He was told he will not receive any tax documentation for this settlement.
This also means that the IRS will not receive any tax documentation for this settlement. Forms documenting taxable income, such as W-2 and 1099, are sent in duplicate (effectively) to the taxpayer and the IRS, and this is the primary way the IRS knows about income.
The IRS does not ...
You need to be sure that you pay appropriate taxes due in your home country on the sale proceeds from selling your flat in your home country; else your home country may have objections to your proposed transfer of the sale proceeds to the US. You will, of course, need to establish a bank account in the US to receive the money which will need you to have a ...
My thoughts with (2) are to contribute a little more into my 401k in order to reduce my taxable income some, and contribute the rest into my IRA to (up to the contribution limit of $6000) in order to take advantage of superior returns.
This is making the best of the "bad" situation of earning $196K+/annum.
It sounds like your question can be boiled down to: is it worth contributing to a potentially less tax-optimal Roth account (versus a pre-tax account) in order to access better investment options?
You are probably the only one that can answer that. But some points to consider:
How superior would pre-tax versus Roth contributions be for you? The main factor ...
At the bottom of your link there, there is a phone number next to "IRS FBAR Hotline". That seems like the logical next step, as I am pretty sure that they won't just let it go. There are probably penalties that you have to pay for missing deadlines, but the longer you delay, the worse those will get. I'd call them ASAP.