An individual can become compliant with United States laws concerning foreign income, accounts and entities by means of the Internal Revenue Service’s Streamlined Procedures or its Delinquent International Information Return Submission Procedures (“DIIRSP”).

The IRS recently revised the DIIRSP to eliminate language limiting the DIIRSP to situations where the taxpayer has not failed to report tax. The DIIRSP as originally issued provided in part:

Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

1. have not filed one or more required international information returns,
2. have reasonable cause for not timely filing the information returns,
3. are not under a civil examination or a criminal investigation by the IRS, and
4. 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.

The DIIRSP thus limited their applicability to situations where the taxpayer did not need to file delinquent or amended tax returns to report and pay additional tax, i.e., where the taxpayer had not failed to report tax.

The DIIRSP Frequently Asked Questions and Answers reinforce this: “Taxpayers who have unreported income or unpaid tax are not precluded from filing delinquent international information returns.” A taxpayer can have unreported income or unpaid tax without having failed to report tax.

As revised on November 5, 2020, the DIIRSP are now for “[t]axpayers who have identified the need to file delinquent international information returns who are not under civil examination or a criminal investigation by the IRS and have not already been contacted by the IRS about delinquent information returns . . ..”

Gone is the language excluding taxpayers who need to file delinquent or amended income tax returns to report and pay additional tax.

The DIIRSP continue to provide that “[p]enalties may be assessed in accordance with existing procedures.” Presumably these would include penalties for failure to timely report or pay tax, as well as penalties for failure to file an information return.

The DIIRSP continue to provide that “[t]axpayers may attach a reasonable cause statement to each delinquent information return for which reasonable cause is being asserted.” Taxpayers reporting additional tax under the DIIRSP should also state reasonable cause for their underreporting of tax.

The DIIRSP continue to provide that “[a]s 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 the taxpayer files a satisfactory reasonable cause statement under the DIIRSP, the IRS will not assess penalties against the taxpayer. The IRS has never proposed penalties in one of my DIIRSP cases.

The DIIRSP continue to provide that delinquent Forms 3520 and 3520-A should be filed according to the applicable instructions for those forms, and that other delinquent international information should be attached to an amended income tax return and filed according to the applicable instructions for the amended return.

This simply acknowledges that Forms 3520 and 3520-A are stand-alone information returns, signed separately under oath, whereas other international information returns are not separately signed but are filed as part of an income tax return.

A major drawback to the DIIRSP is that they do not specify how far back a taxpayer should go in filing amended income tax returns and delinquent international information returns. The assessment statute of limitations on an income tax return is three years. The assessment statute of limitations is six years on a tax return that underreports gross income by more than 25%.

The assessment statute of limitations on an income tax return does not begin running until the tax return is filed. There is no assessment statute of limitations on an income tax return beset by fraud, i.e., willful, material underreporting of tax.

The assessment statute of limitations on a penalty for failure to file an international information return is three years. The failure to file an international information return tolls (suspends the running of) the assessment statute of limitations, not only as to assessment of penalty for failure to file the information return, but as to the taxpayer’s income tax return for that year.

But if there is reasonable cause for failure to file the information return, the assessment statute of limitations is tolled only as to penalties for failure to file the information return, and not as to the underlying income tax return.

Where a taxpayer has failed to file international information returns for many years, I apply a five-year rule in filing delinquent international information returns under the DIIRSP. We file Forms 1040X, Amended Individual Income Tax Return, including delinquent international information returns, for each of the last five years, but we include revised Forms 1040, U.S. Individual Income Tax Return, recomputing tax only for each of the last three years.

The IRS has plenty of work. I have never seen it go back more than five years on delinquent income tax returns.

Despite the recent revision of the DIIRSP, I do not use the DIIRSP for taxpayers who have failed to report more than a de minimis amount of tax.

Under the Streamlined Procedures for Residents of the United States, the taxpayer —

• files amended U.S. income tax returns, including any delinquent information returns, as needed for the last three years;
• submits a Form 14654, Certification by U.S. Person Residing in the United States for Streamlined Domestic Offshore Procedures, setting forth reasonable cause for taxpayer’s delinquency, and computing taxpayer’s “miscellaneous Title 26 offshore penalty” equal to 5% of the taxpayer’s high aggregate balance of the taxpayer’s foreign financial accounts as of the end of each of the preceding six years; and
• pays or arranges to pay any tax and interest due on the amended tax returns, and the miscellaneous Title 26 offshore penalty.

The taxpayer incurs no penalty other than the miscellaneous Title 26 offshore penalty under the Streamlined Procedures for Residents of the United States.

Under the Streamlined Procedures for Nonresidents of the United States, the taxpayer —

• files amended U.S. income tax returns, including any delinquent information returns, as needed for the last three years;
• submits a Form 14653, Certification by U.S. Person Residing Outside of the United States for Streamlined Foreign Offshore Procedures, setting forth reasonable cause for the taxpayer’s delinquency; and
• pays or arranges to pay any tax and interest due on the amended tax returns.

There is no penalty under the Streamlined Procedures for Nonresidents of the United States.

Under the Streamlined Procedures, whether for residents or nonresidents of the United States, noncompliance with the Internal Revenue Code which occurred before the last three years is forgiven. The Streamlined Procedures thus offer certainty which the DIIRSP do not.

To qualify as a “nonresident” of the United States for purposes of the Streamlined Procedures, an individual must meet two tests: (1) the individual must have been physically outside of the United States for at least 330 full days in any one or more of the most recent three years; and (2) the individual must not have had a U.S. abode.

“Abode” for this purpose is tantamount to one’s domicile — his primary residence, where he intends to return when away for a time. Thus, temporary absence from the United States, even for a year or more, will not make a person a “nonresident” of the United States for purposes of the Streamlined Procedures.

In sum, the Streamlined Procedures offer the certainty that if a taxpayer files amended income tax returns as needed for the last three years, and submits a satisfactory reasonable cause statement, earlier tax noncompliance will be forgiven.

But under the Streamlined Procedures for residents of the United States, the taxpayer incurs a miscellaneous Title 26 offshore penalty equal to 5% of the high balance of his foreign financial assets as of the end of each of the preceding six years.

There is no penalty under the Streamlined Procedures for nonresidents of the United States. Under the DIIRSP, there is no penalty, but there is uncertainty as to how far back a taxpayer should file delinquent international information returns.

Stephen J. Dunn is a tax attorney in Troy, Michigan. He is the author of the treatise Foreign Accounts Compliance (Thomson Reuters 2017) and Foreign Accounts Compliance Blog. He is also an adjunct professor at Michigan State University College of Law.