The IRS recently removed one of four options to correct foreign-based reporting omissions. The Delinquent Information Submission Procedure allowed taxpayers to belatedly submit certain forms related to foreign corporations, foreign trusts, or foreign financial assets.
Using this procedure, a taxpayer could file these forms late and attach a reasonable cause statement to explain their non-filing. This way, they would likely avoid costly penalties associated with failure to file being asserted by the IRS.
The IRS quietly removed that option earlier this month.
Who is affected by the change?
The Delinquent Information Submission Procedure could previously be used by taxpayers who had failed to timely file the following forms:
- Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
- Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts
- Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner
- Form 8938, Statement of Specified Foreign Financial Assets
These forms are simply informational disclosures that alert the IRS of foreign financial interests; they don’t necessarily result in any additional tax being owed. However, failing to file the forms when required can lead to large financial penalties.
Anyone who is required to file one or more of those forms, and who has not done so in a timely manner, will be affected by the removal of the Delinquent Information Submission Procedure.
Because the procedure allowed the IRS to avoid the imposition of failure to file penalties, this change could mean more fees for delinquent filers.
If you had already submitted your documents as part of the Delinquent Information Submission Procedure prior to the IRS update, you will likely still have your documents reviewed under the procedural guidelines.
However, if you try to submit amended returns and a reasonable cause statement moving forward, the updated IRS guidelines state: “During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement.”
Options to correct foreign reporting errors moving forward
The Delinquent Information Submission Procedure was one of four options allowing taxpayers to voluntarily come forward and correct their foreign reporting mistakes, often getting substantially reduced penalties as a result.
The other three options remain: Streamlined Filing Compliance Procedures (both Domestic and Offshore), the Voluntary Disclosure Program, and the Delinquent FBAR Submission Procedure.
Not everyone will qualify for each of the remaining programs. If you have foreign financial interests—including bank accounts, other accounts that accrue interest, or a stake in a foreign companies or trusts—and you’re worried you haven’t filed the proper forms, get in touch with our foreign disclosure attorneys. We’ll help you understand your requirements and navigate your options.