Page 3 - Time will not Make this Problem Disappear: The Open-Ended Statute of Limitations for Taxpayers With Delinquent Foreign Information Returns

ABA TAX TIMES
Vol. 35 No. 2 | February 2016
Third, federal interest on underpayments is high: for non-corporate taxpayers, it is three points above the federal short-term rate and compounds daily, as indicated in fourth-quarter reports. A taxpayer who failed to report a foreign asset years ago may be unpleasantly surprised to receive a bill that includes more interest than the original tax would have been had it been paid when the error rst occurred.
In addition to the statute of limitations issue addressed in this article, failure to le foreign information returns can lead to signi cant penalties. A full discussion of those penalties is available as part of the ABA Tax Section CLE Nuts & Bolts Series, titled “International Tax Enforcement: FBARs, FATCA, and More”.7
B. Options for Filing Delinquent Foreign Information Returns
There are several options available for ling delinquent foreign information returns. As an initial matter, the foreign information returns referred to in section 6501(c)(8) are not stand-alone forms, but are attached to the taxpayer’s income tax return. For example, if an individual taxpayer failed to le a Form 8938, the taxpayer would remedy by ling a Form 1040X Amended Individual Income Tax Return to which the delinquent Form 8938 would be attached.
In order to avoid or reduce penalties, as well as to start the statute of limitations on assessment, a taxpayer with delinquent foreign information returns may be eligible to use one of the Service’s voluntary compliance procedures. Below is a brief description of each program, with hyperlinks to the applicable procedures on the Service’s website. Although these programs are primarily directed to foreign bank account non-compliance, they also can be used to le information returns for other offshore assets and interests.
First, the taxpayer can le through the Service’s procedures for delinquent international information returns. This procedure is appropriate for taxpayers who can establish reasonable cause for their failure to le or whose failure to le has caused no or nominal tax non-compliance. This procedure cannot be used, however, if the taxpayer is already under audit or investigation or has otherwise been contacted
by the Service about the delinquent information returns. Under this procedure, the taxpayer les the delinquent returns with a statement of the facts establishing reasonable cause for the failure to le. In the “Frequently Asked Questions” section, the Service explains that taxpayers with tax noncompliance can use this procedure, but that the Service may impose penalties if it does not accept the taxpayer’s reasonable cause explanation.
The next option, available only for taxpayers who are not under audit or investigation, is for the taxpayer to le amended returns through the Service’s Streamlined Filing Compliance Procedures. Under the procedures for U.S. taxpayers who reside in the United States, U.S. residents must le amended returns for the preceding three tax years and FBARs for the preceding six tax years, pay any tax due with interest, and pay a penalty of 5% of the highest aggregate value of assets that should have been reported on the Form 8938—i.e., the value of their previously unreported speci ed foreign assets. Under the procedures for U.S. taxpayers who live abroad, the terms of this program are the same, except that the procedure may also be used to le original Forms 1040 as well as amended returns, and no penalties are imposed.
7 This material was presented at the Tax Bridge to Practice program during the Tax Section’s 2014 May Meeting.
Published in ABA Tax Times, February 2016. © 2016 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied 3 or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. ISSN 2381-5868.