If you are not in need of the Streamlined Procedures because you do not owe additional tax, and you have reasonable cause for not filing an informational return, you may file the delinquent information returns along with an explanation of the facts that support your claim of having reasonable cause for failing to file on time. You must do this before a civil examination or criminal investigation has been opened.
There are some conditions that you must meet in order to file delinquent informational returns:
- You must not have any unreported income and have not filed one or more international information returns (e.g., Forms 8938, 5471, 3520, 3520A) are eligible.
- You should have met the requirements for non-willful intent and have reasonable cause for not timely filing the information return.
- You must not be under a civil examination or a criminal investigation by the IRS.
- You must not already have been contacted by the IRS about the delinquent international information returns.
- You need to file the delinquent international information returns with a statement of facts establishing reasonable cause for the failure to file. This statement must be made under penalty of perjury.
- You must certify that any entity for which the information returns are being filed was not engaged in tax evasion.
While filing delinquent will not automatically throw you into audit category, it does not guarantee that you will not be audited in the future.
If you must file a delinquent form 3520 and 3520-A, you will file it according to the instructions on the form which can be found Here. Make sure that you do not send the return to Utah; send it to the Austin, Texas address.
For all other delinquent information returns (e.g., 5471, 5472, 8938, 926, and 8621): attach the completed forms and reasonable cause supporting fact statement to an amended tax return and file according to the instructions for an amended return; which can be found here.
Delinquent International Informational Returns Submission Procedures
Taxpayers who do not need to use the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns could still have additional issues. If the taxpayer:
- Has not filed one or more required international information returns
- Had reasonable cause for not timely filing the information returns
- Is not under a civil examination or a criminal investigation by the IRS and
- Has not already been contacted by the IRS about the delinquent information returns
They should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file in a timely manner.
As part of the reasonable cause statement, taxpayers must also certify that any entity for which the information returns are being filed was not engaged in tax evasion. If a reasonable cause statement is not attached to each delinquent information return filed, penalties may be assessed in accordance with existing procedures.
Required Attachments for Amended U.S. Tax Returns
All delinquent international informational returns other than Forms 3520 and 3520-A should be attached to an amended U.S. tax return and filed according to the applicable instructions for the amended return. All delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms.
A reasonable cause statement must be attached to each delinquent informational return filed for which reasonable cause is being requested. Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.
Similar to Informational Return Delinquent Filings, you must include a statement that explains why you have reasonable cause; and you must take action before being contacted by the IRS about the delinquent FBAR(s).
Keep in mind that any of these filings can be selected for audit, so be sure your reasonable cause has sufficient support and your disclosures are complete!
If you should find yourself in need of further assistance, please feel free to reach out and set up a consultation with our experienced Senior Counsel at Brotman Law.
What Is Reasonable Cause?
For starters, a lack of funds is not reasonable cause for failure to file or pay taxes on time. However, the reasons for the lack of funds may meet reasonable cause criteria for the reducing failure to pay penalty. The IRS will consider any reason which establishes that the Taxpayer used all ordinary business care and prudence to meet filing obligation but was nevertheless unable to do so.
The IRS will consider the following circumstances as “reasonable”:
- Fire, casualty, natural disaster or other disturbances;
- Inability to obtain records
- Death, serious illness, incapacitation or unavoidable absence of the taxpayer or a member of the taxpayer’s immediate family
- Any other reason which establishes ordinary business care and prudence
FBAR Delinquent Filings
Some taxpayers may not need to use the Streamlined Filing Compliance Procedure options, but still may have a delinquent FBAR. FinCEN has established a procedure to address this problem.
The solution is available to those who:
- Have not filed a required Report of Foreign Bank and Financial Accounts (FBAR) (FinCEN) (Form 114, previously Form TD F 90-22.1)
- Are not under a civil examination or a criminal investigation by the IRS, and
- Have not already been contacted by the IRS about the delinquent FBARs
Filing a FinCEN 114 or FBAR
Time is of the essence when dealing with a delinquent FBAR.
A taxpayer who has not already been contacted should immediately file the delinquent FBARs electronically according to the instructions on the FinCEN website.
The filing must include a statement explaining why the FBARs were filed late. Professional counsel should be retained to assist in the preparation of this letter.
On the cover page of the electronic filing, you will be required to select from options as to the reason for the late filing. If you are absolutely unable to file electronically you should contact FinCEN’s Regulatory Hotline for guidance concerning alternatives.
Keep in mind FinCEN form 114 (the FBAR) is not an IRS filing.
The IRS will not impose a penalty for the failure to file the delinquent FBARs as long as you properly reported the income on your U.S. tax return and paid the tax on the income from the foreign financial account.
You will also be exempt from a failure to file penalty as long as you have not otherwise been contacted regarding an income tax examination or received a request for delinquent returns for the years in which the delinquent FBARs are submitted.
The audit process with regard to FBARs is similar to the selection process in place for tax returns. The key to curing the delinquency is to get the FBAR filed before FinCEN or the IRS comes looking for it.
Relief Procedures for Certain Former Citizens
On September 6, 2019, the IRS announced new procedures that will enable certain individuals who relinquished their U.S. citizenship to come back into compliance with their U.S. tax and filing obligations and receive relief for back taxes. The taxpayer’s non-compliance actions must be deemed non-willful.
- Relinquished their U.S. citizenship after March 18, 2010
- Have not filed U.S. tax returns as U.S. citizens or residents
- Have an aggregate tax liability of $25,000 or less for the five years preceding expatriation and in the year of expatriation
- Have net assets of less than $2 million (at the time of expatriation and at the time of making their submission under these procedures)
- Did not exceed the threshold related to average annual net income for the period of five years ending before the date of expatriation ($168,000 for 2019)
- Must agree to complete and submit all required Federal tax returns for six tax years at issue.
A taxpayer meeting these requirements will not be “covered expatriates” under IRC 877A, and will not be liable for any unpaid taxes and penalties for these years or any previous years.
I always always stress the importance of good record keeping surrounding any tax matter, and documenting relief procedures is no exception. Keep copies of everything. In particular, put together a file of evidence that will substantiate the value of your assets. This will help prove your net worth to the IRS.