Monthly Archives: March 2023

On May 13, 2021 we posted 9th Cir Reverses Tax Court's Finding That Return Supplied During an IRS Examination is Not a Filed Return where we discussed that the Tax Court had concluded that the signed copy of the Form 1065 faxed to agent was not a return under the Beard test, See Beard v. Commissioner, 82 T.C. 766, 777 (1984), the 9^th Circuit went on to analyze this issue. The 9^th Circuit found that the Form 1065 that Seaview faxed to agent met all the Beard criteria and therefore was a return. 

Now according to Law360, the full Ninth Circuit ruled on March 10, 2023 that the IRS timely disallowed a partnership's $35.5 million loss as the partnership's failure to strictly comply with filing rules meant the agency's readjustment deadline didn't pass, overruling a three-judge panel.

The Ninth Circuit majority ruled that the Tax Court was correct in finding that the IRS' 2010 tax adjustment was timely because of Seaview's failure to comply with Treasury Regulation Section 1.6031(a)-1(e)(1) . 

Under that regulation, Seaview was required to send its returns to a service center in Utah, rather than providing copies of those returns to an IRS agent and attorney, the majority said.

But U.S. Circuit Judge Patrick J. Bumatay disagreed. The IRS has long encouraged taxpayers to file untimely returns with IRS officials who ask for them, and the majority's decision "throws our tax system into disarray" as "taxpayers can no longer trust what the IRS has told them about how to file delinquent tax returns," Judge Bumatay said.

"Based on the ordinary meaning of 'filing,' we should have held that a delinquent partnership return is 'filed' when an IRS official authorized to obtain and process a delinquent return asks a partnership for such a return, the partnership delivers the return to the IRS official in the manner requested, and the IRS official receives the return," Judge Bumatay added.

The Ninth Circuit case focused on what constitutes a tax return that is properly filed with the IRS. The three-judge panel said in its May decision that copies of returns the partnership gave the agency in 2005 and 2007 constituted filings of those returns that kicked off the three-year statute of limitations under Internal Revenue Code Section 6229(a).

Internal guidance at the IRS contradicts the agency's assertions that the partnership's returns had to be filed with the Utah service center for them to be treated as having kick-started the statute of limitations, the three-judge panel found.

But the Ninth Circuit majority disagreed that IRS documents cited by Seaview support its arguments that its returns were properly filed. Moreover, the partnership misses the mark in arguing that the place-of-filing rules apply only to timely filings, as the regulation's "place-for-filing requirement contains no carveout for delinquent returns," the majority said.

As U.S. Circuit Judge Bridget S. Bade said in her dissent in the panel decision, "nothing in the text of the regulation indicates that compliance with the place-for-filing requirement is conditioned upon compliance with the time-for-filing requirement, such that filing at the designated place somehow becomes optional whenever a taxpayer files its return late," the majority added.

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According to Law360, despite speculation of an imposed settlement range, the IRS Independent Office of Appeals doesn't have mandated settlement ranges for penalties involving some international related tax returns, appeals officials said Tuesday.

No national settlement range exists for penalties related to Forms 5471 or 5472, Elizabeth Askey, deputy chief of the Internal Revenue Service appeals office, said on a panel during a tax conference hosted by the Federal Bar Association and broadcast online.

"Each Of These Cases Is Worked On Its Own Merits,
And The Appeals Officer Will Consider All The
Applicable Penalty Relief Criteria," She Said.

Those criteria include reasonable cause and litigation hazards, Askey said. She made those comments in connection with a Dec. 7 memo for IRS appeals office employees working international penalties. It says first-time abatement waivers generally aren't available for relief from international penalties addressed in the Internal Revenue Manual. However, the memo adds an exception for technical workers to allow them to consider and recommend granting first-time abatement penalty relief on some systematically assessed penalties for filers of Forms 5471 and 5472, which are information returns.

Form 5471 is for U.S. persons regarding certain foreign corporations. Form 5472 is for 25% foreign-owned U.S. corporations or foreign corporations engaged in U.S. trades or businesses under Internal Revenue Code Sections 6038A and 6038C.

The memo removes an inconsistency between the penalty-and-interest section and the appeals section of the Internal Revenue Manual, Askey said, adding that the appeals section had said first-time abatement wasn't available for Form 5471 and 5472 penalties.

Joshua Wu of Latham & Watkins LLP called the move to align the international penalty and appeals sections helpful for taxpayers with Form 5471 and 5472 penalty cases in IRS appeals. 

"And because the penalty applies for each foreign corporation, they can add up quickly if a taxpayer has multiple 5471 filing requirements," Wu said. "First-time abatement relief is especially useful for otherwise compliant taxpayers who may have yet to become familiar with the complex international reporting rules and failed to file a Form 5471."

The IRS provided Law360 with the memo but declined to comment further. The memo doesn't address Form 3520, which is used to report transactions with foreign trusts and receipt of certain foreign gifts, or Form 3520-A, the annual information return for a foreign trust with a U.S. owner.

However, Andy Keyso, chief of the appeals office, referred to those forms and said he hears the same speculation regarding a national settlement range being imposed by the IRS or that the office is imposing on its officers.

"There Is Certainly No Settlement Policy Imposed By
IRS Or Imposed By Appeals That Our Appeals Officers
Are Restrained By Here,"
Keyso Said During The Panel. "

National Taxpayer Advocate Erin Collins, in her 2020 Annual Report to Congress, listed the agency's assessment of international penalties as one of the most serious problems facing taxpayers. Her report said the agency's treatment of foreign information reporting penalties under Sections 6038 and 6038A as systemically assessable wasn't legally supportable, was administratively problematic, and hit taxpayers with stress, costs and delays.

There are late-filing penalties under Section 6038 for Form 5471 and under Section 6038A for Form 5472, and for at least the last decade the IRS has automatically imposed them for late original corporate and partnership income returns that included them, Matthew Cooper, a managing director with Deloitte Tax LLP's Washington national tax group, told Law360. Cooper was a panelist Tuesday.

Jason B. Freeman of Freeman Law PLLC told Law360 that the idea of a national settlement range is a major concern for him and that he believes speculation regarding it comes from observations in practice.

"It's a phenomenon that, whether deliberate or not, though I largely believe it's deliberate, is a natural consequence of centralizing the review through the use of technical experts," he said. "Practitioners commonly hear appeals officers refer to the position taken by a 'technical expert.'"

Marini& Associates, P.A. 

 

 

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