Delinquent International Information Return Submission Procedures

Delinquent International Information Return Submission Procedures

Taxpayers who need not use the Offshore Voluntary Disclosure Program (OVDP) or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

·        have not filed one or more required international information returns,

·        have reasonable cause for not timely filing the information returns,

·        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 with a statement of all facts establishing reasonable cause for failing to file.  

Describe your situation in the reasonable cause statement

As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion.  If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed under existing procedures.

·        All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended return and filed according to the applicable instructions for the amended return.  

·        All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.  

·        A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested.

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 are in place for any tax or information returns

Taxpayers who have not been willful in their failure to report gross income from foreign financial assets or to meet their reporting obligations, should carefully consider this option. For many taxpayers, this option may provide an expedient and cost-effective way to get current on tax and reporting obligations. However, given the IRS's and the U.S. Department of Justice's vigilance in tracking unreported offshore financial accounts and income, taxpayers should consult with their tax adviser before making any disclosures to the IRS. 

Sec. 6038 requires every U.S. person to furnish, regarding any foreign business entity that such person controls, the information listed in Sec. 6038(a)(1). That information is reported on Form 5471, Information Return Regarding Certain Foreign Corporations, and Form 8865, Return of U.S. Persons Regarding Certain Foreign Partnerships. Sec. 6038A requires any domestic corporation that is 25% foreign-owned to furnish the information listed in Sec. 6038A(b)(1). That information is reported on Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business.

Penalties apply for failure to report the information required under Secs. 6038 and 6038A by failing to timely file Form 5471, 5472, or 8865.

If a taxpayer fails to timely file Form 5471 or 8865, the IRS may assert a $10,000 penalty for each failure for each applicable annual accounting period, plus an additional $10,000 for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $60,000 per return (initial penalty of $10,000 plus the continuation penalty maximum of $50,000 per return) (Sec. 6038(b)). If a taxpayer fails to timely file Form 5472, the IRS may assert a $10,000 penalty for each failure for each applicable tax year, plus an additional $10,000 for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency. The statute does not provide a maximum penalty regarding Form 5472 (Sec. 6038A(d)).

Note: A single failure to timely report Sec. 6038 or Sec. 6038A information causes a taxpayer's entire related federal income tax return to remain open for assessment until the required information is provided to the IRS (Sec. 6501(c)(8)). A taxpayer can limit the extended assessment period to items that relate to the unreported Secs. 6038 and 6038A information if the taxpayer shows that the reporting failure was due to reasonable cause.

Penalty Abatement vs. "Delinquent" Procedures

There are two procedural paths for a taxpayer that files a late Form 5471, 5472, or 8865. Which path may be available depends on whether the taxpayer (1) files the delinquent forms with an original, but untimely, federal income tax return or (2) files the delinquent forms with an amended income tax return and the original income tax return was timely filed.

1. Filing international information returns with an original, but untimely, federal income tax return: Forms 5471, 5472, and 8865 are to be filed with the taxpayer's federal income tax return by the due date of the return, including extensions (Regs. Secs. 1.6038-2(i), 1.6038A-2(d), and 1.6038-3(i), respectively). The Internal Revenue Manual (IRM) provides that if the taxpayer files Form 5471 or 5472 with an original, but untimely, federal income tax return, the IRS will assess a $10,000 penalty per form upon receipt of the late Form 1120, U.S. Corporation Income Tax Return, or Form 1065, U.S. Return of Partnership Income (IRM §§21.8.2.19.2 and 21.8.2.20.2). While the IRM currently does not contain a systematic assessment procedure for a late Form 8865, the IRS has statutory authority to assess a penalty. Once the IRS has assessed penalties, the taxpayer may ask it to abate the penalties under two possible options:

  • First-time abatement (FTA): An FTA can provide penalty relief if the taxpayer has not previously been required to file a return or has no prior penalties (except the estimated tax penalty) for the preceding three years regarding the same IRS Master File module (IRM §20.1.1.3.6.1). Regarding a Form 5471 late-filing penalty, the IRM provides for an FTA if an FTA was applied to the taxpayer's related Form 1120 or Form 1065 late-filing penalty (IRM §21.8.2.19.2(3)). Regarding a Form 5472 late-filing penalty, the IRM provides for an FTA if an FTA was applied to the taxpayer's related Form 1120 late-filing penalty or no penalty was assessed on the related Form 1120 (IRM §21.8.2.20.2). The IRM is silent on applying an FTA to a Form 8865 late-filing penalty.
  • Reasonable cause: Secs. 6038 and 6038A each provide a reasonable-cause basis for penalty relief (Regs. Secs. 1.6038-2(k)(3), 1.6038-3(k)(4), and 1.6038A-4(b)). A taxpayer may qualify for penalty relief based on reasonable cause if the IRS determines that the taxpayer exercised ordinary business care and prudence in determining its tax obligations but nevertheless could not timely file the return to which the Form 5471, 5472, or 8865 was attached.

2. Filing international information returns with an amended federal income tax return (timely original return filed): As of July 1, 2014, taxpayers that have failed to file a Form 5471, 5472, or 8865 may file it under the IRS's Delinquent International Information Return Submission Procedures. The procedures allow taxpayers to avoid penalties under Secs. 6038 and 6038A if the taxpayer filed its original income tax return but omitted the required international information forms.

The procedures are available for taxpayers that (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 already been contacted by the IRS about the delinquent information returns. Taxpayers who have unreported income or unpaid tax are not prevented from filing delinquent international information returns.

Taxpayers that meet the requirements should file the delinquent information returns with an amended income tax return and attach a statement of all facts establishing reasonable cause for failing to timely file the international information returns. As part of that statement, taxpayers must certify that any entity for which the information returns are being filed was not engaged in tax evasion. The reasonable-cause statement must be signed under penalties of perjury.

If a taxpayer does not attach a reasonable-cause statement to each delinquent information return filed, penalties may be assessed under existing procedures. The IRS also may impose penalties if it does not accept the taxpayer's explanation of reasonable cause.

If a taxpayer meets the requirements for and follows these procedures, the IRS will not automatically assess penalties under Secs. 6038 and 6038A for the late filing of Forms 5471, 5472, and 8865.

Taxpayers should know the procedures that apply to late filing of Forms 5471, 5472, or 8865. Whether the taxpayer files the form with a late income tax return or with an amended income tax return (original return timely filed) will determine whether the taxpayer faces assessment of penalties under Sec. 6038 or Sec. 6038A and needs to seek penalty abatement relief, or whether the taxpayer may seek to avoid penalties through submission of the untimely forms under the Delinquent International Information Return Submission Procedures with an amended income tax return.

Disclaimer of Liability: This publication is intended to provide general information to our clients, friends and readers. It does not constitute accounting, tax, or legal advice; nor is it intended to convey a thorough treatment of the subject matter.



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