In early November 2020, the IRS updated the terms of the Delinquent International Information Return Submission Procedures (Procedures). The Procedures apply to taxpayers who (1) have not filed one or more required international information returns, (2) have reasonable cause for not timely filing the information returns, (3) are not under a civil examination or a criminal investigation by the IRS, and (4) have not been contacted by the IRS about the delinquent information returns. It is used often in situations where there is no unreported income but some of the required foreign information filings were omitted from the original filing. Due to the significant penalties associated for non-filing some of these informational returns (such as Form 5471 relating to ownership of foreign corporations), the Procedures have been a widely used program.
Prior to the most recent Procedures update, taxpayers filed an amended return which included the required information return and reported and paid any tax due. A reasonable cause statement, which provides all facts for the failure to file, was required to be attached to each amended return filed. If the taxpayer followed these procedures and met the reasonable cause standard, the IRS would not automatically assess penalties.
Under the new Procedures revisions, taxpayers will file the amended tax return in the same manner as any other amended tax return. The IRS may assess the penalty automatically without considering the attached reasonable cause statement. The taxpayers will then need to respond to specific correspondence and submit or resubmit reasonable cause information.
Thus, it seems that Procedures returns may not be receiving the initial degree of special attention while being processed as in the past. We expect that there will be more penalty notices issued by the IRS and more efforts required by Taxpayers to seek penalty abatement. Whether the IRS takes a more stringent view towards penalty abatement remains to be seen.
In addition to the Procedures, there are other ways to address prior foreign tax non-compliance including (1) IRS Voluntary Disclosure; (2) Streamlined Filing Compliance Procedures; and (3) Delinquent FBAR Submission Procedures. Each program is unique and there is not “a one size fits all” solution to remediate exposure in this area.
For more information, or if you have any questions about this or any other tax matter, please contact your WilkinGuttenplan advisor.