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Part 20. Penalty and Interest

Chapter 1. Penalty Handbook

Section 9. International Penalties

20.1.9  International Penalties

20.1.9.1  (11-20-2007)
Overview

  1. International information return penalties are civil penalties assessed on a U.S. person for failure to timely file complete and accurate international information returns required by specific Code sections.

    1. U.S. taxpayers are required to report their world wide income. International information returns provide information that the IRS has no other method of securing. The information returns provide a vehicle for verifying that the correct income tax is assessed.

    2. Many of the returns have been required since 1962 and the penalty provisions have been in place since 1984. Although this IRM includes current law, penalties may be assessed for periods under prior law.

    3. Generally, the returns are required for entities or events that the taxpayer has "control" over.

    4. Returns submitted that are not complete and accurate are considered as not having been filed.

    5. Some returns are considered unfiled if the taxpayer does not provide required information when requested and penalties apply even if the required return has been submitted.

    6. Penalties may be assessed prior to the filing of the required information return or the submission of required information.

    7. U. S. persons frequently have multiple obligations for each year and multiple penalty assessments. Penalties apply to each information return that was required to be filed for each year.

  2. For international return processing, see IRM 3.15.128 and IRM 3.15.129.

  3. The exhibits listed in the table provide the following information:

    Exhibit # Title
    20.1.9-1 Quick Reference Guide to International Penalties
    20.1.9-2 Reference Guide to Forms
    20.1.9-3 Quick Guide for Reference Numbers to Process International Penalty Assessments
    20.1.9-4 International Penalties Subject to or Not Subject to Deficiency Procedures
    20.1.9-5 Reasonable Cause Relief

20.1.9.1.1  (11-20-2007)
Common Terms

  1. U. S. Person. Unless otherwise indicated, the term "U.S. person" includes individuals, corporations, partnerships, estates or trusts. Penalties cannot be assessed on married taxpayers jointly but can be assessed on each person separately. See IRC section 7701(a)(30).

  2. Assessable Penalties. Penalties listed in this section, unless otherwise noted, are assessable penalties and are not covered by deficiency procedures of IRC section 6211. For these penalties, there is no 30-day letter, no agreement form and no notice is required prior to assessment. See Exhibit 20.1.9-3, Quick Guide for Reference Numbers to Process International Penalty Assessments, for a list of reference numbers. The reference number identifies the applicable Code section and dictates the explanatory language in the assessment notice.

  3. Statute of Limitations. Penalties that are not considered taxes generally have no statute of limitation for assessment.

  4. Reasonable Cause applies to most but not all of the penalties. Reasonable cause will be considered by the examiner per IRM 20.1.1 prior to assessing the penalty. See Exhibit 20.1.9-5, Reasonable Cause Relief, for a quick reference. Specific information is listed with the related penalty and Code sections.

    1. The fact that reasonable cause relief was granted to the related income tax return does not automatically provide relief for the failure to timely file the information returns. Among the many considerations is the fact that the penalties for failure to file the information returns are not limited to the first five months under IRC section 6651(a)(1) that the tax return is delinquent.

  5. Appeal rights.

    1. Reserved.

  6. Specific Powers of Attorney or Authorizations to Disclose Tax Information are required prior to discussing penalty issues with a person other than the person subject to the assessment or required to file the returns.

  7. Information returns are generally required to be attached to the related income tax return. In addition, certain information returns must also be separately filed with the IRS campus site identified in the instructions for such form. Any information return required to be attached to the related income tax return is due on the due date of the income tax return, including extensions. Examiners should focus on the requirement to attach the information returns to the related income tax return when determining whether or not the required return has been filed timely. Form 3520 (MFT 68) and Form 3520-A (MFT 42) are processed to Master File, and are not required to be attached to the income tax return.

  8. Civil Penalty cases are not controlled on AIMS. However, penalties assessed by Examination are associated with an examination on the taxpayer. Use CFOL "Z" to identify closed examinations.

  9. Campus examiners are authorized to assess penalties on late filed or incomplete information returns received at the Campus. Campus employees can abate penalties asserted by Campus personnel.

    Note:

    All other abatements must be approved by the organizational unit that authorized the assessment (LMSB or SBSE Examination).

