What To Do If You Have Delinquent International Information Tax Returns

by M. Robinson & Company, P.C.
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A U.S. taxpayer with international holdings and interests may not be fully compliant with U.S. tax reporting obligations even though they have currently reported all foreign source income on their annual tax return, filed Form 8938: Statement of Foreign Assets, and submitted a timely FBAR. Some taxpayers may also have an obligation to file additional international information returns.[1] These returns typically do not create a tax liability and are for reporting purposes only. However, the failure to file international information returns on a timely basis can have serious tax consequences.

Tax Related Consequences of Delinquent International Information Returns

Statute of Limitations

The general rule for the statute of limitations for federal income tax returns is that the IRS has a three-year assessment period from the date the return was filed.[2] However, a delinquent international information return may result in an indefinitely open limitations period for the taxpayer’s entire tax return.[3] Once the delinquent information return is filed, the three-year statute of limitations on the complete tax return may commence, barring any issues to the otherwise.[4]

 Penalties

In general,[5] if a U.S. taxpayer fails to file an international information return or if the return is incomplete, the IRS may impose a $10,000 penalty for each annual accounting period for which the return has not been filed.[6] This fine may increase if the IRS notifies the taxpayer of the delinquent return. If the taxpayer does not file the required information return within 90 days of the IRS mailing, an additional $10,000 penalty may be imposed for each 30-day period until the taxpayer files, up to a maximum of $50,000 additional penalties in that calendar year.[7] Under an open statute of limitations period, if the taxpayer has been delinquent for multiple tax years, these penalties, plus those which may be incurred from an examination of the entire return, have the potential to become confiscatory.

Compliance under the Delinquent International Information Return Submission Procedures

If you are a taxpayer who has just discovered that you were required to report one or more international information returns, you may be eligible to file prior year returns under the “Delinquent International Information Return Submission Procedures.” These procedures may assist taxpayers who would otherwise not need to file under the Offshore Voluntary Disclosure Program or under the Streamlined Procedures. Certain eligibility requirements exist and the taxpayer must file all delinquent information returns. Also, the taxpayer must be able to certify that the delinquency was due to reasonable cause.

Common International Information Returns Which May Be Filed Under “The Delinquent International Information Return Submission Procedures:”

  • Form 926: Transfer of Property to a Foreign Corporation;
  • Form 3520: Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts;
  • Form 3520-A: Annual Information Return of Foreign Trust With a U.S. Owner;
  • Form 5471: Information Return of U.S. Persons With Respect to Certain Foreign Corporations;
  • Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business;
  • Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund;
  • Form 8865:Return of U.S. Persons With Respect to Certain Foreign Partnerships;
  • Form 8858: Information Return of U.S. Persons With Respect to Foreign Disregarded Entities; and
  • Form 8938: Statement of Foreign Financial Assets.

Eligibility

To qualify to use the Delinquent International Information Return Submission Procedures, Taxpayers who do, the taxpayer must:

  • Not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax;
  • Have not filed one or more required international information returns;
  • Have reasonable cause for not timely filing the information returns;
  • Not be under civil examination or a criminal investigation by the IRS; and
  • Not have already been contacted by the IRS about the delinquent information return(s).[8]

The Reasonable Cause Statement

Providing a thoroughly written reasonable cause statement is critical to a positive outcome. It is not enough to submit the delinquent information returns alone. The statement also needs to explain reasonable cause to the satisfaction of the IRS. If the reasonable cause statement is not supplied or if the IRS does not accept it, the monetary penalties mentioned above may apply.[9]

Taxpayers must be attentive in ensuring that all components of the reasonable cause statement are provided. First, a reasonable cause statement must be attached to each delinquent information return.[10] One reasonable cause statement to cover all the delinquent information returns will not suffice.

Next, the taxpayer must certify that the entity, such as a corporation, partnership or trust, for which the information returns are filed was not engaged in tax evasion.[11] A reasonable cause statement should contain all the facts and circumstances specific to the taxpayer’s failure to file[12] and establish that the delinquency was due to good faith and not to willful neglect. There is no single template to reference as such statements are evaluated on a case-by-case basis.[13] Finally, the taxpayer must sign the reasonable cause statement under penalty of perjury.[14]

General Submission Procedures

If the taxpayer meets the eligibility criteria, there are three requirements for submission. First, all delinquent international information returns must be accurately completed. For all information returns, other than Form 3520 and Form 3520-A, the taxpayer must attach these information returns to an amended tax return and file according to the applicable instructions for the amended returns.[15] (Delinquent Forms 3520 and 3520-A are filed according the instructions for those forms.) Finally, reasonable cause statements, including certification of no tax evasion by the respective entity and signed under penalty of perjury, must be attached to the international information return.

Conclusion

Taxpayers should be aware that making the submission does not guarantee an outcome in which no penalties will be assessed. Much turns upon the acceptance of the reasonable cause statement. However, the IRS has stated that filing delinquent Forms 5471 and 3520 with a statement of explanation will avoid a failure to file penalty in situations where there are no underreported tax liabilities and the taxpayer has not been contacted about an income tax examination or a request for the delinquent information returns.[16]

Taxpayers are also cautioned by the IRS that, while the information returns filed with amended returns will not automatically be selected for audit, they may still be selected for audit through the existing audit selection process.[17] However, your exposure to IRS examination on the filed returns is now limited. Barring facts to the otherwise, the three-year statute of limitations will start running once the information returns are filed under the Delinquent International Information Returns Submission Procedures and the IRS will no longer be able to make an assessment on the entire return indefinitely.

[1] Please see below for a list of the more common international information returns which may also need to be filed.

[2] IRC §6501(a).

[3] IRC §6501(c)(8).

[4] Id.

[5] Monetary penalties are not applied to a delinquent Form 8621: Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund, but the indefinitely open statute of limitations applies. Also, penalty amounts may differ for Forms 926, 3520 and 3520-A.

[6] IRC §6038(b)(1).

[7] IRC §6038(b)(2).

[8] See Delinquent International Information Return Submission Procedures, http://www.irs.gov/Individuals/International-Taxpayers/Delinquent-International-Information-Return-Submission-Procedures, last accessed April 23, 2015.

[9] Id.

[10] Id.

[11] Id.

[12] Id.

[13] Treas. Reg. 1.6038A-4(b)(2)(iii).

[14] See fn 7.

[15] Id.

[16] See Options Available to Help Taxpayers With Offshore Interests, http://www.irs.gov/Individuals/International-Taxpayers/Options-Available-to-Help-Taxpayers-With-Offshore-Interests, page last reviewed or updated April 30, 2015.

[17] See fn 7.

Acknowledgement: With grateful appreciation to Attorney Morris N. Robinson, CPA, LL.M. for his expert input and co-authorship.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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