Yearly Archives: 2021

On April 10, 2019, we posted US Taxpayers Are Receiving Automated Penalty Assessments For Late Filed Form 5471's & 5472's - We Can Help!  where we discussed that we have been receiving a many calls from businesses who have received penalty notices regarding late filed or non-filed Form 5471 & 5472's and that we discussed ways to defend against these automatic assessments and request penalty abatement including the Reasonable Cause Defense and First-Time Offender Abatement (FTA) Defense.

The same arguments are equally as effective when defending the even more egregious late filing penalties, associated with Form 3520 & Form 3520-A. 

 

The key to successfully having these penalties abated, more so today than ever before, is to hire an Experienced Tax Attorney, to develop the facts and distinguish adverse case law, especially when requesting penalty abatement based upon "Reasonable Cause".

Penalties for Late Filing or Failure to File Form 3520

IRC section 6677 provides for stiff penalties if Form 3520 is not timely filed or is incomplete or incorrect. The initial penalty is the greater of $10,000 or—

• 35% of the gross value of any property transferred to a foreign trust if a U.S. person fails to report the creation of or transfer to a foreign trust;
• 35% of the gross value of the distributions received from a foreign trust by a U.S. person who fails to report receipt of the distribution; and
• 5% of the gross value of all of a foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (IRC sections 671–679) if the U.S. owner fails to report required information. The owner is also subject to an additional 5% penalty if the foreign trust itself fails to file a timely Form 3520-A [“Annual Information Return of Foreign Trust With a U.S. Owner”; see IRC section 6048(b)], does not provide all required information, or provides incorrect information. 

Penalties for Late Filing or Failure to File Form 3520-A

The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person at the close of that tax year if the foreign trust (a) fails to file a timely Form 3520-A, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return.

Read more at: Tax Times blog

On June 21, 2016 we posted  US Taxpayers Are Receiving Automated $10,000 Penalty Assessments For Late Filed Form 5471's & 5472's - We Can Help! where we discussed that we have been receiving a lot of calls from businesses who have recently received penalty notices regarding late filed or non-filed Form 5471 & 5472's. The Internal Revenue Service imposes an automatic penalty of $10,000 whenever an individual or company is late in filing an information return disclosing their interest in a foreign corporation, regardless of whether there is any associated underreported of income or tax deficiencies.

Now in a recently updated International Practice Unit (IPU), IRS has explained the Code Sec. 6679 penalty for certain U.S. persons that are required to file Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, but fail to file, fail to file on time, or file an incomplete form. The IPU includes, among other things, insight as to what constitutes reasonable cause for failing to file. 

IPUs are not official IRS pronouncements of law or directives and cannot be used, cited, or relied upon as such. Nonetheless, they identify strategic areas of importance to IRS and can provide valuable insight as to how IRS examiners may audit a particular issue or transaction. 

U.S. persons including businesses with at least a 10 percent interest in a foreign corporation or who are officers of a foreign corporation in which any U.S. person owns or acquires a 10 percent interest are required to file a Form 5471 with their tax return to disclose their ownership. 

The IRS has begun to automatically applying the $10,000 penalty for each Form 5471 and Forms 5472 that was filed after the due date.  

There are ways to defend against these automatic assessments and request penalty abatement. There are four defenses that you should consider when assess the penalty for filing an international information return after the due date.

1. Follow the Delinquent Information Return Procedure - First, the taxpayer can file through the Service's procedures for delinquent international information returns. This procedure is appropriate for taxpayers who can establish reasonable cause for their failure to file or whose failure to file has caused no or nominal tax non-compliance. This procedure cannot be used, however, if the taxpayer is already under audit or investigation or has otherwise been contacted by the Service about the delinquent information returns. Under this procedure, the taxpayer files the delinquent returns with a statement of the facts establishing reasonable cause for the failure to file. In the "Frequently Asked Questions" section, the Service explains that taxpayers with tax noncompliance can use this procedure, but that the Service may impose penalties if it does not accept the taxpayer's reasonable cause explanation.
2. Ask for a First-Time Offender Abatement (FTA) - Generally, an FTA can provide penalty relief if the taxpayer has not previously been required to file a return or has no prior penalties (except the estimated tax penalty) for the preceding three years with respect to the same IRS  File (IRM §20.1.1.3.6.1). With respect to a Form 5472 late-filing penalty, the IRM provides for an FTA if an FTA was applied to the taxpayer's related Form 1120 late-filing penalty or no penalty was assessed on the related Form 1120 (IRM §21.8.2.20.2).
3. Reasonable Cause Defense - Under Section 6038 of the tax code, which lays out the information reporting requirements for individuals and businesses with an interest in foreign corporations and the penalties for delinquent filing, penalties may be abated if a reasonable cause exists for the failure to file. However, neither the statute nor the applicable regulations define a reasonable cause standard for the abatement. Treasury Regulations Section 301.6651-1(c) provide a definition of what constitutes reasonable cause for failure to file corporate income tax returns and says that "if the taxpayer exercised ordinary business care and prudence and was nevertheless unable to file the return within the prescribed time, then the delay is due to reasonable cause." and
4. Statute of Limitations - Though a $10,000 penalty may discourage some from filing in international information return after the deadline, there is a greater exposure to not late filing and information return and that is that the statute of limitations for tax returns which is generally three years does not apply for returns that are missing the information reports and the statute remains open indefinitely. Under the indefinite statute of limitations, not only can the IRS make adjustments to items related to the international information returns, but they also can examine any other area on the tax return. 