  10. The Examiner determines whether a taxpayer has failed to comply with the reporting/filing requirements, solicits any facts regarding reasonable cause from the taxpayer, and decides if reasonable cause applies.

    1. If reasonable cause does not exist, or exists for only a portion of the time, the examiner then computes the amount of the penalty to be assessed.

    2. The penalties are assessed by Examination on Form 8278 with a Form 886-A attached.

  11. Penalty Tax Adjustments. Some of the penalty Code sections include penalty adjustments to income tax or penalties that are based on the amount of income tax. Penalties based on the amount of income tax, income tax deficiency, adjustments to taxable income, tax credits or income tax computations are return related penalties and are covered by deficiency procedures. Return related penalties must be included in an examination report. These penalties are noted in Exhibit 20.1.9-4 for information purposes.

  12. Related Statute for Assessment. IRC section 6501(c)(8) extends the statute for assessment on the related income tax return regarding items related to the information required to be reported until 3 years after the information required by IRC sections 6038, 6038A, 6038B, 6046, 6046A and 6048 is furnished to the Secretary (effective for returns due after 8/5/1997, except for information required by IRC section 6038B which is effective for returns due after 12/31/1984). Examiners should be aware that filing or failing to file information returns may affect the statute for assessment on the related income tax returns.

  13. Notice. A notice and demand for payment is a legally due and payable assessment (bill) mailed to the taxpayer.

  14. Notice lettersare pre-assessment requests for returns (or complete and accurate return information) sent by certified mail to the taxpayer.

20.1.9.1.2  (11-20-2007)
Other Penalties

  1. U.S. and foreign taxpayers are subject to criminal penalties for willful failure to file a return (IRC section 7203) or filing a false or fraudulent return (IRC sections 7206 and 7207).

  2. IRC section 6662(e), Substantial Valuation Misstatement, and IRC section 6662(h), Increase in Penalty in Case of Gross Valuation Misstatements, address the coordination of IRC section 482 transfer price adjustments on returns ending after November 5, 1990.

  3. The following reporting/filing requirements are subject to Failure to Deposit penalties as discussed in IRM 20.1.4:

    IRC section Subject Applicable Form
    1441 and 1442 Withholding of Tax on Nonresident Aliens and Foreign Corporations Form 1042
    Form 1042-S
    1445 Withholding of Tax on Dispositions of U.S. Real Property Interests Form 8288
    Form 8288-A
    1446 Withholding Tax on Foreign Partner’s Share of Effectively Connected Income Form 8804
    Form 8805
    Form 8813

20.1.9.1.3  (11-20-2007)
31 U.S.C. 5321 -- TD F 90-22.1, Report of Foreign Bank and Financial Accounts (FBAR)

  1. Generally, a U.S. person having one or more foreign accounts with maximum balances totaling over $10,000 for any calendar year is required to maintain records and file Form TD F 90-22.1 with the Internal Revenue Service by June 30th of the following year.

  2. A penalty applies—

    1. Under 31 U.S.C. 5321(a)(5)(B) for any non-willful violation of the recordkeeping and filing requirements under 31 U.S.C. 5314, occurring after October 22, 2004,

    2. Under 31 U.S.C. 5321(a)(5)(C) for any willful violations of the recordkeeping and filing requirements under 31 U.S.C. 5314,

    3. Under 31 U.S.C. 5314, 5321(a)(6)(A) for negligently failing to meet the filing and recordkeeping requirements for financial institutions or non-financial trades or businesses under 31 U.S.C. 5314 and 31 C.F.R. 103.24, or 31 C.F.R. 103.32, and

    4. Under 5321(a)(6)(B) for a pattern of negligent violations of any provision of 31 U.S.C. 5311-5332 .

  3. See IRM 4.26.16 for FBAR penalty computation rules and mitigation guidelines. See IRM 4.26.17 for FBAR penalty procedures.

  4. See 31 U.S.C. 5321(b) for the statute of limitations on assessment and collection.

20.1.9.2  (11-20-2007)
Assessment Procedures for Penalties Not Subject to Deficiency Procedures

  1. This section provides general procedures common to the penalties discussed in this section. Exceptions are noted in the discussion of the specific penalties.

  2. Generally, the penalties included in this section are asserted by international examiners, revenue agents, or tax compliance officers after inquiring about the event, information return or requesting the return from the taxpayer.

