IRS Revises Delinquent International Information Return Submission Procedure (DIIRSP)

The IRS revised its Delinquent International Information Return Submission Procedure (DIIRSP) last week. The DIIRSP provided an alternative 0% penalty voluntary disclosure process to taxpayers other than the Offshore Voluntary Disclosure Program or the Streamlined Filing Compliance Procedures to file delinquent international information returns. We have successfully filed hundreds of DIIRSP filings for clients since the DIIRSP program was started in 2014. The IRS revision is the first major revision since 2014.

The DIIRSP has been used to file the below delinquent international-related information returns:

• Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation

• Form 3520, Annual Return to Report Transactions with Foreign Trusts & Receipt of Foreign Gifts

• Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

• Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations

• Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

• Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities

• Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships

• Form 8938, Statement of Specified Foreign Financial Assets

The revisions to the DIIRSP program are as follows (compared to the old guidelines):

Taxpayers who What do not need to use the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:I do if I have not filed one or more required a delinquent international information returns, return? Taxpayers who have reasonable cause for not timely filing theidentified the need to file delinquent international information returns, who 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 information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file. Describe your situation in the reasonable cause statement 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, penaltiesthrough normal filing procedures. Penalties may be assessed in accordance with existing procedures. All delinquent international information returns other than Forms 3520 and 3520-A should be attached to an amended 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. ATaxpayers may attach a reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requestedasserted. During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information. 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.

The below DIIRSP FAQ linked information was also deleted (but the information is still present on the IRS website):

Q1.      Are the Delinquent International Information Return Submission Procedures announced on June 18, 2014 different from the procedures described in 2012 OVDP FAQ 18 (in effect prior to July 1, 2014)?         Yes. The IRS eliminated 2012 OVDP FAQ 18, which gave automatic penalty relief, but was only available to taxpayers who were fully tax compliant. The Delinquent International Information Return Submission Procedures clarify how taxpayers may file delinquent international information returns in cases where there was reasonable cause for the delinquency. Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns. Unlike the procedures described in OVDP FAQ 18, penalties may be imposed under the Delinquent International Information Return Submission Procedures if the Service does not accept the explanation of reasonable cause. The longstanding authorities regarding what constitutes reasonable cause continue to apply, and existing procedures concerning establishing reasonable cause, including requirements to provide a statement of facts made under the penalties of perjury, continue to apply. See, for example, Treas. Reg. § 1.6038-2(k)(3), Treas. Reg. § 1.6038A-4(b), and Treas. Reg. § 301.6679-1(a)(3).

I believe the significant revisions are:

1.         Taxpayers who do not need to use the IRS Criminal Investigation Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax,  The nexus or connection between the DIIRSP and the IRS Voluntary Disclosure Practice or the Streamlined Filing Compliance Procedures has been severed. This is probably helpful because the prior connection was ambiguous and open to interpretation. Unfortunately, the new revised DIIRSP guidelines fail to provide comfort or needed certainty to taxpayers (see below).

2.         “During processing of the delinquent information return, penalties may be assessed without considering the attached reasonable cause statement.”  Normal processing of some delinquent international information returns sometimes result in automatic penalty assessments.  This could mean that penalties could be assessed without consideration of reasonable cause. 

3.         “It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause information.”  We have successfully filed hundreds of DIIRSP filings for clients without any responsive correspondence from the IRS.   This could mean that reasonable cause statements could be face more scrutiny.

4.         “Taxpayers may attach a reasonable cause statement”.  Under the prior procedures, taxpayers were required (note the deletion of the “must be attached” text above) to have a reasonable cause statement and taxpayers were required to certify that foreign entities were not engaged in tax evasion. Under the new procedures, taxpayers file through “normal filing procedures” and taxpayers “may” attach a reasonable cause statement. This could mean that penalties could be assessed without consideration of reasonable cause.  This could also mean (doubtfully) that penalties may not be assessed at all.  Again, unfortunately, the new revised DIIRSP guidelines fail to provide needed certainty to taxpayers.

The new revisions are not helpful to taxpayers who wish to come forward in good faith and comply and file delinquent international information returns.  Until more guidance is released by the IRS, in my opinion, the DIIRSP still exists and will be used to help taxpayers (cautiously) file delinquent international information returns.