Key Takeaways
Form 8858 Penalty Structure:
- Initial penalty: $10,000 per form, per year
- Continuation penalty: $10,000 per 30-day period after IRS notice
- Maximum penalty: $50,000 per form, per year
- Reasonable cause exception may eliminate penalties
- IRS Delinquent International Information Return Procedures available for penalty-free late filing
Table of Contents
Introduction
Form 8858 penalties can reach $50,000 per form, per year, making it one of the more heavily penalized international information returns. Many taxpayers don’t discover their filing obligation until they receive an IRS notice or their tax preparer identifies the requirement during return preparation.
The good news: relief options exist for taxpayers who can demonstrate reasonable cause or who come forward before the IRS contacts them. Understanding the penalty structure and available relief programs helps you make informed decisions about how to address missed filings.
This guide covers the complete Form 8858 penalty framework, relief options, and practical steps for resolving past non-compliance.
Form 8858 Penalty Structure
Form 8858 penalties are imposed under IRC Section 6038(b), the same section that governs Form 5471 penalties. The penalties are statutory, meaning they don’t adjust for inflation and apply as specified in the tax code.
Initial Penalty: $10,000
The IRS assesses a $10,000 penalty for each Form 8858 that’s:
- Not filed by the due date
- Filed but substantially incomplete
- Filed but contains material misstatements
This penalty applies per form, per year. If you have three FDEs and fail to file Form 8858 for each one, you face three separate $10,000 penalties for that year alone.
Continuation Penalty: $10,000 per 30 Days
If you receive an IRS notice demanding the return and don’t file within 90 days, additional penalties accrue. After the 90-day period, the IRS adds $10,000 for each 30-day period (or fraction thereof) that the failure continues.
Maximum Penalty: $50,000
The total penalty is capped at $50,000 per form, per year. This cap includes both the initial $10,000 and continuation penalties.
Example Calculation:
Taxpayer owns one FDE and hasn’t filed Form 8858 for 3 years.
Without IRS notice: Potential penalty = $10,000 × 3 years = $30,000
With IRS notice and continued failure: Potential penalty = $50,000 × 3 years = $150,000
How Penalties Are Assessed
Understanding how the IRS discovers and assesses Form 8858 penalties helps you evaluate your risk and options.
Discovery Methods:
The IRS identifies missing Form 8858 filings through several channels:
- Cross-referencing Form 5471 filings (FDEs should be reported)
- Information from foreign tax authorities under treaty agreements
- Audit examinations of related returns
- Whistleblower reports
- Voluntary disclosure by the taxpayer
Assessment Process:
- Initial Notice: IRS sends a notice identifying the missing Form 8858
- 90-Day Period: Taxpayer has 90 days to file the return
- Penalty Assessment: If not resolved, initial $10,000 penalty is assessed
- Continuation Notices: Additional 30-day periods trigger continuation penalties
- Maximum Cap: Penalties stop accruing at $50,000 per form per year
Statute of Limitations:
The statute of limitations for assessment doesn’t begin until you file a substantially complete Form 8858. This means the IRS can assess penalties for unfiled returns indefinitely. Filing late but completely starts the clock running.
Additional Consequences
Beyond the direct monetary penalties, Form 8858 non-compliance carries other consequences.
10% Deduction Reduction
IRC Section 6038(c)(2) reduces certain deductions by 10% as an additional penalty. This reduction applies to:
- Deductions attributable to the FDE
- Deductions for amounts paid or accrued to the FDE
This reduction can’t be avoided through reasonable cause and applies on top of the monetary penalties.
Extended Statute of Limitations
The normal three-year statute of limitations for assessment doesn’t apply to international information returns. The IRS can assess tax related to the FDE until three years after you file a substantially complete Form 8858.
Potential Criminal Exposure
Willful failure to file Form 8858 can result in criminal penalties under IRC Section 7203, including:
- Up to $25,000 fine for individuals
- Up to one year imprisonment
- Both fine and imprisonment
Criminal prosecution is rare but possible in cases involving intentional tax evasion schemes.
Impact on Other Positions
Missing Form 8858 filings may indicate other compliance issues the IRS will examine:
- FBAR filing requirements
- Form 8938 (FATCA) reporting
- Related Form 5471 or Form 8865 requirements
- Foreign tax credit calculations
Reasonable Cause Exception
The most important relief provision for Form 8858 penalties is the reasonable cause exception under IRC Section 6038(c)(4)(B). If you establish reasonable cause, the IRS can abate all monetary penalties.
What Constitutes Reasonable Cause:
Reliance on Professional Advice You relied in good faith on advice from a qualified tax professional who had all relevant facts. The advice must be from someone with expertise in international tax matters, and you must have provided them complete information about your foreign entities.
Reasonable Misunderstanding of Requirements You made a reasonable, good-faith effort to comply but misunderstood the complex filing requirements. This is more likely to succeed for first-time filers or unusual situations.
