If you’re uncooperative, you’re non-compliant. Plain and simple.
An uncooperative taxpayer in the eyes of the IRS is simply one who is non-compliant. Non-compliance can mean many different things such as failing to file tax returns, failing to file informational returns or reports, and/or filing a tax return with a balance due and failing to make payment or payment arrangements.
The rule of thumb for filing that applies here is to always file (assuming extensions are unavailable)
even if not all the information is ready for filing. At a later point in time, when all the information can be obtained, one can always file an amendment to make corrections. However, being late is definitely a red flag for the IRS and shows that the taxpayer is not being proactive with their responsibility to voluntarily file and report information.
In terms of audit risk, all forms are important and none should be left out. In the international arena, the FBAR filing is definitely the most important. After this, it’s the 1040 with Schedule B, plus a properly notated 8938 (if applicable). Also, if ownership in foreign businesses or trust comes into play, international informational reports need to be filed, such as 5471, 5472, 8865, 3520, 3528, 926, etc. Finally, if a taxpayer has expatriated or renounced their citizenship, form 8854 needs to be filed.
In terms of audit risk, all forms are important and none should be left out. In the international arena, the FBAR filing is definitely the most important. After this, it’s the 1040 with Schedule B, plus a properly notated 8938 (if applicable). Also, if ownership in foreign businesses or trust comes into play, international informational reports need to be filed, such as 5471, 5472, 8865, 3520, 3528, 926, etc. Finally, if a taxpayer has expatriated or renounced their citizenship, form 8854 needs to be filed.
The IRS may miss one of these forms in their review, which can trigger an audit. This can happen if a form has been filed previously but is not being filed with the return in question. Another scenario that could trigger an audit is if Fatca information has been exchanged with the IRS, but the taxpayer has not filed the appropriate return or respective forms.
An example would be that a taxpayer has an ownership interest in a foreign corporation and signature authority over the corporation’s foreign financial account. The IRS would want to see a corresponding current year Form 5471, a properly notated Schedule, Form 8938 (if applicable) and Fbar.
If the IRS asks the filer to respond by a certain date, at minimum, either the taxpayer or the practitioner representing the taxpayer needs to respond in time, even if it is merely to say that the full set of information asked for in its letter will be furnished at a later date.
Not responding to letters or phone calls as well as not showing up for appointments with officers of the IRS or providing requested documents are of course also all signs that the taxpayer is being uncooperative.
Another important thing is to keep one’s mailing address updated through an 8822 change of address form so the IRS is always able to correspond with the taxpayer.
All these issues are best addressed with the help of a federally authorized tax practitioner (CPA, attorney, or IRS enrolled agent). It is all too tempting for do-it-yourselfers to get into a mindset of “what can I get away with?” The answer to this question, however, is quite uncertain due to the complexity involved and the unpredictability of audits. Therefore the overall risk of navigating this without professional help is not worth the-not-only potentially costly, time-consuming and stressful audits but also the interest and high penalties for non-compliance.
About Five Stone Tax Advisers
Five Stone Tax Advisers has years of experience negotiating directly with the IRS to get the best possible outcome for you. Our International Tax Advisory and Compliance unit has a team of tax attorneys, certified public accountants and enrolled agents that form a single sourced point of contact that will provide services for all the legal, compliance and financial reconstruction aspects of offshore account cases.
