Delinquent international information return submission procedures (DSP) were one of the four methods for taxpayers with unreported offshore accounts to become compliant.
- 1 What are the Delinquent International Information Return Submission Procedures?
- 2 What is reasonable cause?
- 3 Streamlined domestic offshore procedures vs. reasonable cause
What are the Delinquent International Information Return Submission Procedures?
Changes after 11/2020
As of November 2020, the DSP is no longer available. The IRS page has been superseded with the following language:
Taxpayers who have identified the need to file delinquent international information returns who 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 should file the delinquent information returns through normal filing procedures.
Penalties may be assessed in accordance with existing procedures.
- All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return.
- All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
- Taxpayers may attach a reasonable cause statement to each delinquent information return filed for which reasonable cause is being asserted. During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information.
Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
DSP before 11/2020
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.
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 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 184.108.40.206.2.1:
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 220.127.116.11.2.2.6 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 18.104.22.168.2.2.6 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. reasonable cause
Non-willful taxpayers have a choice between filing amended returns and FBARs under the streamlined domestic offshore procedures (SDOP) and filing delinquent international information return submission procedures with a statement of reasonable cause. The decision 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.
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.
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