    Note:

    In certain situations, the examiner will make the determination that the return is required without first contacting the taxpayer with respect to an income tax examination.

  3. Examiners must perform appropriate research when addressing these penalties. Technical Advisors can provide additional information on specific provisions. The penalty amounts shown reflect current law. See Exhibit 20.1.9-1, Quick Reference Guide to International Penalties. For other detailed examination procedures on international penalties, refer to IRM 4.60.8, International Examination and Processing Procedures.

  4. Deficiency procedures under IRC section 6211 do not apply to penalties discussed in this section. These penalties are noted in Exhibit 20.1.9–4 for information purposes.

  5. U.S. and foreign taxpayers are subject to criminal penalties such as willful failure to file a return (IRC section 7203) and filing a false or fraudulent return (IRC section 7206 or 7207). If at any point these Code sections apply, examiners must discuss the situation with their managers and the fraud specialist before further contacting the taxpayer.

  6. Penalties are assessed on U.S. persons. See IRM 20.1.9.1.1.

  7. Requirement to File. The examiner must determine that the information return was required to be filed before referring to the information listed under the individual Code section and reference number. The following types of information support a presumptive requirement to file an international information return:

    1. Testimony of the taxpayer or other reliable persons.

    2. Late filed return.

    3. A filed return indicating that information returns are due for prior or subsequent periods or for related entities.

    4. A filed return that does not include all the required information or the required supporting information was not provided when requested.

    5. Information that the taxpayer has control over, is receiving benefits from, is receiving distributions or income from an account in the name of a foreign entity.

    6. Statement in the name of the foreign entity addressed to the taxpayer.

    7. Information received from promoter investigations that indicates the taxpayer owns or has control over a foreign entity, is controlled by a foreign entity, or meets another filing requirement.

  8. Fact of Filing. The examiner must determine that the information return (with complete and accurate information) has not been filed or was filed after the required date.

    1. Generally, the information returns or statements are required to be attached to the related income tax return and the due date is the same as the related income tax return including extensions. Specific exceptions are noted for each penalty separately.

    2. Some returns have dual filing requirements and the penalty can apply for failure to file either return.

    3. Examiners should focus on the requirement to attach the information return to the related income tax return when determining whether or not the required returns have been filed timely.

  9. Referral. Domestic examiners must make a referral on the Specialist Referral System for International Assistance when they are assigned a case which involves international information returns. The web site is http://srs.web.irs.gov/Default.asp. SBSE examiners have been delegated the authority to issue penalty letters when referrals are not accepted, and to make all other penalty determinations. See IRM 1.2.43, Delegations of Authority for the Examining Process. When the examiner secures a required return that was not originally filed, the examiner should attach the return and enter appropriate comments in the workpapers.

  10. Penalty Case Control. When an examiner determines that an information return is due, has not been filed, and that a penalty applies, the examiner should request approval for a penalty investigation from the manager, establish penalty case controls and prepare a penalty case file. The file must include the information that supports the requirement to file and establishes that the information return has not been filed.

  11. Request the Returns. Examiners should inform the taxpayer of the requirements to file the information returns and of the intent to assess the penalty for failure to comply. The initial penalty can be assessed without advanced notification. However, examiners should inform the taxpayer prior to assessing the penalty. Examiners must take steps to secure appropriate documentation to support the requirement to file the returns. This information may also be necessary for the related income tax examination.

  12. Notice Letter Provisions. Penalties under IRC sections 6038, 6038A, 6677 and 6679 have "notice letter" provisions, and a continuation penalty may apply. The provisions state that:

    1. If the required returns are not filed on or before the 90th day after the notice letter is issued, additional penalties of $10,000 per month (or fraction thereof) may be assessed.

    2. The penalty continues to be increased until the required information or information returns are filed or the maximum penalty is assessed.

    3. The maximum penalty amount for the continuation penalty is different for each Code section and is referenced in each penalty section.

  13. Notice Letters. Examiners must issue notice letters at the earliest date possible. The taxpayer must respond within 30 days after the date the letter was issued. Notice letters also provide an opportunity for the taxpayer to produce information to prove that the information return in question was not required to be filed. Notice letters are available on http://publish.no.irs.gov/catlg.html.