A Category 2 filer is a U.S. citizen or resident who is an officer or director of a foreign corporation in which a USP has acquired, in one or more transactions:

• . . . stock which meets the 10% stock ownership requirement (described below) with respect to the foreign corporation, or
• . . . an additional 10% or more (in value or voting power) of the outstanding stock of the foreign corporation.

For purposes of both Categories 2 and 3, the stock ownership threshold is met if a USP owns 10% or more of the (i) total value of the foreign corporation's stock, or (ii) total combined voting power of all classes of stock with voting rights. (Reg. § 1.6046-1(a), Reg. § 1.6046-1(c) ). A USP is treated as having acquired stock in a foreign corporation when the person has an unqualified right to receive it. (Reg. § 1.6046-1(f)(1))

A Category 3 filer is:

• . . . A USP who acquires stock in a foreign corporation which, when added to any stock owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation,
• . . . A USP who acquires stock which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation,
• . . . A person who is treated as a U.S. shareholder under Code Sec. 953(c) with respect to the foreign corporation,
• . . . A person who becomes a USP while meeting the 10% stock ownership requirement with respect to the foreign corporation, or
• . . . A USP who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the 10% stock ownership requirement. (Code Sec. 6046, Reg. § 1.6046-1(c))

There are a number of exceptions to the filing requirement for Category 2 and 3 filers, including when multiple persons are required to file Form 5471 and applicable schedules with respect to the same foreign corporation for the same period (in which case the form may be jointly filed).

Guidance for examiners. IRS examiners are instructed to determine whether a taxpayer who is required to file Form 5471 in fact filed a timely and accurate form. As noted above, the Form 5471 is due when the USP's income tax return is due, with extensions (and taking into account if the last day for filing was a weekend or legal holiday), and must be filed with that return. If one was not timely filed, or it wasn't complete, then penalties may be asserted unless the failure was due to reasonable cause.

While identifying Forms 5471 that were required, but not filed, for the exam year(s), examiners are instructed to consider reviewing whether similar failures occurred in earlier tax years. The IPU notes that the related income tax returns for the prior years are not required to be under exam to assess penalties under Code Sec. 6679.

There are ways to defend against these automatic assessments and request penalty abatement. These four defenses should be considered when your receive a $10,000 penalty for filing an international information return after the due date.

Has  Your Company  Been Assessed an
Automatic $10,000 Penalty for a Late Form 5471 or a $25,000 Penalty for a Late Form 5472?

Contact the Tax Lawyers at 

Marini & Associates, P.A.

 

for a FREE Tax Consultation at 

www.TaxAid.com or www.OVDPLaw.com

or Toll Free at 888-8TaxAid (888 882-9243)

 

 

Read more at: Tax Times blog

The Treasury Inspector General for Tax Administration (TIGTA) has released an audit initiated to determine whether IRS is identifying and addressing individual and business taxpayers with underreported income or unfiled returns related to Form 1099-K, Payment Card and Third Party Transactions Income. (Audit Report No. 2021-30-002). 

Auditors identified 314,586 business taxpayers with $335.5 billion in Form 1099-K income "that appeared to have a filing obligation, but were not identified as nonfilers by the IRS," it said. "The problem is that the IRS cannot use third-party information returns, such as Form 1099-K data, to identify business nonfilers and create cases if the taxpayers' accounts are coded as not having an open filing requirement, or no tax account exists because the business has never filed a tax return," the audit said.

According to TIGTA, IRS also does not identify all individual nonfilers with significant Form 1099-K income. Auditors identified some 62,000 individual nonfilers with $575 million in Form 1099-K income who IRS failed to identify as nonfilers. No nonfiler cases were created for these individuals. "While the IRS cannot work all of the nonfiler cases it identifies due to resource limitations, TIGTA identified a significant number (325,060 business nonfilers and 103,991 individual nonfilers with $203 billion and $3 billion in Form 1099-K income, respectively) that were not selected to be worked," the audit said. 

In addition, auditors identified some 45,000 business under reporter cases not selected to be worked by the Field Case Selection unit, with $73 billion in "potentially underreported" Form 1099-K income.

