The Delinquent International Information Reporting Submission Procedures (DIIRSP) is the disclosure program that you would utilize if you have unfiled or incorrectly filed international information reporting forms and don’t need a streamlined program to report underreported income or underreported taxes.
What is included with a DIIRSP Submission
DIIRSP submissions include the amended or delinquent tax returns and a reasonable cause statement for EACH international information form that could potentially be subjected to a penalty. For example, if you own a foreign corporation that you failed to previously disclose on Form 5471 and Form 8938, you would include a reasonable cause statement with each Form 5471 and Form 8938 for each year being filed.
The number of years included with a DIIRSP submission is not as clearly defined as it is for the streamlined disclosures. When you go through a DIIRSP disclosure, you want to file in a way that addresses all of your non-compliance and the associated penalty exposure, but, because the IRS has an unlimited amount of time to assess penalties on international information forms, this could potentially mean filing decades of tax returns. Clearly this is an unreasonable result, and it leaves you in a situation where you have to make a judgment call on the number of years that you would like to include. We can certainly help you to make that judgment call, but it isn’t a decision that we can make for you.
What is Reasonable Cause?
Let’s start with what the IRS has to say about reasonable cause:
“Reasonable Cause is based on all the facts and circumstances in your situation. We will consider any reason which establishes that you used all ordinary business care and prudence to meet your Federal tax obligations but were nevertheless unable to do so.”
This standard sounds a lot more forgiving than it actually is. Ordinary business care and prudence is usually the nail in the reasonable cause coffin. When you read the following, keep in mind that your death could be considered a reasonably foreseeable event:
“Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that he or she exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.”
As indicated above, applied outside of the international information forms context, reasonable cause is a tough standard. Unless you’ve been in a coma for the last year, woke up, and filed your returns in short order, it is not easy to convince the IRS that you had reasonable cause for failing to file a return. IRS reasonable cause relief, under normal circumstances, requires some extraordinary events, because individuals have every reason to be fully on notice of their tax filing obligations, and anyone exercising ‘ordinary business care and prudence’ will get their returns filed on time annually.
It’s relevant to consider the the general reasonable cause standard because in this international economy, with more and more people engaging in business around the world, and the U.S. taxation of foreign source income and the U.S. reporting obligations for foreign accounts and assets becoming much more widely known, the expectation will increasingly become that the average person engaged in any financial activities outside of the U.S. SHOULD be aware of their filing obligations.
Disclosure of foreign income and foreign accounts has only really been a hot issue for a little more than the last ten years. The recent IRS push to begin enforcing (and expanding) the reporting obligations for individuals with foreign income and foreign accounts has resulted in the IRS attempting to create avenues for individuals to come into compliance before the IRS identifies their noncompliance. This is in line with the ‘voluntary’ nature of the U.S. tax system, voluntary in this context, meaning “allowing taxpayers initially to determine the correct amount of tax and complete the appropriate returns, rather than have the government determine tax for them from the outset.”
Before we jump to flag the generosity of the IRS in the creation of these programs, let’s remember that they are woefully understaffed and the individuals going through these programs may have been difficult for the IRS to identify independently. It is getting easier and easier for the IRS to identify a lot of individuals through the reporting received from foreign financial institutions (thanks FATCA) but it is still convenient and efficient for the IRS to encourage this self-reporting. As soon as it becomes easier for the IRS to identify and penalize this noncompliance, we can expect these programs to change, vanish, or at the very least be administered more aggressively.
The IRS understands that more people understand the filing obligations for foreign income and accounts everyday. This knowledge is eventually going to elevate the expectations for circumstances that give rise to reasonable cause.
There is separate guidance within the Internal Revenue Manual (a publicly available guide to IRS employees) for reasonable cause for each of these international information forms. But it is important to note that the IRM is not binding on the IRS. It’s certainly persuasive and complying with the IRM will bolster any conflicts that do eventually get litigated, but at the end of the day, the IRS has an incredible amount of discretion to determine what does and what doesn’t constitute reasonable cause.
I could walk you through the arguments we typically make, arguments that have been winning arguments for us thus far, but at the end of the day, when it comes to filings that include reasonable cause arguments, you have to be aware that there is a fair amount of risk associated with the increased scrutiny that will likely be applied in the administration of the DIIRSP program in the future.