Category Archives: criminal tax law

The Tax Court in Beland, (2021) 156 TC No. 5, found for the taxpayers, that a revenue agent's presentation of a revenue agent report to the taxpayers was an initial determination under Code Sec. 6751(b)(1), which provides that the IRS may not assess a penalty unless the "initial determination" of such assessment is personally approved by the immediate supervisor of the individual making such determination. Since no supervisor had approved the penalties in the report, the IRS could not assess them.  

While the Tax Court in this case says that there is no statutory or regulatory guidance on when an "initial determination" is made, the Court does say there is some caselaw. In Belair Woods, LLC, (2020) 154 TC No. 1, the Court stated that the "initial determination" of a penalty assessment "is embodied in the document by which the IRS Examination Division formally notifies the taxpayer, in writing, that it has completed its work and made an unequivocal decision to assert penalties."

The Court also held in Oropeza, (2020) 155 TC No. 9, that, "depending on how a particular examination is conducted, the taxpayer may receive this notification in a notice of deficiency, or he may receive the notification in a document that the IRS sent him at an earlier date."

In this context, the term "initial determination" of a penalty assessment "denotes a communication with a high degree of concreteness and formality" and represents a "'consequential moment' of IRS action". (Belair Woods)

The IRS began an examination of a married taxpayers' 2011 Form 1040 in 2014.

An RA met with the taxpayers in August 2015. During the meeting, the RA presented to the taxpayers
Form 4549, Income Tax Examination Changes, commonly referred to as an RAR. The RAR included a fraud penalty with a stated amount and contained the RA's electronic signature. The RA completed the RAR before the August meeting, stating in her internal notes that she intended to discuss the RAR during the meeting.

The taxpayers declined to sign the RAR during the August meeting because they did not agree with the fraud penalty. They also declined to sign Form 872, Consent to Extend the Time to Assess Tax, which would have extended the limitations period on assessment for the 2011 tax year. With fewer than 240 days left on the limitations period at the time of the August meeting, the RA informed the taxpayers that they would forgo their appeal rights, their 2011 examination case file would be closed, and the IRS would issue a notice of deficiency.

On August 21, 2015, the RA sent the 2011 examination case file and Civil Penalty Approval Form containing the fraud penalty, as well as an alternative assertion of an accuracy-related penalty pursuant to Code Sec. 6662(a) (accuracy-related penalty), to her immediate supervisor, an IRS Group Manager (GM), for approval.

The GM signed the Civil Penalty Approval Form that same day.

On September 1, 2015, the IRS issued a notice of deficiency to the taxpayer for tax year 2011 that included the fraud penalty without modification from the RAR given to the taxpayers during the August meeting, as well as the alternative assertion of the accuracy-related penalty.

The taxpayers argued that the RAR presented at the August meeting embodied the first formal communication of the RA's initial determination to assert the fraud penalty. Hence the fraud penalty could not be sustained since the RA's immediate supervisor had not given written approval of the fraud penalty before the meeting as required by Code Sec. 6751(b)(1).

The IRS contended that the notice of deficiency, which was issued after the GM provided written approval of the fraud penalty, represented the first formal communication of the initial determination to assert the fraud penalty. Specifically, the IRS claimed that the RA's work remained incomplete and an unequivocal decision to assert the fraud penalty was not made until after the August meeting.

The Court found for the taxpayers, i.e., that the RAR was the initial determination.

The Court said that presenting the taxpayers with the RAR at the closing conference for an opportunity, if not expectation, to legally bind the taxpayers to that assessment sufficiently was a consequential moment in which the RA had made the initial determination to impose the fraud penalty.

The RAR provided to the taxpayers included the title "Income Tax Examination Changes" without additional text indicating to the taxpayers that the form was meant to serve as a discussion tool for purposes of the meeting or that the fraud penalty within it was preliminary.

The RAR also contained the RA's signature, a specific fraud penalty of a determinate amount, and a signature box for the taxpayers to consent to the assessment of that penalty. When the taxpayers refused to sign the RAR or consent to extend the limitations period, the RA informed them that the next step would be to close the taxpayers' 2011 examination case file to issue a notice of deficiency for the unagreed items in the RAR, thereby confirming that the fraud penalty contained in the RAR was in no way tentative and that no further substantive examination work remained.

The Court pointed out that, while the revenue agents in Belair Woods and Oropeza sent the taxpayers the RARs through the mail, the Court has never held that an initial penalty determination must be communicated by letter. Rather, the Court's focus is on the document and the events surrounding its delivery that formally communicate to the taxpayer the IRS's decision to definitively assert penalties. The Court therefore saw no reason to limit the means of communication of the initial determination to the mail; instead, this communication may occur in person during a formal IRS meeting held at the final stage of the examination process.

 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

Filing requirements for foreign trusts, gifts, and accounts are a constant challenge. Even with the best of intentions you could find yourself out of compliance and with IRS and staring at notice CP15 penalty issues that carry serious consequences.

Filing requirements for Form 3520 follows the IRS tax return deadline and is due April 15th. Form 3520-A, which is closely related to to Form 3520, deals with trusts and it has a separate filing deadline.

If You Forgot To File or File Late Either Form 3520 or Form 3520-A Then You May End Up Dealing With An IRS
 Notice CP15, Which Details Penalty Issues.

The CP15 Notice is an IRS Penalty Charge that requires a timely response in the form of a Protest Letter. Writing a sponsor of letter to the IRS explaining why you filed on time or what your reasonable cause for filing late is, will not suffice!

To appeal this penalty you must send to the IRS, at the address shown on page 1 of the notice, a written request to appeal within 30 days from the date of this notice. Your request should include any explanation and documents that will support your position that you filed timely or that you had reasonable cause for not filing these forms timely.

Received a CP15 Notice and 25% Penalty
For Late Filing Form 3520A?

Received a CP15 Notice and $10,000 Penalty
For Failure To File 3520?

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

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

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