    Note:

    Use search feature to determine the appropriate Letter to be sent to the taxpayer. Be sure to select Letter for the product type.

    1. Notice letters are addressed to the U.S. person responsible for ensuring that the required returns are filed and include the name of the related foreign entity.

    2. Notice letters must be signed by an examination group manager in SBSE or an international examiner in LMSB.

    3. The notice letters instruct the taxpayer to mail the information returns to the address of the examiner issuing the letter.

    4. There is no provision in the Code or regulations for an extension of the 90-day period described in the notice letter. However, the running of the 90-day period may be suspended by other Code sections not specific to these penalties.

  14. Reminder Letters. In many situations, it is advisable to send a follow-up letter 45 days after the notice letter is issued if no response is received.

    1. If no response to the reminder letter is received, no additional letter is required prior to assessment of the penalty.

    2. If the notice letter was issued based on presumptive evidence, and the taxpayer did not provide evidence contrary to our information, assess the penalty.

  15. Secured Returns. When an examiner secures a delinquent information return and/or statement, determine if it provides all of the required information and is accurate. If the return is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and correct. For complete and accurate returns, perform the following actions:

    STEP Action
    1. Date stamp and make 1 photocopy of the document.
    2. Associate the original with the related income tax return. Often, the received date of the information return affects the statute for assessment on the related income tax return. See IRC section 6501(c)(8).
    3. Place the photocopy in the penalty case file. The return received will be kept in the penalty case file and the related income tax file.

  16. Reasonable Cause. Examiners must consider any reason a taxpayer provides in conjunction with the guidelines, principles and evaluating factors relating to reasonable cause based on the facts and circumstances. Examiners should be mindful of the fact that, generally, these penalties apply to individuals who have business or investment activities in foreign countries, and, as such, general business care and prudence requires researching the filing and tax obligations of all jurisdictions. See Exhibit 20.1.9-5,IRM 20.1.1, IRC sections and Treas. Regs. relating to the specific penalty.

    1. Reasonable cause should not be considered until the taxpayer is in compliance with respective provision of the law.

    2. Reasonable cause does not apply to the initial penalty in some Code sections.

    3. Many of the penalty sections have specific provisions for reasonable cause.

    4. Examiners must issue a determination letter if the taxpayer requests reasonable cause consideration and it has been denied.

    5. Reasonable cause determinations can only be made by the unit that asserted the penalty (e.g., Campus cannot allow reasonable cause for a penalty asserted by LMSB or SBSE Examination).

  17. Compute the Penalties. After the examiner has determined that the penalty applies, the examiner must compute the amount of the penalty and prepare the assessment documents, Form 8278 and Form 886-A (required). The penalty amounts are discussed in the section for each penalty.

    1. Penalties will be computed until the date returns or the required information is received or until the maximum penalty amount is reached.

    2. For penalties without notice letter provisions or if no notice letter was issued: (i) Assess penalties promptly after receipt of the required returns or return information, or (ii) If no return is received, 90 days after the request for the return.

  18. Penalties with a Notice Letter Provision. Generally, the initial assessment(s) package should be prepared on or after the 125th day, but before the 150th day after the date that the notice letter was issued. The penalty would be for the initial penalty plus 2 months of the continuation penalty.

    Example:

    For one delinquent Form 5471 the first assessment of the penalty would be $30,000:

    Reference Number 623 $10,000
    Reference Number 619 $20,000

  19. The examiner must maintain a copy of the initial penalty case file for subsequent assessments if noncompliance continues.

    1. The second and subsequent (if applicable) assessments of the continuation penalty should be made after 215 days from the date of the notice letter, unless the maximum penalty amount has been reached.

    2. This penalty will be for 3 months: $30,000 for each required return.

      Example:

      For one Form 5471:

      1. Reference Number 623 $ 00.00
      2. Reference Number 619 $ 30,000
      This would be the maximum penalty for IRC section 6038 for one unfiled Form 5471.
      3. The process in "2" should be continued every 3 months until the maximum penalty is reached or until an administrative decision is made to suspend additional assessments.

  20. Approval. IRC section 6751 requires that managers approve the penalties prior to assertion. Managers must approve the ERCS case control, sign SBSE notice letters and approve the case prior to closing.

