Posted by: Cory Stigile | August 23, 2017

LB&I Audit Practice – When is an International Informational Return Substantially Complete? by Cory Stigile

On June 19, 2017, the IRS’s LB&I Division issued a “Practice Unit” to provide guidance on the meaning of “substantially complete” for international information return penalty purposes[1].  Practice Units[2] are developed to serve as both job aids and training materials for the IRS and to provide explanations of tax concepts as well as information about specific types of transactions.

Here, the IRS issued an LB&I Concept Unit to discuss the meaning of “substantially complete” with respect to international information return penalties, and in particular, the failure to complete parts of the Form 5471. The Concept Unit also notes that a court might apply the generally applicable substantial compliance doctrine to other international information returns, including:

  1. Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships;
  2. Form 8858, Information Return of U.S. Persons With Respect to Certain Foreign Disregarded Entities;
  3. Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation;
  4. Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts; and
  5. Form 3520-A, Annual Information Return of Foreign Trusts With a U.S. Owner

While the three examples provided in this particular “Concept Unit” illustrate when the IRS may NOT apply the substantial compliance doctrine, the examples set forth seven factors that should be considered in determining whether the taxpayer has substantially complied:[3]

  1. The magnitude of the underreporting, or of the over-reporting, of the erroneous reported
  2. transaction(s) in relation to the actual total amount of that reported type of transaction(s).
  3. Whether the reporting corporation has reportable transactions other than the erroneoustransactions.
  4. reported transaction(s) with the same related party and correctly reported such other
  5. The magnitude of the erroneous reported transaction(s) in relation to all of the other
  6. reportable transactions as correctly reported.
  7. The magnitude of the erroneous reported transaction(s) in relation to the reporting
  8. corporation’s volume of business and overall financial situation.
  9. The significance of the erroneous reported transaction(s) to the reporting corporation’s
  10. business in a broad functional sense.
  11. Whether the erroneous reported transaction(s) occur(s) in the context of a significant
  12. ongoing transactional relationship with the related party.
  13. Whether the erroneous reported transaction(s) is (are) reflected in the determination and
  14. computation of the reporting corporation’s taxable income

The guidance also reminds IRS representatives to keep in mind that estimates are allowed in completing, for instance, Form 5472, if information is not readily available.

The guidance also cites analogous areas of the law, such as when a taxpayer may be “substantially compliant” with the qualified appraisal requirements under IRC Section 170, and the regulations thereunder. In Bond v. Commissioner,[4]  as described in the guidance, the Tax Court evaluated whether the requirements in the regulations related to the substance or essence of the statute.  The Tax Court ultimately determined that the regulatory requirement was held to be directory rather than mandatory, and the taxpayer was held to have substantially complied.  The guidance then concludes that Substantial compliance generally applies to regulatory requirements, but strict compliance applies to statutory requirements, although it also notes that such compliance is a heavily litigated area and is based on the facts and circumstances of each case.

Ultimately, the guidance consults that there is no available guidance on whether other international information returns are subject to the judicial substantial compliance doctrine, but if a Revenue Agent believes it may apply, then Field counsel should be consulted. For practitioners though, the development of the concept of the substantial compliance doctrine reminds preparers and representatives that reasonable cause is not the only exception that may be raised when disputing international informational reporting penalties.

CORY STIGILE – For more information please contact Cory Stigile –  Mr. Stigile is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., a CPA licensed in California, the past-President of the Los Angeles Chapter of CalCPA and a Certified Specialist in Taxation Law by The State Bar of California, Board of Legal Specialization. Mr. Stigile specializes in tax controversies as well as tax, business, and international tax. His representation includes Federal and state civil and criminal tax controversy matters and tax litigation, including sensitive tax-related examinations and investigations for individuals, business enterprises, partnerships, limited liability companies, and corporations. His practice also includes complex civil tax examinations. Additional information is available at


[2] Practice/Process Units are not official pronouncements of the law, and cannot be used, cited or relied upon as such.  Still, they provide useful roadmaps for the underlying authorities related to concepts that are applied during examinations.

[3] CCA 200429007.

[4] Bond v. Commissioner – 100 T.C. 32 (1993)

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