The “Costs” of Non-Compliance A Timely Reminder as Filing Deadlines Draw Nearer
Are you a U.S. person or company with foreign holdings/operations or a U.S. subsidiary of a foreign company that files international information returns?
If you answered NO, you ought to reconsider whether you should be filing international information returns.
As we move further into the “tax filing season,” it is worth taking a pause to revisit whether you have or will timely satisfy all of your U.S. information return filing obligations, with respect to your global holdings and/or activities.
While avoiding monetary penalties is certainly at the top of the list of reasons motivating U.S. taxpayers to timely file all requisite U.S. information returns, the failure to timley file can also potentially result in the following unwanted consequences:
Statute of limitations (“SOL”) can remain open indefinitely for the entire U.S. tax return (until 3 years from the date the requisite forms are filed with an amended return);
- Potential loss of foreign tax credits (possibly resulting in increased U.S. cash taxes, penalties and interest);
- Unexpected U.S. taxable income recognition (e.g., recognizing an unintended deemed dividend from “busting” a gain recognition agreement or not appropriately certifying a dual consolidated loss); and/or
- Transactional due diligence risk – possible impact on purchase/sale price and/or indemnities related to historical missed information return filings.
Setting aside the monetary failure-to-file penalties, which are non-deductible for tax purposes, the impact on the SOL should not be ignored. Generally, the SOL for the IRS to assess all income taxes is within three years after a U.S. taxpayer’s original income tax return is filed. However, the 2010 HIRE Act changed the rules by extending the SOL indefinitely on a U.S. taxpayer’s entire income tax return, where the taxpayer fails to file one of the international information returns. If, however, the U.S. taxpayer can establish “reasonable cause” for the failure to file a missing international information return, there is potential for some relief. That is, the limitations period may be left open only for the item, or items, related to the failure to disclose when the required international information return is not filed.
Summarized below is the line-up of the “usual suspects” that, if not timely filed, can result in(absent the ability to demonstrate “reasonable cause” or other standard noted below) the listed monetary penalties as well as, in some cases, the SOL remaining open for the entire return, until filed.
In light of the above, we recommend U.S. taxpayers review their international information return tax filing requirements to ensure that all required filings are scheduled for completion, or have been completed, for the current and prior years.