Our tax lawyers have reviewed the IRS’ newly issued FAQs for its Delinquent International Information Return Submission Procedures, the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing in the United States (SDOP), and the Streamlined Filing Compliance Procedures for U.S. Taxpayers Residing Outside the United States (SFOP). These programs are first cousins of the IRS’ Offshore Voluntary Disclosure Program (OVDP), but technically are not part of OVDP, and are options for individuals who have failed to report income from offshore bank accounts, and who may have failed to file a Foreign Bank Account Reports, FinCEN Form 114, formerly TDF 90-22.1 (FBAR) or other international information reporting returns.
Perhaps the most disturbing FAQ is the one issued for the Delinquent International Information Return Submission Procedures. The procedures replace former OVDP FAQ 18, and became effective July 1, 2014. Under old FAQ 18, if a taxpayer failed to file an information reporting form, but had reported all taxable income, and paid all the tax the IRS would not impose a penalty. Under the new Delinquent International Information Return Submission Procedures however, even if all income has been reported, and taxes paid, the taxpayer must submit a “reasonable cause statement” with each delinquent information return. Before the issuance of the new FAQ, many tax attorneys believed (hoped?) that if a taxpayer met the requirements of old FAQ 18 that no penalty will be imposed without regard to whether there was reasonable cause.
The FAQ makes clear that if the IRS does not accept the reasonable cause statement then penalties will be imposed. The FAQ states that the reasonable cause determination will be based upon longstanding authorities, and cites to Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3). The FAQ suggests that a statement of facts made under penalties of perjury should be included with the late filed returns.
The cited authorities are not particularly helpful in determining whether or not reasonable cause exists. For example, Treas. Reg. Section 1.6038-2(k)(3) which references reasonable cause for the failure to file Form 5471 (related to controlled foreign corporations or CFCs) does not set forth any standard for determining reasonable cause.
These requirements essentially make the Delinquent International Information Return Submission Procedures worthless. It has always been the case that penalties for the failure to file international information reporting forms could be waived if there was reasonable cause. The procedure adds nothing in the way of protection, and it is unclear why it even exists. A taxpayer who has reasonable cause for the failure to file can assert that defense at any time. Our tax lawyers see little benefit to filing under these procedures. Taxpayers who are concerned about not meeting the reasonable cause test should consider instead whether they would be better off in one of the IRS’ Streamlined Filing Compliance Procedures, or even a full-blown OVDP.
If you have any offshore bank accounts or other tax problems, call the tax litigation attorneys at Brager Tax Law Group, A P.C.
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