Since the 2014 OVDP changes some taxpayers with unreported income from unreported foreign assets have filed under the Delinquent International Information Return Submission Procedures.
- 1 What are the Delinquent International Information Return Submission Procedures?
- 2 Streamlined domestic offshore procedures vs. delinquent international information return submission procedures
- 3 What should non-compliant taxpayers do?
What are the Delinquent International Information Return Submission Procedures?
These procedures are one of the four methods for taxpayers with unreported offshore accounts to become compliant.
Can I use this program if I also have unreported income from foreign assets?
While taxpayers with unreported foreign income were previously precluded from using these procedures, this is not the case since the 2014 changes to the program. The IRS specifically addressed this issue in a Q&A:
Q1 Are the Delinquent International Information Return Submission Procedures announced on June 18, 2014 different from the procedures described in 2012 OVDP FAQ 18 (in effect prior to July 1, 2014)?
Yes. The IRS eliminated 2012 OVDP FAQ 18, which gave automatic penalty relief, but was only available to taxpayers who were fully tax compliant. The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).
What are the requirements to file under this program?
The program is available for taxpayers who:
• have not filed one or more required international information returns,
• have reasonable cause for not timely filing the information returns,
• are not under a civil examination or a criminal investigation by the IRS, and
• have not already been contacted by the IRS about the delinquent information returns
Is there a penalty under this program?
No penalties are applied if there is reasonable cause for the failure to file the information form and the IRS agrees.
What is reasonable cause?
While the elements of what constitute reasonable cause are a question of law, whether those elements are present in a given case are questions of fact. Reasonable cause is not defined anywhere in the tax code. It has been defined through case law, which is summarized in IRM 18.104.22.168.2.1:
Any reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief.
There are obvious examples of what constitute reasonable cause:
- Death, serious illness, or unavoidable absence
- Fire, casualty, or natural disaster
Other situations can also establish reasonable cause but will involve a more careful review of the facts in the case. The courts have made it clear that reasonable cause is determined on a case-by case basis, taking into account all of the facts and circumstances. Courts have been willing to look at reasonable cause subjectively based on the experience, knowledge, and education of the taxpayer. Streber v. Comm’r, 138 F.3d 216, 223 (5th Cir. 1998).
Ignorance of the law
IRM Section 22.214.171.124.2.2.6 states that “reasonable cause may be established if the taxpayer shows ignorance of the law in conjunction with other facts and circumstances.”
In Congdon v. United States, T.C. 2011 U.S. Dist. LEXIS 98024 the court denied the government summary judgment, finding that ignorance of the law in conjunction with other facts and circumstances, such as inexperience in tax matters can constitute reasonable cause.
Reliance on a tax preparer
Several cases have found that reliance on a tax advisor or preparer can constitute reasonable cause. E.g., Neonatology Associates, P.A., 115 T.C. 43 (2000)
Complexity of the law
lRM Section 126.96.36.199.2.2.6 paragraph (2)(E) provides that when considering various factors as a basis for whether a taxpayer is ignorant of the law, “the level of complexity of a tax or compliance issue” is another factor that should be considered in evaluating reasonable cause because of ignorance of the law.
Streamlined domestic offshore procedures vs. delinquent international information return submission procedures
Non-willful taxpayers have a choice between filing amended returns and FBARs under the streamlined domestic offshore procedures (SDOP) and the delinquent international information return submission procedures. The decicision as to which method to choose should be based on the following considerations: length of previous non-compliance and the ability to show reasonable cause.
Length of previous non-compliance
Almost all laws that prescribe fines or imprisonment have a statute of limitations. Outside the applicable statute of limitations in tax, the government may not audit, tax, or fine a taxpayer for a violation. For a typical tax return, the statute of limitations is 3 years. However, there are some very important exceptions that apply to foreign account compliance:
- IRC § 6501(e)(1)(A)(ii) provides that the IRS may assess tax within six years after a return is filed if the taxpayer omits income from a foreign financial account which is in excess of $5,000 in any given year.
- IRC § 6501(c)(8)(A) provides that the statute of limitation never begins if a Form 8938 was required to be filed and was not filed on an income tax return.
The great thing about the streamlined procedures is that by filing 3 years of amended returns through the streamlined procedures, the taxpayer does not need to worry about prior returns that might have open statutes of limitations.
If filing under the delinquent international information return submission procedures, taxpayers should consider that amending only 3 years of returns may leave prior returns open for additional tax and penalty assessments.
Reasonable cause vs. non-willfulness
The reasonable cause standard was described above. It can be very difficult to show reasonable cause. The non-willfulness standard covers any conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.
What should non-compliant taxpayers do?
If taxpayers are non-compliant with the foreign asset and income reporting requirements, they should consider applying to one of IRS’ voluntary disclosure programs:
- Voluntary disclosure program
- Streamlined domestic offshore program
- Streamlined foreign offshore program
- Delinquent international information return submission procedures
- Delinquent FBAR Submission Procedures
We assist taxpayers who have undisclosed foreign financial assets. Schedule an appointment to see how we can help.