly,  the IRS is allowed to audit the tax year involved at any time.

For example, the IRS International Tax Auditor examines your 2012 form 5471.  He finds that you did not complete Schedule O.  So, he checks your 2010 and 2011 form 5471.  And by golly, you did not complete Schedule O.

Since the tax returns for 2010 and 2011 were filed more than three years ago, you thought that the IRS could not examine those years.  Yes, that is the general rule.  However, when an IRS international form is not filed, the tax years remains open to examination forever.

IRS International Tax Audit and Voluntary Disclosures

When you discover a mistake on your IRS international tax filings, you can be pro-active or wait and see if the IRS audits you.

Pro-active has many advantages.  First, you will likely avoid tax penalities.  Next, you start the clock ticking as to how long the IRS has to audit your tax return.

Voluntary disclosures come with a high tax penalty (27.5 percent of the value of the non-reported foreign asset(s)) but with a great tax planning opportunity.

The voluntary disclosure program allows you to dissolve your foreign corporations without incurring tax on the dissolution.   Once the corporation is dissolved, you can re-design your international tax corporate structures.

Another advantage is avoid a nasty tax on what is known as a passive foreign investment company (PFIC).  Often the novice international tax planner will create a foreign holding company to own the shares of foreign subsidiaries.  

This is one of the worst structures because the holding company is a PFIC.

And there is another tax savings.  If you are invested in foreign funds, your tax rate is only 20% instead of the usually PFIC tax rate of 39%.

If you need help with your international tax issues, then contact me, Brian Dooley, CPA, MBT at [email protected]