  21. Statute of Limitations. Assessable penalties that are not considered taxes have no statute of limitation for assessment. However, whenever possible, agents should make assessments within 3 years of the date that a complete and accurate information return was filed.

  22. Payment. To process payment:

    1. Use Form 3244 to process payments.

    2. Use Transaction Code (TC) 640 to indicate an advance payment.

    3. Use TC 670 for any payments received after assessment.

20.1.9.2.1  (11-20-2007)
Penalty Assessment – Form 8278, Computation and Assessment of Miscellaneous Penalties

  1. The examiner will enter the dollar amount of the penalty on Form 8278 and attach Form 886-A, Explanation of Items.

  2. Form 8278 is the assessment document for the Civil Penalty Module. The penalty assessment is posted to the module using the Reference Numbers (RNs) reflected on the Form 8278. The RNs included in section "C" of Form 8278 are the RNs referred to in Exhibit 20.1.9–3, Quick Guide for Reference Numbers to Process International Penalty Assessments.

    1. Include the "continuation penalty" (RN 619) on the same Form 8278 as the initial penalty amount. Subsequent assessments of the continuation penalty should include a zero assessment for the RN of the initial penalty.

    2. Prepare a separate Form 8278 for each tax year and Code section for which a penalty assessment is made.

    3. If a penalty investigation is started and the penalty is waived for reasonable cause or other reasons, appropriately document the workpapers.

  3. Attach Form 886-A to each Form 8278 and include the following information:

    1. Name and TIN of the U. S. person required to file the information return.

    2. Name and TIN of the entity for which the return was required to be filed (if applicable).

    3. Applicable Internal Revenue Code section.

    4. Computation of penalty.

    5. Date the notice letter (if applicable) was issued or returns requested.

    6. Any other significant correspondence.

    7. Date the information or information return was received.

    8. Discussion of facts and law as necessary, e.g., reasonable cause for not filing; information on ATAT involvement and the promotion; pattern of filing information returns; or other related tax violations (e.g., understatement of income tax related to the failure to file the information returns or failure to file FBAR returns.)

    Reminder:

    These penalties should not be entered on Forms 870, 4549, 4549-A, or any other examination report. For preparing the International Examiners, report refer to IRM 4.60.9.

  4. The taxpayer’s signature is not required with respect to these penalties. If the taxpayer agrees to the penalty assessment, note it in your workpapers and on Form 886-A.

20.1.9.2.2  (11-20-2007)
Penalty Case File Assembly and Procedures

  1. Examiners will establish a separate penalty case file for penalties that contains all relevant information and follow current procedures for case file assembly. The "penalty report" consists of Form 8278 and Form 886-A with explanation and computation.

    Note:

    Form 5344 is not used.

    1. Prepare a separate penalty case file with a separate Form 8278 when penalties will be assessed under more than one IRC section or for more than one tax year.

    2. Identify multiple assessments for the same taxpayer.

      Reminder:

      Assessable penalties are assessed on individual taxpayers even when a Married Filing Joint return is filed.

    3. Request a current IMFOL/BMFOL "I" for the TIN that the case is to be assessed on. If other civil penalties are on the module, request IMFOL/BMFOL "T" and analyze the accounts. Comment if the penalty is not a duplicate and should be assessed.

  2. Keep the penalty case file separate from any related income tax file(s). Identify related penalty case files as "related returns." Keep a copy of the following in the penalty case file:

    1. A copy of the information return (if secured – with stamped received date),

    2. Form(s) 8278 and Form 886-A with complete explanation of penalty adjustment, and

    3. Copies of any relevant documents from the related income tax case file.

  3. Include a copy of the following with your workpapers:

    1. The secured information return and/or statements (if filed).

    2. Page "one" of the income tax return with a comment that you inspected the return and the required form was not attached.

    3. Copy of the notice letter with certified mail receipt.

  4. Prepare the outside of the penalty case file as follows:

    1. Attach Form 3198 to the outside of the penalty case.

    2. The MFT is 55 for individuals or MFT 13 for entities.

    3. Indicate the Reference Number and penalty amounts outside the folder. For example, "Assess IRC section 6038 (or 6677, etc.) Civil Penalty indicated on Form 8278."

