20.1.9  International Penalties (Cont. 2)

20.1.9.15 
IRC 6679 – Return of U.S. Persons With Respect to Certain Foreign Corporations and Partnerships

20.1.9.15.1  (04-22-2011)
Reporting and Filing Requirement

  1. For tax years that began before January 1, 2005, IRC 6679 provided a penalty for failure to furnish information and timely file a return required under IRC 6035. IRC 6035 required a U.S. citizen or resident who was an officer, director, or 10 percent shareholder of a foreign personal holding company to file Form 5471 Schedule N by the due date of the taxpayer’s income tax return, including extensions.

    Note:

    Foreign personal holding company provisions have been repealed effective for tax years of foreign corporations beginning after December 31, 2004, and to tax years of U.S. shareholders with or within which such tax year of the foreign corporation ends. Therefore, there is no Form 5471 Schedule N filing requirement for periods after the rules have been repealed.

  2. IRC 6046 requires Form 5471 Schedule O to be filed by the due date of the taxpayer’s income tax return, including extensions and must be filed by:

    1. A U.S. citizen or resident who is an officer or director of a foreign corporation in which a U.S. person has acquired:
      1. Stock which meets the 10% stock ownership requirement with respect to the foreign corporation, or
      2. An additional 10% or more of the outstanding stock of the foreign corporation.

    2. A U.S. person 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.

    3. A U.S. person who acquires stock in a foreign corporation which, without regard to stock already owned on the date of acquisition, meets the 10% stock ownership requirement with respect to the foreign corporation.

    4. Each person who is treated as a U.S. shareholder under IRC 953(c) with respect to the foreign corporation.

    5. Each person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation.

    6. A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his or her interest to less than the stock ownership requirement.

  3. IRC 6046A requires Form 8865 Schedule P, to be filed by the due date of the taxpayer’s income tax return, including extensions. The form must be filed by any U.S. person who:

    1. Acquires an interest in a foreign partnership,

    2. Disposes of an interest in a foreign partnership, or

    3. Whose proportional interest in a foreign partnership changes substantially.

20.1.9.15.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Form 5471, Schedule O—See Exhibit 20.1.9-13, Pattern Letter for Failure to File Form 5471, Schedule O.

  2. Form 8865 Schedule P—See Exhibit 20.1.9-14, Pattern Letter for Failure to File Form 8865 Schedule P.

  3. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a BMFCP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 613 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.15.3  (04-22-2011)
Penalty Assertion

  1. An initial penalty is asserted on Form 8278 using PRN 613 when the examiner has established that the taxpayer:

    1. Was a U.S. citizen or resident,

    2. Had a filing requirement under IRC 6046 or IRC 6046A (or under IRC 6035 for tax years beginning prior to January 1, 2005),

    3. Failed to timely file the required information on Form 5471 or Form 8865, and

    4. Does not have reasonable cause for the failure to file.

20.1.9.15.4  (03-21-2013)
Penalty Computation

  1. Initial Penalty—The penalty is $10,000 per failure.

    Note:

    For tax years beginning prior to January 1, 2005, the penalty for failure to file Form 5471 Schedule N, Return of Officers, Directors, and 10% or More Shareholders of a Foreign Personal Holding Company, was $1,000 per failure and was assessed with PRN 614.

  2. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. The maximum continuation penalty is limited to $50,000 per failure. These additional penalties are also asserted on Form 8278 using PRN 704.

    Note:

    Prior to January 2013, PRN 619 was used for this continuation penalty.

  3. The maximum total penalty under IRC 6679 is $60,000 per failure (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per failure).

20.1.9.15.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has furnished and filed the required information for all open years (not on extension).

  2. IRC 6679(a)(1) provides a reasonable cause exception to the initial penalty.

  3. Reasonable cause does not apply to the continuation penalty.

20.1.9.16  (03-21-2013)
Reserved

  1. Reserved

20.1.9.17  (03-21-2013)
IRC 6686 – Information Returns for IC-DISCs

  1. IRC 6686 was added by P.L. 92-178 for Domestic International Sales Corporations (DISC) or former Foreign Sales Corporations (FSC).

  2. The provisions for FSCs were repealed by P.L. 106-519 effective generally for transactions after September 30, 2000.

  3. Interest-Charge Domestic International Sales Corporations (IC-DISCs) are domestic corporations formed to export U.S. products. Although the FSC provisions were repealed, the IC-DISC provisions remain in effect.

