Page 10 - Penalties: Reconsidering the Reasonable Cause Defense to Late-Filing Penalties and the Impact of the Service's Clarification of the DIIRSP

PeNALtieS

doubt that the Service may summarily assess a delinquent part. In general, the SFCP requires a taxpayer to file an
information return penalty and use traditional collection amended tax return and all required international infor-
devices, such as a Notice of Federal Tax Lien or a levy, mation forms for the most recent three years, pay tax and
to collect the penalty. Instead, a delinquent information interest due for those three years, and pay a miscellaneous
return penalty may arguably be collected only by the offshore penalty equal to 5% of the highest aggregate
United States Department of Justice’s Tax Division (“Tax balance or value of the taxpayer’s foreign financial assets
Division”) in an affirmative collection suit or after the that are subject to the penalty. The taxpayer may avoid
taxpayer is issued a notice of deficiency (and afforded an this penalty if she meets the definition of a nonresident.
opportunity to file a petition for a redetermination of the The availability of the SFCP is limited to individuals and
liability in the Tax Court. 53 estates, so entities seeking to address noncompliance with
international information returns are not eligible under
B. How Should taxpayers with the SFCP.
Delinquent information Returns Come For those taxpayers who engaged in willful noncom-
into Compliance? pliance, and are therefore ineligible for the DIIRSP, the
Service offers the voluntary disclosure practice, which
A taxpayer with unfiled delinquent international infor- is designed for those taxpayers who have true exposure
mation returns should file all required returns, but with to a criminal investigation and prosecution. The Service
the advice of counsel familiar with the various paths to has made it clear that its voluntary disclosure practice is
compliance, grounds for defending against proposed civil not intended to be a solution for those who acted with
penalties, and the taxpayer’s potential exposure to criminal reasonable cause. 55
investigation and prosecution. For a taxpayer who has Finally, taxpayers may always simply file delinquent or
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reasonable cause for late-filing the information return, amended returns, frequently referred to as a “quiet disclo-
the DIIRSP is one option for correcting the historical sure,” to come into compliance. The Service has a well-
noncompliance. But any taxpayer who opts to use the established, general policy set forth in the I.R.M. advising
DIIRSP must understand that it is possible (indeed, likely) taxpayers to utilize a six-year look-back period. While
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that (1) the Service will assess delinquent international this policy does not offer finality for years prior to the look-
information return penalties, and (2) the taxpayer may back period, and does not start the statute of limitations
not be able to challenge the imposition of that penalty in on assessment for unfiled returns, the approach remains
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a judicial forum without first prepaying the liability and a viable method of addressing a taxpayer’s noncompliance.
filing a lawsuit to recover the amount paid.
C. the Reasonable Cause Statement and
Responding to Requests for information
The recent clarifications to the DIIRSP The reasonable cause statement takes renewed signifi-

suggest that taxpayers and tax cance under the DIIRSP. By attaching the reasonable
advisors should revisit the standards, cause statement to the delinquent information return,
it remains possible that the Service will not assess a
case law, and administrative guidance late-filing penalty at all. In fact, as the Service recruits

that apply to requests to have late- and hires additional personnel, it may be in a position
in the not-too-distant future to review reasonable cause
filing penalties abated on the ground statements attached to returns prior to assessing any
of reasonable cause. civil penalties. Moreover, drafting the reasonable cause
statement with the principles discussed in part I of this
article in mind enables a taxpayer to anticipate any
questions the Service may have, and in answering those
A second option is for an eligible taxpayer to forego the questions prospectively, the strength (or weakness) of
DIIRSP and instead avail herself of the SFCP. The SFCP the taxpayer’s reasonable cause position should become
is available to a taxpayer who certifies that her failure to apparent. Another benefit of this early effort is the abil-
report foreign financial assets and pay all tax due in respect ity to point to the statement if and when the taxpayer
of those assets did not result from willful conduct on her pursues an administrative appeal.

32 JoUrnal of taX praCtiCe & proCedUre Winter 2020