    4. Indicate if the case qualifies for post-assessment appeals and the taxpayer has made an appropriate request.

  5. For cases submitted to Appeals, be sure to:

    1. Attach Form 4665,

    2. Include taxpayer's written request for appeal of penalties, and

    3. For postassessment penalty appeals (see IRM 20.1.1.4.1.2), include proof that such assessment has been made by the Service.

20.1.9.2.3  (11-20-2007)
Claims or Penalty Abatement Requests

  1. In certain instances, taxpayers will ask for reconsideration of a penalty that has been assessed but not paid. The examiner will determine whether all the facts were considered when the penalty was assessed.

    Note:

    If, during a taxpayer contact, it appears there may be a hardship situation, or the taxpayer insists on being referred to the Taxpayer Advocate Service (TAS), or the contact meets TAS criteria, see IRM 21.1.3.18, TAS Guidelines for Referral, or IRM 13.1.7.2, TAS Criteria.

  2. In the case of Wheaton vs. USA, 95-12 U. S. Cas. P50, 526, the court held that after a penalty is assessed the taxpayer must make "…a 'plausible and believable' assertion that, viewing the facts and law most favorably to the government, the government is certain to fail on the merits of its case. In his affidavit, plaintiff simply denies control over the ten foreign corporations as that term is used in IRC section 6038. Although in theory this allegation may be plausible and believable, the Court does not deem it sufficient to shift the burden of proof to the government."

  3. Payment of claims on penalties or abatement of penalties must be approved by the organizational unit that assessed the penalties.

    1. Collection or Campus personnel do not have delegated authority to abate or decrease penalties in this chapter assessed by Examination (LMSB or SB/SE).

    2. Delinquent information returns received with a claim or abatement request must be referred to the Examination function that assessed the penalty. The referral package must include the assessment documents.

20.1.9.3  (11-20-2007)
IRC Section 6038 – Information Reporting for Foreign Corporations and Partnerships

  1. IRC section 6038 provides a monetary penalty of $10,000 for failure to furnish information with respect to certain foreign corporations and partnerships. The penalty applies to information for annual accounting periods beginning after August 5, 1997 for corporations and December 31, 1999 for partnerships.

  2. If the information is not submitted within 90 days of notice by the Service, an additional penalty will apply.

    1. The continuation penalty is $10,000 for every 30-day period (or fraction thereof) that the information is not received.

    2. The maximum continuation penalty is $50,000.

  3. The filing requirements are the same for entities electing to be treated as associations taxable as corporations or partnerships under Treas. Reg. 301.7701-3.

  4. See IRC section 6501(c)(8) for statute of limitations on assessment.

20.1.9.3.1  (11-20-2007)
Reporting/Filing Requirement – Form 5471

  1. IRC section 6038(a) and Treas. Reg. 1.6038–2(a) require a U.S. person to furnish information with respect to certain foreign corporations. The required information includes, among other things, foreign corporation entity data, stock ownership data, financial statements, and intercompany transactions with related persons.

  2. A taxpayer meets the requirement by providing the required information on a timely filed Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. A Schedule M attached to Form 5471 is used to report related party transactions. The information is for the annual accounting period of the foreign corporation ending with or within the U.S. person’s taxable year. Form 5471 is filed with the U.S. person’s income tax return on or before the date required by law for the filing of that person’s income tax return, including extensions. Treas. Reg. 1.6038–2(i).

  3. Regulations provide exceptions for attaching the Form 5471 to the related income tax return when the return is filed by another shareholder.

    1. The taxpayer must provide a copy of the filed Form 5471 when requested.

    2. The non-filer must attach a statement to its income tax return with both the name and TIN of the person filing the Form 5471. If the required return was not filed timely by the other party, the penalty applies.

  4. Revenue Procedure 92-70 provides for summary reporting of dormant corporations. By using the summary filing procedure, the filer agrees that it will provide any information required within 90 days of being asked to do so on audit. The monetary penalty or the foreign tax credit reduction can be imposed if the information is not provided within the 90 days. Revenue Procedure 92-70 applies in its entirety.

  5. Reasonable Cause Decision Tree provides general information on the requirements to file and the exceptions to the penalties for Failure to File Form 5471. See http://sbse.web.irs.gov/opi/Documents/FTF%205471%20DecisionTree.pdf.

