IRS practice unit: “Substantial compliance” doctrine - KPMG Global
Share with your friends

IRS practice unit: “Substantial compliance” doctrine, international information return penalties

IRS practice unit: “Substantial compliance” doctrine

The IRS Large Business and International (LB&I) division today publicly released a “practice unit” that addresses what the term "substantially complete" means with reference to international information return penalties.


Related content

The practice unit is part of a series of IRS examiner “job aides” and training materials intended to describe for IRS agents leading practices for specific international and transfer pricing issues and transactions. 

It is available on the IRS practice unit webpage (release date of June 19, 2017).

Substantial compliance doctrine

International information returns must be substantially complete in order for the filer to have met its filing requirement. However, the terms “substantially complete” and “substantially incomplete” are not defined in the Code or regulations. 

As noted in the practice unit, if the filer of an information return did not submit a substantially complete return, then penalties under sections 6038, 6038A, and 6046 may apply. The practice unit provides informal guidance for IRS agents examining a U.S. entity with foreign ownership or foreign-owned U.S. businesses, for purposes of determining whether the required international information return is substantially complete so that the filing requirement is met. 

The practice unit begins by explaining the substantial compliance doctrine—a judicial concept that applies to certain tax returns, elections, and the substantiation of certain deductions. In some cases, courts require strict compliance with the statutory or regulatory requirements, but in other situations, the courts will accept substantial compliance. While the concept of substantially complete has not been the subject of judicial review, the body of case law concerning the substantial compliance doctrine provides guidance as to how a court may interpret whether an international information return is substantially complete. This background can be applied to supplement existing informal guidance on substantial completeness or, when the IRS has not provided specific informal guidance, this background can suggest a general approach for the IRS agent to follow.

KPMG observation

Tax professionals have observed that the practice unit released today provides valuable insight into the IRS viewpoint on application of the substantial compliance doctrine, and the meaning of “substantially complete” for purposes of imposing penalties related to international information return obligations and associated filing requirements. In this practice unit, the IRS discusses these terms and instructs agents how to interpret and apply them—specifically with regard to Form 5471 and Form 5472 filing obligations—and notes how these principles might apply to other international information return penalties. The practice unit also provides guidance regarding when a strict compliance requirement is to apply. Taxpayers with international information return obligations might find it helpful to review this practice unit.

© 2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

KPMG International Cooperative (“KPMG International”) is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Want to do business with KPMG?


Request for proposal