Form 8938 late penalty

[Questionguy101]

Client has filed his own tax return but did not know about the new Form 8938 requirement. He wants me to amend the original return for him and add the Form 8938.

My question is: If he amend the tax return now and file the Form 8938, would there still be late penalty imposed? It is kind of unthinkable that they will penalty him for $10,000 because he file the Form 8938 one month late.

[Koss]

Form 8938

You have an opportunity to provide some real value to the client. And you can probably charge a healthy fee, even if he only has one foreign account, and even if it only takes you 15 minutes to complete the forms.

I think the penalty can be avoided, but you certainly can't guarantee that to your client.

Technically, he can't win. If he does the right thing and files it now, he may be subject to the penalty. If he does nothing, and then the IRS catches it, that makes it worse.

One thing is certain: If he does nothing and the IRS does catch it later, it is less likely that the penalty will be waived.

The key is the reasonable cause exception. Here's the relevant text of the regulations:

If a specified person shows that the failure to report the information required under section 6038D and §1.6038D-4T is due to reasonable cause and not due to willful neglect, no penalty will be imposed under section 6038D(d) or §1.6038D-8T. To show that the failure to report is due to reasonable cause and not due to willful neglect, the specified person must make an affirmative showing of all the facts alleged as reasonable cause for the failure to report.

The determination of whether a failure to disclose a specified foreign financial asset on Form 8938 was due to reasonable cause and not due to willful neglect is made on a case-by-case basis, taking into account all pertinent facts and circumstances. For this purpose, the fact that a foreign jurisdiction would impose a civil or criminal penalty on the specified person (or any other person) for disclosing the required information is not reasonable cause.

So you need to attach a statement to the amended return, in which you explicitly assert that there was reasonable cause for the failure to file the form with the original return, and that it was not due to willful neglect.

Your skill in crafting that statement, and citing the applicable regulations, is probably worth at least a couple hundred bucks.

With that being said, it's hard to come up with any explanation other than the fact that he just didn't know about the new law. So you need to emphasize that because he did not know, the failure to include the form was not willful. And you need to stress the fact that as soon as he became aware of it, he sought the advice of a tax professional, and filed an amended return to remedy the failure.

You might consider determining whether the fee you charge right now will cover any follow-up work on this. And that may hinge on whether you are an EA or a CPA, i.e., whether you can represent him in the appeals process, if it gets to that point.

I might charge the guy as much as $400 or $500, and tell him that the fee includes all representation to get the penalty waived, including the appeals office.

I would also tell him that it is not likely to reach that level. In my opinion, if he files it now, with the appropriate statement, it is unlikely that the IRS will assess the penalty, and if it is assessed, you can probably get it waived without having to go to the appeals office. This is the first year that the new rule is applicable. They are interested in going after people who are intentionally concealing foreign accounts--not people who just didn't know, and who come forward as soon as they become aware of the mistake.

BMK

[Koss]

Further thoughts

If your client is a working-class guy who just happened to get swept into the new regulations because he has a joint account with a sister who lives in Canada, or something like that, he may not understand the value in paying a professional fee up front to deal with this issue, however it unfolds. And he might feel that he can't afford it.

But if he's a high-income or high net worth person who has serious foreign assets, he may be very happy to pay $500 right now for professional representation to help him avoid a $10,000 penalty.

I don't jack up my fees just because I think a client is wealthy. If the guy objected, I might say: Okay, I'll do the amended return, with an explanatory statement requesting waiver of the penalty, for $150. But for any work on this matter after the amended return is filed, you get billed by the hour.

For some clients, a flat fee up front might be more attractive.

BMK