20.1.9.3.2  (11-20-2007)
Reporting/Filing Requirement – Form 8865

  1. IRC section 6038(a) and Treas. Reg. 1.6038–3(a) require a U.S. person to furnish information with respect to certain foreign partnerships. The required information includes, among other things, foreign partnership entity data, ownership data, financial statements, and intercompany transactions with related persons.

  2. A taxpayer meets the requirement by providing the required information on a timely filed Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

  3. Schedule N, attached to Form 8865, is used to report related party transactions. The information is for the annual accounting period of the foreign partnership ending with or within the U.S. person’s taxable year.

  4. Form 8865 is filed with the U.S. person’s income tax return on or before the date required by law for the filing of that person’s income tax return, including extensions. Treas. Reg. 1.6038–3(i).

  5. Generally, examiners should verify fact of filing by inspecting the original income tax return. When examiners believe that neither Form 5471 or Form 8865 was filed timely, examiners should be sure to secure them and attach copies to the related income tax return.

20.1.9.3.3  (11-20-2007)
Penalty Computation

  1. Initial Monetary Penalty. Reference Number 623. The initial penalty is $10,000 per failure to timely file complete and accurate information on either Forms 5471 or 8865. The penalty for Form 5471 is applicable to annual accounting periods beginning after August 5, 1997. The penalty for Form 8865 is applicable to annual accounting periods beginning after December 31, 1999.

    1. The penalty is assessed for each form (each foreign corporation and/or partnership) for each year that was not timely filed with complete and accurate information.

    2. Reasonable Cause. Treas. Reg. 1.6038-2(k) provides relief to certain taxpayers.

  2. Continuation Penalty. Reference Number 619. If failure continues for more than 90 days after the Service mails notice of such failure to the taxpayer, the penalty shall be increased in the amount of $10,000 for each 30-day period, or fraction thereof, during which such failure continues after the expiration of the 90-day period.

    1. The maximum continuation penalty for IRC section 6038(b) is $50,000 per required Form 5471 or 8865.

    2. For assessments prior to July 2005, the total penalty amount including the continuation penalty was assessed using Reference Number 623.

  3. The maximumtotal penalty under IRC section 6038(b) is $60,000 per return required to be filed per year ($10,000 Initial Monetary Penalty plus $50,000 maximum Continuation Penalty).

    Example:

    Taxpayer files Form 1120 return for the 2005 calendar year on March 15, 2006, but does not file the 3 required Forms 5471. On February 1, 2007, notice letter is issued to the taxpayer regarding the returns required to be filed and the penalty to be assessed. Taxpayer files the 3 Forms 5471 on July 27, 2007. The penalty is calculated as follows:

      1. $30,000 for the initial failure to file, plus
      2. $90,000 continuation penalty
    Computed: 3 months X $10,000 X 3 returns for the period of May 1, 2007 (the end of the 90-day period) through July 27, 2007.

20.1.9.4  (11-20-2007)
IRC Section 6038(c) – Reduction of Foreign Tax Credit

  1. IRC section 6038(c) provides for a reduction in foreign tax credit for a failure to furnish information with respect to a controlled foreign corporation, or a controlled foreign partnership, that is required to be filed under IRC section 6038.

  2. The foreign tax credit reduction is limited to the greater of $10,000 or the income of the foreign entity for the applicable accounting period.

  3. For reporting/filing requirements, see IRM 20.1.9.3.1. and IRM 20.1.9.3.2.

20.1.9.4.1  (11-20-2007)
Penalty Computation

  1. Application of IRC section 901. The amount of taxes paid or deemed paid is reduced by 10 percent.

  2. Application of IRC sections 902 and 960. The amount of taxes paid or deemed paid is reduced by 10 percent. The 10 percent reduction is not limited to the taxes paid or deemed paid by the foreign corporation with respect to which there is a failure to file information but may apply to the taxes paid or deemed paid by all foreign corporations controlled by that person.

  3. Additional Penalty for Continued Failure. If such failure continues for more than 90 days after the Service mails notice of such failure to the taxpayer, the amount of the reduction is increased by an additional reduction of 5 percent for each 3-month period, or fraction thereof, during which such failure continues after the expiration of the 90-day period.

