First, you should contact a local CPA experienced in preparing this form - it is not an income-tax matter, the focus of this community.
Instructions for Form 720 (03/2021) mention penalties and interest, but do not provide much detail. The term "penalties and Interest" does not include imprisonment. The most severe monetary penalty is to pay the excise tax yourself (est. $13/year) . Also, some of foreign insurance premiums may be exempt from this tax by treaty. You can also apply for an EIN - you do not need to have a business, just a reporting requirement.
From: Instructions for Form 720 (03/2021):
"Penalties and Interest: If you receive a notice about a penalty after you file this return, reply to the notice with an explanation and we will determine if you meet reasonable-cause criteria. Don't include an explanation when you file your return."
Foreign Insurance Taxes
Policies issued by foreign insurers (IRS No. 30).
Enter the amount of premiums paid during the quarter on policies issued by foreign insurers. Multiply the premiums paid by the rates listed on Form 720 and enter the total for the three types of insurance on the line for IRS No. 30.
Section 4371(3) tax on foreign reinsurance premiums no longer applies.
The 1% tax doesn’t apply to premiums paid on a policy of reinsurance issued by one foreign reinsurer to another foreign insurer or reinsurer, under the situations described in Rev. Rul. 2008-15, 2008-12 I.R.B. 633. See Rev. Rul. 2016-03, 2016-3 I.R.B. 282, available at IRS.gov/IRB/2016-03_IRB#RR-2016-03.
Who must file.
The person who pays the premium to the foreign insurer (or to any nonresident person such as a foreign broker) must pay the tax and file the return. Otherwise, any person who issued or sold the policy, or who is insured under the policy, is required to pay the tax and file the return.
Treaty-based return positions under section 6114.
Foreign insurers and reinsurers who take the position that a treaty of the United States overrules, or otherwise modifies, an internal revenue law of the United States must disclose such position. This disclosure must be made once a year on a statement which must report the payments of premiums that are exempt from the excise tax on policies issued by foreign insurers for the previous calendar year. This statement is filed with the first quarter Form 720, which is due before May 1 of each year.
You may be able to use Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), as a disclosure statement.
At the top of Form 720, write "Section 6114 Treaty." If you have no other transactions reportable on Form 720, complete Form 720 as follows.
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If this is your final return, check the Final return box.
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Write "None" on lines 1 and 3.
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Sign the return.
You need an EIN to file Form 720. If you don't have an EIN, see Employer Identification Number (EIN), earlier.
Where to file your treaty-based return positions under section 6114.
All filers should mail Form 720 with the attached Form 8833 or disclosure statement to the address listed under Where To File, earlier. See the Cautionunder Private Delivery Services (PDSs), earlier.