Circumstances Beyond Control Events outside your control prevented timely filing, such as:
- Natural disasters
- Serious illness or incapacity
- Death of key personnel
- Unavailability of essential records (through no fault of your own)
First-Time Filer Considerations While not an automatic excuse, first-time filers who demonstrate good faith compliance efforts may receive favorable consideration.
What Does NOT Constitute Reasonable Cause:
- Ignorance of the filing requirement alone
- Complexity of the rules (without professional advice)
- Financial hardship in paying preparation costs
- Belief that the FDE had minimal activity
- Reliance on non-professional advice
Documentation Requirements:
To support a reasonable cause claim, document:
- Your compliance efforts (engagement letters, communications with advisors)
- The specific circumstances that led to non-filing
- Your actions once you discovered the requirement
- Your complete filing history going forward
IRS Delinquent International Information Return Procedures
The Delinquent International Information Return Submission Procedures (DIIRSP) provide a path for penalty-free late filing of Form 8858 and other international information returns.
Eligibility Requirements:
You may use these procedures if:
- You have reasonable cause for the late filing
- You’re not under IRS civil examination for any tax year
- You’re not under criminal investigation
- You haven’t received a delinquency notice for the specific returns
How to File:
- Prepare Complete Returns: File all delinquent Form 8858s with required schedules
- Attach Reasonable Cause Statement: Include a written statement explaining why you failed to file timely and the steps you’ve taken to ensure future compliance
- File with Income Tax Return: If your income tax return is also delinquent, file everything together
- Mail to Appropriate Address: Send to the address specified for your return type (don’t use the normal processing center)
What to Include in Your Reasonable Cause Statement:
“I am filing this Form 8858 for [tax year] under the IRS Delinquent International Information Return Submission Procedures. I was unaware of the Form 8858 filing requirement until [date/circumstance]. Once I learned of this obligation, I [describe immediate steps taken]. I have taken steps to ensure future compliance by [describe measures]. I respectfully request that penalties be waived based on reasonable cause.”
Benefits:
- No monetary penalties if the IRS accepts your reasonable cause
- Returns are processed normally
- No examination is triggered solely by the delinquent filing
Limitations:
- No formal closing agreement is provided
- The IRS can still examine the returns later
- If reasonable cause is rejected, penalties may be assessed
- Doesn’t protect against criminal prosecution for willful violations
For more on late filing procedures, see our guide on delinquent FBAR filing, which covers similar procedures.
Streamlined Filing Compliance Procedures
The Streamlined Filing Compliance Procedures offer another path for resolving Form 8858 non-compliance, particularly when combined with unreported foreign income.
Domestic Streamlined (Streamlined Domestic Offshore Procedures)
For U.S. residents who:
- Failed to report income from foreign financial assets
- Failed to file required information returns (including Form 8858)
- Can certify the failure was non-willful
Requirements:
- File amended returns for the past 3 years
- File FBARs for the past 6 years
- Pay a Title 26 miscellaneous offshore penalty equal to 5% of the highest aggregate balance of foreign financial assets
- Submit Form 14654 (non-willfulness certification)
Foreign Streamlined (Streamlined Foreign Offshore Procedures)
For U.S. taxpayers living abroad who:
- Meet the non-residency requirement
- Failed to report foreign income or file information returns
- Can certify non-willfulness
Requirements:
- File amended returns for the past 3 years
- File FBARs for the past 6 years
- No miscellaneous offshore penalty (0%)
- Submit Form 14653 (non-willfulness certification)
When Streamlined is Better Than DIIRSP:
- You have unreported foreign income to report
- You have multiple delinquent international forms
- You want more certainty about penalty treatment
- Your situation involves foreign financial accounts subject to FBAR
When DIIRSP is Better:
- Your only issue is the Form 8858 (no unreported income)
- You don’t have FBARs to file
- You want to avoid the 5% miscellaneous penalty
Voluntary Disclosure Practice
For willful violations, the IRS Voluntary Disclosure Practice provides a path to resolve non-compliance while minimizing criminal prosecution risk.
When VDP is Necessary:
- You knowingly failed to file Form 8858
- You deliberately concealed foreign entities
- Your actions could be characterized as tax fraud
- You can’t certify non-willfulness in good faith
Preclearance Process:
- Submit preclearance request to IRS Criminal Investigation
- Receive confirmation you’re not already under investigation
- Submit preliminary disclosure
- Work with IRS to resolve civil tax matters
- Pay all taxes, interest, and penalties owed
Penalty Framework:
The VDP has a structured penalty framework that’s typically less severe than what you’d face if the IRS discovered the violation independently. Specific penalties are negotiated based on your circumstances.
Criminal Protection:
While VDP doesn’t guarantee immunity from prosecution, it significantly reduces criminal risk for taxpayers who come forward voluntarily and cooperate fully.
Penalty Relief Success Factors
Based on how the IRS evaluates reasonable cause claims, these factors improve your chances of penalty relief:
Act Promptly
File delinquent returns as soon as you discover the requirement. Delay after learning of your obligation undermines reasonable cause claims.
