Are You Properly Reporting Foreign Income and Assets? Part 1March 29, 2021
Are you a U.S. taxpayer with foreign assets? Make sure you’re complying with foreign income and asset reporting guidelines.
Do you have foreign assets? Unsure if you’re properly reporting this information? In many instances the consequences for omitting information or not reporting correctly can be onerous and far more burdensome than the unpaid taxes. Fortunately, in the last few years the IRS has established several programs that allow the out of compliance taxpayers to voluntarily come forward and avoid many of the penalties that would otherwise apply.
In the first of a series on these various options, we are going to address one of the most painless of these programs, the Delinquent International Information Return Submission Procedures.
What is the Delinquent International Information Return Submission Procedure?
This program provides potentially penalty free method for the submission of a variety of delinquent foreign related disclosure forms. This is significant because the penalties associated with these forms can be quite punitive.
How does it work?
As stated on the IRS website,
“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.”
So what does this mean in practical terms?
It means that for those forms that are normally submitted with one’s Form 1040, the submission should be made with an amended Form 1040X. Delinquent Forms 3520 and 3520-A should be submitted separately without a Form 1040X. See the discussion of FBARs below.
How does this avoid penalties?
It’s all about showing reasonable cause for the failure to file. This is the secret ingredient for this process as well as many other penalty abatement scenarios. Here’s a further excerpt from the IRS website:
- “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.”
So if you’re reading this guidance and thinking that the penalty relief doesn’t sound like a slam dunk you may have a point. Up until November of last year the IRS instructions were to include the reasonable cause statement with the filing. Does this revision signal a shift in IRS position where the burden of proof may be shifting, and penalty abatement may be more of an uphill battle? Probably not. It is more likely a processing issue in that the IRS did not have the ability to properly evaluate the submissions. Under the revised procedures that evaluation will now shift to the tail end of the process through tax notices. Nevertheless, it does raise the question of whether this process is any better than a normal amended filing. I think it does provide value in that typically when the IRS establishes this type of program, they encourage taxpayers to use it in lieu of other types of routine disclosures. The best form of encouragement is not being overly strict on the reasonable cause standards.
Should I wait until I hear from the IRS to act?
Absolutely not! In this as well as other IRS disclosure programs the requirement is that you disclose before they find you.
What if I owe tax as well?
While you are not specifically precluded from using this program it’s probably not the best choice. I will be discussing other alternative submission procedures in a future blog.
Do these procedures apply to delinquent foreign bank and financials reports (FBARs)?
There is a similar even simpler procedure for FBARs that does not entail the submission of an amended tax return. The delinquent FBAR is submitted directly with a reasonable cause explanation included in a designated area of the electronic form.
Our International Tax Services team at KLR specializes in the analysis and minimization of worldwide income tax obligations. Contact our team for assistance.