Page 4 - 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
Both resident and non-resident U.S. taxpayers must submit a statement to the Service, using either Form 14653 or Form 14654, that explains the circumstances of their non-compliance and certi es that the failure to le was “non-willful.” In this context, “non-willful” means that the taxpayer’s conduct was “due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law.” This is a less stringent standard than reasonable cause.
Finally, there is an option most likely to be used by taxpayers who are concerned that the Service may view their non-compliance as willful or fraudulent and impose steep civil penalties or prosecute them criminally. It is the Service’s Offshore Voluntary Disclosure Program (the OVDP). Under the terms of the OVDP, the taxpayer must le amended returns, including all delinquent foreign information returns and FBARs for the preceding eight tax years, pay the tax due plus a 20% accuracy penalty and interest, and pay a penalty of 27.5% of the highest balance during that period of any unreported foreign accounts and other foreign assets related to tax non-compliance. This penalty will be increased to 50% of the highest balance during the period at issue for those taxpayers who had an undisclosed account with a foreign nancial institution or facilitator identi ed by the Service as under criminal investigation or as having been served with a John Doe summons. The Service maintains an up-to-date list of these foreign nancial institutions and facilitators. The OVDP is available to any taxpayer, regardless of whether they acted willfully or committed tax fraud, so long as (i) the taxpayer is not under audit or investigation and (ii) the income being reported is from a legal source.
Because the statute of limitations will not close on an income tax return with incomplete foreign information reporting, “waiting it out,” is not a solution to the problem of non-compliance. Tax practitioners should assess their clients’ unique circumstances and determine the best method for coming into compliance, keeping in mind the tax practitioner’s own obligations under Circular 230. In the context of delinquent foreign information returns, tax practitioners should inform their clients about the extended statute of limitations as well as the potential penalties, and then discuss whether one of the Service’s procedures is appropriate for them.8 ■
Because the statute of limitations will not close on an income tax return with incomplete for- eign information reporting, “waiting it out,” is not a solution to the problem of non-compliance.
8 See 31 C.F.R. § 10.21.
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 4 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.