Document Everything
Keep records of:
- How you discovered the filing requirement
- Communications with tax professionals
- Your compliance efforts
- Steps taken to ensure future compliance
Professional Representation
Working with a CPA or tax attorney experienced in international tax matters demonstrates good faith and often results in better outcomes.
Consistent Narrative
Your reasonable cause explanation should be consistent across all forms and communications. Contradictory statements undermine credibility.
Complete Compliance Going Forward
Show the IRS you’re now fully compliant. Current compliance supports the argument that past non-compliance was unintentional.
Consider the Full Picture
If you have multiple delinquent international forms, address them all together. Piecemeal disclosure suggests you’re hiding something.
Case Study: Penalty Relief in Practice
The Situation:
Maria, a U.S. citizen, formed a Mexican single-member LLC (S. de R.L. de C.V.) in 2021 to hold rental property in Cancun. Her U.S. tax preparer wasn’t aware of the international reporting requirements, and Maria filed her 2021-2024 returns without Form 8858.
In 2025, Maria engaged a new CPA who identified the missing filings. She had four years of unfiled Form 8858s with potential penalties of $40,000 (or $200,000 if she ignored IRS notices).
The Approach:
Maria’s CPA recommended using the Delinquent International Information Return Submission Procedures. They:
- Prepared complete Form 8858s for all four years
- Drafted a reasonable cause statement explaining:
- Maria’s reliance on her previous tax preparer
- Her immediate action upon learning of the requirement
- Steps taken to ensure future compliance
- Filed the delinquent returns with the reasonable cause statement
The Outcome:
The IRS processed Maria’s returns without assessing penalties. Her reasonable cause claim succeeded because she:
- Acted promptly after discovering the requirement
- Could document reliance on professional advice
- Had no other compliance issues
- Demonstrated commitment to future compliance
Lessons Learned:
- Reliance on a tax preparer can support reasonable cause
- Prompt action after discovery is critical
- Complete documentation strengthens your case
- Professional guidance improves outcomes
Frequently Asked Questions
What if I can’t afford the penalties?
The IRS has payment options including installment agreements and, in extreme cases, offer in compromise. However, focus first on establishing reasonable cause to avoid or reduce penalties before worrying about payment.
Can I negotiate Form 8858 penalties?
If reasonable cause doesn’t fully apply, you may still negotiate penalty reduction through the IRS examination process or appeals. Partial reasonable cause or mitigation factors can reduce (though not eliminate) penalties.
How long does reasonable cause review take?
Processing times vary. If you file under DIIRSP, you may hear nothing (meaning the returns were accepted) or receive a notice within 6-12 months if the IRS questions your reasonable cause.
What if IRS denies my reasonable cause request?
You can appeal the denial through the IRS Independent Office of Appeals. You’ll have 30 days from the denial notice to request appeals consideration.
Do I need an attorney for penalty relief?
An attorney isn’t required, but professional representation improves outcomes, especially for large penalty exposure or potential criminal issues. A CPA with international tax experience can handle most civil penalty cases.
Will filing late trigger an audit?
Filing delinquent Form 8858s under DIIRSP doesn’t automatically trigger an audit. However, the IRS may examine the returns later, so they should be accurate and complete.
Can penalties be assessed after I file correctly?
Once you file a substantially complete Form 8858, the statute of limitations begins. The IRS generally has three years to assess penalties from that point, though longer periods may apply if there’s a substantial understatement of income.
Are Form 8858 penalties tax deductible?
No. Tax penalties are not deductible for federal income tax purposes.
When to Get Professional Help
Consider professional assistance when:
- Multiple years of unfiled returns create significant penalty exposure
- Large potential penalties justify the cost of professional representation
- You’ve received an IRS notice demanding Form 8858 or assessing penalties
- Complex entity structures make compliance analysis difficult
- Willfulness concerns raise potential criminal issues
- You need to coordinate Form 8858 with Form 5471, Form 8865, or FBAR filings
SDO CPA helps taxpayers resolve Form 8858 penalty situations, from straightforward DIIRSP filings to complex penalty negotiations. We can analyze your situation and recommend the best path forward.
Schedule a Form 8858 Penalty Consultation
Conclusion
Form 8858 penalties are severe but manageable with the right approach. The key is acting promptly once you discover a filing obligation, documenting your reasonable cause, and coming into full compliance.
Relief options exist through the Delinquent International Information Return Procedures, Streamlined Filing Compliance Procedures, or Voluntary Disclosure Practice, depending on your circumstances. Professional guidance helps you choose the right path and maximize your chances of penalty relief.
Don’t let fear of penalties prevent you from addressing non-compliance. The longer you wait, the worse potential penalties become, and the harder it is to establish reasonable cause.
Get Help with Form 8858 Penalties
Related Resources
- Form 8858 Foreign Disregarded Entity Guide
- Who Must File Form 8858
- Form 5471 Penalties and Relief Guide
- Form 8865 Penalties and Relief Guide
- FBAR Penalties and Relief
- Delinquent FBAR Filing Procedures
- Form 8858 Filing Services
- International Tax Services
This article is for informational purposes only and does not constitute tax or legal advice. Consult a qualified tax professional for advice specific to your situation.