January 15, 2021 – New York, United States
The IRS Decries No More Chances:
Removal of the Delinquent Information Submission Procedure
In a recent article, there was a discussion of the IRS offshore voluntary disclosure program, or OVPD. In a metaphorical comparison, the IRS Wealth Squad was likened to the famed Mod Squad of the popular 70’s television series. Both squads had a mission to accomplish, with the IRS mission to bring taxpayers into compliance with their reporting requirements for foreign income, accounts, and assets. To achieve this end, the IRS implemented measures to absolve taxpayers of criminal liability for prior nonadherence to the law. However, as the IRS starts to receive more information from other sources such as foreign governments and financial institutions under the Foreign Account Tax Compliance Act of 2010, the window of opportunity to voluntarily come clean with the IRS and catch up on delinquent reporting requirements is closing. Readers and taxpayers alike beware to heed the advice of critically acclaimed British actor, Alan Bennett who famously stated: “Sometimes there is no next time, no time-outs, no second chances. Sometimes it’s now or never.”
The Delinquent Information Submission Procedure was one of four ways in which delinquent filers of foreign information could report their records and pay any additional taxes. To qualify for this program and its associated penalty mitigation, a taxpayer would have had to have a reasonable cause for not timely filing the information returns. Further, as the name of the umbrella program OVPD suggests, qualifying for the program is voluntary. Consequently, the taxpayer cannot at present be the subject of any criminal investigation or civil examination by the IRS. One cannot have already been contacted by the Service about the delinquent information returns. Otherwise, the voluntary correction of filing omissions would frustrate the purpose of the program otherwise disincentivizing taxpayers to come forward on their own accord.
This program was frequently utilized by tax practitioners to correct the accounting errors on these returns, which was the outgrowth of a program that was in a constant state of change. Over the years, with the proliferation of IRS programs monitoring offshore and cross border transactions came a whole slew of new forms to be filled in and duly filed. Further, with each form came a barrage of interpretive understanding of the manner or form by which data was to be presented. Confronted by a horde of statutory vagaries, many taxpayers had found themselves drowning in a sea of backlogged noncompliance. Some examples of new or newly interpreted forms were the Controlled Foreign Corporation (CFC) attribution rules as well as the form to report information under FATCA, form 8938. Prior to this removed version of the program, there had already been a precedent reporting structure in place generously forgiving towards taxpayers and practitioners. This precedent had laid the groundwork for later programs such as the one at question. The programs addressed issues dealing with no omissions of any tax due or the non-filing of a specific form because it was purely overlooked.
An IRS reworking of the program needs to include an elucidation of its basic fundamentals such as the factors needed in order to qualify for the program and whether penalties will be waived upon qualifying. The future of such an overhaul and updating of the program seems nebulous however. This is because an IRS update from October 2 seemed to omit any guidance on the topic to the extent of it not even appearing as an option for taxpayers. This is in spite of the fact it was clearly shown as a choice during a previously published March 13 update.
Works in progress, i.e., Delinquent Information Submission Procedures in the middle of preparation for missed forms like forms 5471, 3520, 3520-A or 8938 still fall under the purview of the program as it was before it was rescinded. Compliance with the program requires the attachment of a statement of reasonable cause. However, the new process as defined by the IRS includes provisions that give the Service authority to assess penalties in spite of a reasonable cause statement attachment. The regulations stress that taxpayers need to effectively respond to specific correspondence. Replies to the Service would also require the attachment of a mandatory first-time submission or resubmission of the reasonable cause statement.
Language such as this seems to suggest that with a “no chances left” policy, a taxpayer may not have his reasonable cause statement reviewed at all nonetheless processed or even considered at all. Without an assurance otherwise forthcoming from the IRS, there are apparently no obstacles standing in the path of the Service to collect on an automatic assessment of penalties. In spite of stricter enforcement, there has still been some guidance issued by the Service indicating a reluctance on its part to automatically subject information returns to audit. Rather, the Service will revert to its normal and existing audit procedures already in place for any tax or information returns. Such a policy effectively maintains the incentive for taxpayers to voluntarily report a missed filing because there is some degree of assurance that doing so will not red-flag the return for an audit.
Windows of opportunity are exactly that…windows. Like windows, an opportune chance at rectifying past incongruities comes and goes with the breeze. Once the window is closed and boarded shut, those breezes are locked out and the chances terminate. The window that has closed on the Delinquent Information Submission Procedure has been in the process of being closed for a long time since January 2017. This is when the Large Business and International division, the Wealth Squad, rolled out initiatives targeting several international tax issues that were prone to noncompliance. Practitioners are not surprised then that the window has now been slammed shut on at least one of these initiatives.
During this interim period of time since 2017, there have been many “next times”, “time-outs”, and “second chances” for compliance as the IRS has engaged in an extensive information and public relations campaign. It has published information webinars that made clear to taxpayers that in spite of limited human and other resources, technology and data analytics were to be maximized to track noncompliance. Further, they established streamlined submission procedures to ease the reporting burden. However, there has been no indication from the service when these programs will end. They have not announced when these “next times”, “time-outs”, and “second chances” disappear entirely. It would be best then to take the advice of an outdated British actor to heart and rectify errors and omissions immediately. In all likelihood, with the closure of this one enterprise, it will not be long before the “now” ends and the “never” begins on those other initiatives.
About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA). She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
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