20.1.9.17.1  (03-21-2013)
Reporting and Filing Requirements

  1. An IC-DISC is a domestic corporation that has elected to be an IC-DISC on Form 4876-A, Election To Be Treated as an Interest Charge DISC, and its election is still in effect.

  2. Deriving tax benefits through an IC-DISC requires completion of Form 8873, Extraterritorial Income Exclusion, to calculate the exclusion.

  3. An IC-DISC must file an annual U.S. tax return even though it pays no U.S. income taxes. See Treas. Reg. 1.992-1.

20.1.9.17.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a BMFCP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 605 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.17.3  (03-21-2013)
Penalty Assertion

  1. A penalty is asserted by field examiners on Form 8278 using PRN 605 when the examiner has established that:

    1. The entity is a DISC, or former DISC as defined in IRC 992(a), or the entity is a FSC or former FSC as was defined in IRC 922, and has failed to timely file Form 1120-IC-DISC as applicable, or

    2. Files a return which does not show the information required under IRC 6011(c), and

    3. Does not have reasonable cause for the failure to file or supply information.

  2. Penalties may also be asserted by the campus for incomplete or inaccurate returns filed. Refer to IRM 3.11.16.36.7, Civil Penalty — IRC Section 6686.

20.1.9.17.4  (03-21-2013)
Penalty Computation

  1. The penalty under IRC 6686 is $100 for each failure to supply information (but the total amount imposed for all such failures during any calendar year shall not exceed $25,000) and $1,000 for each failure to file a Form 1120-IC-DISC.

20.1.9.17.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed all open years (not on extension).

  2. IRC 6686 provides for such penalties unless it is shown that such failure to file or supply information is due to reasonable cause.

20.1.9.18  (04-22-2011)
IRC 6688 – Reporting for Residents of U.S. Possessions

  1. IRC 6688 applies to any person described in IRC 7654(a) who is required to furnish information and who fails to comply with such requirement unless it is shown that such failure is due to reasonable cause and not to willful neglect.

20.1.9.18.1  (04-22-2011)
Reporting and Filing Requirements

  1. IRC 6688 provides a penalty for individuals with total worldwide gross income of more than $75,000 who take the position that, for U.S. income tax reporting purposes (see IRM 937(c)), they became or ceased to be bona fide residents of a U.S. possession and fail to meet the requirements under IRC 937 by filing Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession. Note that:

    1. The instructions to Form 8898 currently specify that the form only needs to be filed by such individuals if they have more than $75,000 in worldwide gross income in the taxable year that they take the position that they became or ceased to be a bona fide resident of a U.S. possession.

    2. U.S. Possessions—Guam, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), the Commonwealth of Puerto Rico, and the U.S. Virgin Islands are U.S. possessions.

    3. Form 8898 is filed separately with the Philadelphia Campus (or campus identified in future instructions), not with the individual’s tax return.

  2. The penalty also applies to individuals who have adjusted gross income of $50,000 and gross income of $5,000 from sources within Guam or CNMI and who fail to file Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (CNMI), as required under Treas. Reg. 301.7654-1(d) for individuals who file U.S. income tax returns.

  3. For tax years 2001 through 2005, Form 8898 must be filed by October 16, 2006.

  4. Subsequent to 2005, Form 8898 must be filed by the due date (including extensions) for filing Form 1040, U.S. Individual Income Tax Return, or Form 1040NR, U.S. Nonresident Alien Income Tax Return.

20.1.9.18.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, an IMFCP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 669 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

20.1.9.18.3  (04-22-2011)
Penalty Assertion

  1. The penalty is asserted on Form 8278 using PRN 669 when an examiner determines that:

    1. The taxpayer failed to furnish information and file Form 8898 about his or her residence status of a U.S. Possession, or

    2. The taxpayer failed to meet the requirements of Treas. Reg. 301.7654-1(d) and not timely file a properly executed Form 5074, Allocation of Individual Income Tax to Guam or Commonwealth of the Northern Mariana Islands, or

    3. The taxpayer failed to meet the requirements of IRC 932(a) and Treas. Reg. 1.932-1(b)(1) and did not file Form 8689, and

    4. Does not have reasonable cause for the failure.

20.1.9.18.4  (04-22-2011)
Penalty Computation

  1. For tax years ending after October 22, 2004, the penalty is $1,000 for failure to file the respective Form 8898, Form 5074, Form 8689, or for filing incorrect or incomplete information.