Finally, "TIGTA estimates that if the IRS identified, created, and worked just the nonfiler and under reporter cases with Form 1099-K income of $1 million or more for businesses (Form 1120) and $100,000 or more for individuals, the IRS could potentially assess an additional $5.723 billion in taxes.

 Contact the Tax Lawyers at

Marini & Associates, P.A. 

for a FREE Tax HELP Contact us at:
www.TaxAid.com or www.OVDPLaw.com
or Toll Free at 888 8TAXAID (888-882-9243) 

Read more at: Tax Times blog

The federal district court struck down the IRS's imposition of a 35% civil penalty for failing to timely file a Form 3520, an information return used to report, among other things, transactions with foreign trusts, and limited the penalty to a 5% penalty.

The court ruled that the penalty must be computed based upon the year-end value of the trust's bank account, which meant that the penalty amount was zero and not $3,221,183, as the IRS asserted. The ruling is a clear taxpayer victory and provides much needed guidance by a federal district court on the application of the civil penalties for unfiled Forms 3520 for foreign trusts.

In Wilson, No. 19-cv-5037 (BMC) (E.D.N.Y. 11/18/19), the U.S. District Court for the Eastern District of New York ruled that the IRS could assess only a 5% penalty (not both a 5% penalty and a 35% penalty) for an individual's untimely filing of a 2007 Form 3520. Wilson illustrates that practitioners should carefully review IRS penalty computations and not merely take them for granted.

Information return penalty cases, and particularly unfiled Form 3520 cases, are relatively new to IRS field agents, even the most seasoned IRS agents, and there are only a handful of reported cases that agents can look to for guidance. An agent working an offshore trust case may not fully understand the workings of two complex Code sections, Secs. 6677 and 6048, that must be read in conjunction to determine the penalties accurately. When faced with a technically challenging issue, an agent should reach out for technical assistance to, for example, IRS Counsel, for field advice, but this does not always occur. The agent may, in good faith, believe that he or she got it right, assess the penalty, and close the case.

A reasonable cause exception exists for unfiled information returns, such as Form 3520 or even a Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and this may be a valid defense in most situations. Under Sec. 6677(d), no penalty is imposed "on any failure which is shown to be due to reasonable cause and not due to willful neglect."

However, as taxpayers face more and more steep information return penalties, it is prudent to do more than assert that reasonable cause exists for the untimely filed form to mount a strong defense. Practitioners must understand how the IRS computed the penalty, and as in the Wilson case, determine whether the IRS got it right. This could be a golden nugget in the hands of a taxpayer that significantly reduces the penalty amount and provides needed financial relief.

Civil penalties for late-filed Forms 3520 is an evolving area of the law and taxpayers should be prepared that the agent assigned to the case may not be thoroughly familiar with the intricacies of the Code, especially since there are few published cases. The tax professional should be ready to answer the agent's questions on the law and the facts (particularly, the mechanics of the foreign trust). The IRS's mission is to apply the tax law with integrity and fairness to all. In complex cases, the best results are often reached when both sides work together collaboratively.  

A taxpayer who has received an IRS Notice CP 15 for an unfiled Form 3520 involving a foreign trust would be wise to contact a competent tax counsel, who can review the facts of the case, explain the options, and formulate a defensible position.

 

The key to successfully having these penalties abated, 
more so today than ever before, is to hire an 
Experienced Tax Attorney, to develop the facts and distinguish adverse case law, especially when requesting penalty abatement based upon "Reasonable Cause".

Penalties for Late Filing or Failure to File Form 3520

IRC section 6677 provides for stiff penalties if Form 3520 is not timely filed or is incomplete or incorrect. The initial penalty is the greater of $10,000 or—

• 35% of the gross value of any property transferred to a foreign trust if a U.S. person fails to report the creation of or transfer to a foreign trust;
• 35% of the gross value of the distributions received from a foreign trust by a U.S. person who fails to report receipt of the distribution; and
• 5% of the gross value of all of a foreign trust’s assets treated as owned by a U.S. person under the grantor trust rules (IRC sections 671–679) if the U.S. owner fails to report required information. The owner is also subject to an additional 5% penalty if the foreign trust itself fails to file a timely Form 3520-A [“Annual Information Return of Foreign Trust With a U.S. Owner”; see IRC section 6048(b)], does not provide all required information, or provides incorrect information. 

Penalties for Late Filing or Failure to File Form 3520-A

The U.S. owner is subject to an initial penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust's assets treated as owned by the U.S. person at the close of that tax year if the foreign trust (a) fails to file a timely Form 3520-A, or (b) does not furnish all of the information required by section 6048(b) or includes incorrect information. Criminal penalties may be imposed under sections 7203, 7206, and 7207 for failure to file on time and for filing a false or fraudulent return. 

Sources:

Wilson, No. 19-cv-5037 (BMC) (E.D.N.Y. 11/18/19)

Steven L. Walker

Read more at: Tax Times blog