Delinquent International Informational Return Submission
Prior to November 2020, the Internal Revenue Service had developed an amnesty procedure referred to as DIIRSP or the Delinquent International Information Return Submission Procedures. This was an alternative procedure to the streamlined program for taxpayers who did not require any modification to their tax return involving income or other substantive matters. In other words, a taxpayer could amend their prior returns and international information reporting forms, explain to the IRS why certain forms were missed, show they were non-willful and had reasonable cause for the missed filings, and would avoid penalties. Fast forward to November 2020 and this is no longer the case – even with DIIRSP (and no missed income), penalties are not automatically waived (although they can still oftentimes be avoided). Here are 5 important facts:
Amending Tax Returns
In order to complete the procedures, a taxpayer must amend their tax returns to include the missing international information returns such as Form 8938 or Form 3520 but generally does not have unreported income. In a situation in which a taxpayer also has unreported income, then it is not a per se delinquent procedure submission and instead morphs into a more generic reasonable cause submission (the IRS cannot issue penalties when the taxpayer can show reasonable cause and not willful neglect). The distinction has become less apparent since November 2020, since DIIRSP penalties are no longer automatically waived.
FBAR Compliance Is 6-Years
In general, taxpayers who are seeking to remedy an FBAR noncompliance situation with the US Government will submit six (6) years of missed FBAR forms. That is because the statute of limitation for FBAR is six years. In addition, submitting accurate FBARs – albeit late – can help protect the taxpayer from receiving other penalties (or at least reduce the penalty amount).
Must Show Reasonable Cause
In order to qualify for the delinquency procedures, a taxpayer must convincingly show that they have reasonable cause and not willful neglect. Unfortunately, there is no bright-line rule setting forth the elements of reasonable cause and instead, the taxpayer must rely on the totality of the circumstances to show that they acted reasonably.
Offshore Penalties Are Still Possible With DIIRSP
When a person submits under the delinquency procedures, there is still a good chance that they will avoid penalties, but that is not always the case — especially with Form 3520 penalties. Since the procedures were modified back in November 2020, the Internal Revenue Service reserves the right to penalize taxpayers despite the fact that they have submitted under the delinquency procedures, can show reasonable cause, and had no unreported income. This is why it is important to work with an international tax specialist firm for these types of complex matters.
CP15, Appeals, CDP, Tax Court, or Federal Court
If a person receives a penalty notice, they will generally either receive a CP15 Notice (which allows the taxpayers 30 days to protest) or a Letter 843 which bypasses the protest phase and requires a taxpayer to either file an appeal or usually hold off and wait until they qualify for a Collection Due Process Hearing. While the collection due process may be a better opportunity than an appeal, it does come with certain negatives to be aware of, including having to wait until a final notice of levy and/or actually receiving a federal tax lien. Whether or not a taxpayer can pursue both an appeal and the collection due process hearing has not been definitively decided, and some taxpayers may have the chance to submit to both, but it comes with a risk. That is because oftentimes if the taxpayer had the opportunity to dispute the merits at the IRS Office of Appeals, they will not have the opportunity to pursue a Collection Due Process Hearing (and this can limit their chance to go to Tax Court).