  4. Limitation. The amount of the foreign tax reduction for each failure to furnish information with respect to a foreign corporation may not exceed the greater of:

    1. $10,000, or

    2. The income of the foreign corporation for its annual accounting period with respect to which the failure occurs.

      Note:

      No taxes may be reduced more than once for the same failure. Also, the regulations have not been updated; where the IRC currently refers to a foreign corporation’s "post 1986 undistributed income," the regulations still refer to "accumulated profits."

  5. Not every controlled foreign corporation carries a foreign tax credit to the U.S. income tax return. The reduction per IRC section 6038(c) is rarely asserted.

  6. Coordination with IRC section 6038(b). The amount of the IRC section 6038(c) penalty of reducing foreign tax credit must be reduced by the amount of the dollar penalty imposed by IRC section 6038(b).

20.1.9.5  (11-20-2007)
IRC Section 6038A(d) – Information Reporting for Foreign-Owned Corporations

  1. IRC section 6038A(d) provides a penalty for a foreign-owned domestic corporation failing to report required information or failing to maintain records.

  2. Reporting/Filing Requirement. IRC section 6038A(a) and Treas. Reg. 1.6038A–2 generally require a reporting corporation to furnish the following information:

    • name,

    • business address,

    • nature of business,

    • country in which organized or resident,

    • nature of relationship to reporting corporation, and

    • description and value of transactions between reporting corporation and related party.

  3. Form 5472 is filed as an attachment to the U.S. income tax return by the due date of that return, including extensions. But, if the reporting corporation's income tax return is not timely filed, Form 5472 nonetheless must be timely filed at the campus where the return is due. When the income tax return is ultimately filed, a copy of Form 5472 must be attached.

    1. A taxpayer meets the requirement by timely filing the required information on Form 5472.

    2. A separate Form 5472 must be filed with regard to each related party that has reportable transactions with the reporting corporation.

    3. A taxpayer is also specifically required to maintain relevant records sufficient to allow determination of the correct tax treatment of the transactions with a related party (as defined in IRC section 6038A(c)(2)).

  4. Small Corporation Exception.

    1. A reporting corporation that has less than $10,000,000 in U.S. gross receipts for a taxable year is not subject to the record maintenance requirement or the authorization of agent requirement for such taxable year.

    2. If the total value of all gross payments (both made and received) from foreign related parties with respect to related party transactions for a taxable year is not more than $5,000,000 and is less than 10 percent of its U.S. gross income, the reporting corporation is not subject to the record maintenance requirement and the authorization of agent requirement for those transactions.

    Note:

    The small corporation exception applies only to the record maintenance requirements and the authorization of agent requirement. This exception does not apply to the reporting requirements for Form 5472 and the general record maintenance requirements of section 6001.

20.1.9.5.1  (11-20-2007)
Definitions

  1. Reporting Corporation. A reporting corporation is either a domestic corporation that is 25 percent (or more) foreign-owned or a foreign corporation engaged in a trade or business within the U.S. at any time during the taxable year.

  2. 25 Percent Foreign-Owned. A corporation is 25 percent foreign-owned if it has, at any time during the taxable year, at least one direct or indirect 25 percent foreign shareholder (a foreign person owning at least 25 percent of the total voting power of all classes of stock of such corporation entitled to vote, or the total value of all classes of stock of such corporation). The attribution rules of IRC section 318 apply. See IRC section 6038A(c)(5).

  3. Related Party. The term "related party" means any direct or indirect 25 percent foreign shareholder of the reporting corporation; any person who is related (within the meaning of IRC section 267(b) or 707(b)(1)) to the reporting corporation or to a 25 percent foreign shareholder of the reporting corporation; and any other person who is related within the meaning of IRC section 482 to the reporting corporation.

  4. Foreign Person. The term "foreign person" means any person who is not a U.S. person as defined in IRC section 7701(a)(30), except that any individual who is a citizen of any possession of the U.S. (but not otherwise a citizen of the U.S.) and who is not a resident of the U.S. shall not be treated as a U.S. person.

20.1.9.5.2  (11-20-2007)
Penalty Assessment

  1. A penalty is assessed when the examiner determines that:

    1. A U.S. corporation is 25 percent foreign-owned during a taxable year, and has had transaction(s) with a related party,

    2. Has failed to timely file Form