May 13, 2022
As many tax practitioners and taxpayers have experienced, the Internal Revenue Service (“IRS”) has increased enforcement of international reporting requirements in recent years. One enforcement tool the IRS appears to be using (at least on a test basis) is the issuance of a Letter 6338 to taxpayers who the IRS believes have an interest in a foreign financial account, foreign entity, and/or foreign asset. The IRS currently provides no information to taxpayers who receive a Letter 6338 other than the letter itself. So, what does the Letter 6338 require of taxpayers?
In the Letter 6338, the IRS first asserts that the agency has received information that the taxpayer receiving the letter has an interest in a foreign financial account, foreign entity, and/or foreign asset. The letter may or may not state how the IRS learned of the taxpayer’s alleged foreign interest(s). The Letter 6338 goes on to state that the taxpayer receiving the letter may have been required to file one or more of various international information returns, including a Foreign Bank Account Report (FinCEN Form 114), IRS Form 3520, IRS Form 3520-A, IRS Form 5471, IRS Form 8938, and IRS Form 8865. The Letter 6338 also states that one or more of these forms may have been required for one or more years.
After asserting that a taxpayer may have been required to file one or more forms for one or more years based on the interest the IRS believes that taxpayer may have (or had) in a foreign financial account, foreign entity, or foreign asset, the letter provides three options for responding. First, the Letter 6338 states that the taxpayer may use the IRS Streamlined Filing Compliance Procedures to correct past non-compliance issues raised in the letter. To pursue this option, the taxpayer must qualify for the Streamlined Filing Compliance Procedures[i].
Taxpayers who pursue this option are supposed to send their streamlined submission as required by Streamlined Filing Compliance Procedures instructions, not to the address in the Letter 6338. The taxpayer should write “Response to Letter 6338” in red across the top of the first page of their streamlined submission Form 14653 or Form 14654. They should also send a letter to the address in the Letter 6338 stating they have made a submission through the Streamlined Filing Compliance Procedures. The Letter 6338 does not state whether the IRS will confirm receipt of the taxpayer’s response.
As a second option, for taxpayers who do not qualify for the Streamlined Filing Compliance Procedures is to file past due or amended tax return(s) with all required forms. Taxpayers who pursue this option should mail the past due or amended return(s) to the address in the Letter 6338 with “Response to Letter 6338” written in red across the top of the first page of such return(s).
The Letter 6338 does not explain how taxpayers should file past due or amended Foreign Bank Account Reports (FinCEN Form 114); these forms are not filed through the IRS. The Letter 6338 also does not state whether any penalties will be assessed against taxpayers who correct their past mistakes through this second option[ii]. And there is no indication whether a taxpayer can or should include a reasonable cause statement with their past due or amended return(s) to avoid the assessment of penalties, as a taxpayer would through the Delinquent International Information Return Submission Procedures.
Lastly, if a taxpayer believes they are fully compliant, the Letter states that the taxpayer should provide a statement stating that they are fully compliant. Specifically, per the Letter 6338, a taxpayer should provide (1) a statement of facts explaining their position and actions taken to become compliant, (2) a statement of facts and supporting documents demonstrating that they are in full compliance; (3) statement of facts and supporting documents showing actions taken to become compliant if such actions have been taken; and (4) their contact information with current residence and mailing address.
Taxpayers pursuing this option are also requested to include a jurat after their statement of facts so that they are signing under penalty of perjury that the facts as stated are true and correct. The Letter 6338 states that the information provided will be checked for accuracy against information received from third parties (but does not state what information the IRS has). The taxpayer’s letter and documents should be submitted to the address provided in the Letter 6338.
The Letter 6338 provides taxpayers with thirty days to respond with a one-time thirty-day extension to respond (or forty-five days for taxpayers residing outside the United States). The request should be made in writing sent to the address in the Letter 6338. This is a very short timeframe for responding to the Letter 6338, even with the extension, especially if complex international information returns must be prepared. While the Letter 6338 states that it does not constitute an examination or initial contact regarding an examination, the letter does state that the IRS may refer the taxpayer for examination for lack of a response or an inadequate response.
If you have received a Letter 6338, making a decision on whether, and how, to respond to this letter may have serious consequences. The IRS can impose large civil penalties for a failure to timely file international information returns. In egregious situations, the IRS may even refer the matter criminally to the Department of Justice for prosecution.
If you have received a Letter 6338 or have any other questions about international information return reporting requirements, please contact one of the experienced Orange County tax attorneys with the Law Offices of A. Lavar Taylor.
Author: Daniel W. Soto, Attorney
[i] For an explanation of the Streamlined Filing Compliance Procedures, please visit our Firm’s March 10, 2022, blog post: IRS Streamlined Filing Compliance Procedures and the Non-Residency Requirement. You may also contact one of our Firm’s experienced Orange County tax attorneys.
[ii] For an explanation of the penalties associated with various international information returns, please visit our Firm’s March 10, 2022, blog post: IRS Streamlined Filing Compliance Procedures and the Non-Residency Requirement. You may also contact one of our Firm’s experienced Orange County tax attorneys.
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