The IRS quietly removed last week one of the four options to correct for return errors in the international space.
The removed program, the Delinquent Information Submission Procedure, provided an avenue to taxpayers who did not need to use or were not eligible under the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax. These taxpayers had not filed one or more required international information returns, had reasonable cause for not timely filing the information returns, were not under a civil examination or a criminal investigation by the IRS, and had not already been contacted by the IRS about the delinquent information returns to voluntarily correct filing omissions.
This program was used often to correct accounting errors, as the filing requirements have been in significant flux. Practitioners who do not specialize in foreign reporting forms often found themselves playing catch-up with new forms or new interpretations of forms (such as the new Controlled Foreign Corporation attribution rules and the introduction of Form 8938 (often called the FATCA form).
This removed version of the program replaced a prior regime that provided far greater clarity and comfort to taxpayers and practitioners where no tax was omitted and a form was simply missed. Hopefully any new IRS reworking of the program will include greater clarity about who qualifies, and penalties will be waived if the taxpayer qualifies.
A hidden clue
An IRS update on Oct. 2 provided a small hint about the IRS’s intentions in this area. When the guidance was updated for the Delinquent Information Submission Procedure on the right hand side of the page, the Delinquent Information Submission Procedure disappeared from the list of offshore compliance options, though it was clearly shown during a March 13, 2020 update.
Moving forward
Those in the middle of producing a Delinquent Information Submission Procedure filing for a missed Form 5471, Form 3520, Form 3520-A or Form 8938 can still move forward with the filing. The filing is made in the ordinary course of attaching a reasonable cause statement to the submission.
Will the new process work smoothly? The new process described by the IRS acknowledges two things that could be very concerning to practitioners:
“During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement.”
and
“It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information.”
From this we understand there is no guarantee the reasonable cause statement is being reviewed, processed or even considered. Reporting penalties are frequently assessed automatically. If the automation process continues to develop, we hope the ability of practitioners to present a reasonable cause to the IRS and be heard in a timely way about the issue will improve as well. In the COVID era, under the current system, that “back-end” process is (at best) clunky. When a taxpayer or a practitioner is waiting to have the IRS make a ruling on reasonable cause, that currently does not deter the IRS from collecting on the assessment. Involvement by the Taxpayer Advocate may be needed as the number of these cases increase.
On the positive side, the IRS does assure taxpayers that “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.”
This assurance may provide a degree of comfort in that the taxpayer is not opting into an audit or verification review by presenting a missed filing voluntarily.
Other options
The IRS decision to close the Delinquent Information Submission Procedure should not come as a surprise for international tax practitioners. The window for voluntary compliance for delinquent U.S. expats and noncompliant taxpayers started to close in Jan. 2017 when the Large Business International division rolled out a series of compliance campaigns that included several international tax issues most prone to noncompliance. During this period, the IRS launched information webinars that made clear the campaigns were part of the IRS initiative to use data analytics and technology to make the greatest use of limited IRS resources. As the IRS gets more information from foreign banks and governments under FATCA, from reporters and from whistleblowers, the options available to delinquent taxpayers to come forward voluntarily and get caught up on their tax-filing obligations is narrowing.
For now, there remain excellent options to address international reporting forms that were inadvertently missed during regular tax-filing deadlines, including the streamlined submission procedures. As the IRS does not guarantee these programs will remain open or that the eligibility criteria will remain constant, it behooves qualifying taxpayers to move quickly once an international error is identify to correct the mistakes quickly under the available regimes.