  2. For tax years ending before October 23, 2004, the penalty is $100.

20.1.9.18.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has furnished and filed the required information for all open years (not on extension).

  2. IRC 6688 provides for such penalties unless it is shown that such failure is due to reasonable cause and not to willful neglect.

20.1.9.19  (03-21-2013)
IRC 6689 – Failure to File Notice of Foreign Tax Redetermination

  1. IRC 6689 provides a penalty for failure to notify the Service of a foreign tax redetermination with respect to:

    1. The amount of foreign taxes paid, accrued, or deemed paid by the taxpayer for which a notice is required under IRC 905(c), or

    2. The amount of adjustment to the deduction for certain foreign deferred compensation plans under IRC 404A(g).

20.1.9.19.1  (03-21-2013)
Reporting and Filing Requirements

  1. A taxpayer is required to notify the Service of any foreign tax redetermination that may affect U.S. tax liability. If a taxpayer has a reduction in the amount of foreign tax liability, the taxpayer must provide notification by filing Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return, and Form 1116, Foreign Tax Credit, or Form 1118, Foreign Tax Credit—Corporations, by the due date (with extensions) of the original return for the taxpayer's taxable year in which the foreign tax redetermination occurred. See former Treas. Reg. 1.905-4T(b)(1)(ii). In addition:

    1. If a foreign tax redetermination results in an additional assessment of foreign tax, the taxpayer has the 10-year period provided by IRC 6511(d)(3)(A) to file a claim for refund based on additional foreign tax credits. See former Treas. Reg. 1.905-4T(b)(1)(iii).

    2. When a foreign tax redetermination affects the indirect or deemed paid credit under IRC 902, the taxpayer must provide notification by reflecting the adjustments to the foreign corporation’s pools of post-1986 undistributed earnings and post-1986 foreign income taxes on a Form 1118 for the taxpayer’s first taxable year with respect to which the redetermination affects the computation of foreign taxes deemed paid.

  2. Redetermination of IRC 404A Deduction—A taxpayer is required to notify the Service, in the time and manner specified in the regulations under IRC 905, if the foreign tax deduction for deferred compensation expense is adjusted. See IRC 404A(g)(2)(B).

  3. Foreign Tax Redetermination—Former Treas. Reg. 1.905-3T(c) defines a foreign tax redetermination as a change in the foreign tax liability that may affect a U.S. taxpayer’s foreign tax credit and includes:

    1. Accrued taxes that when paid differ from the amounts added to post-1986 foreign income taxes or claimed as credits by the taxpayer,

    2. Accrued taxes that are not paid before the date two years after the close of the taxable year to which such taxes relate, or

    3. Any tax paid that is refunded in whole or in part, and

    4. For taxes taken into account when accrued but translated into dollars on the date of payment, the difference between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to fluctuations in the value of the foreign currency relative to the dollar between the date of accrual and the date of payment.

  4. Statute of Limitations—IRC 6501(c)(5) independently suspends the normal statute of limitations for additions to tax resulting from a redetermination of foreign tax. IRC 905(c) contains special rules for such changes.

20.1.9.19.2  (04-22-2011)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer.

    1. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 570 is generated and sent to the taxpayer. A sample of a CP 15 notice for this penalty is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

    2. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 570 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.19.3  (03-21-2013)
Penalty Assertion

  1. The assessment of the penalty is not subject to deficiency proceedings and is asserted on Form 8278 using PRN 570 when the examiner determines that:

    1. The taxpayer failed to notify the Service of a foreign tax redetermination, and

    2. Does not have reasonable cause for the failure.

      Caution:

      Unless final regulations under Treas. Reg. 1.905-4 and proposed Treas Reg. 301.6689-1 have been published, penalties under IRC 6689 are only applicable to U.S. tax deficiencies that result from foreign tax redeterminations that occurred in:
      1) Taxable years beginning on or after November 7, 2007 (the date of publication of temporary Treas. Reg. 1.905-4T in the Federal Register), where the foreign tax redetermination occurred on or before November 5, 2010 (the date on which the regulations expired), or
      2) Any of the three taxable years of a U.S. taxpayer immediately preceding the taxpayer’s first taxable year beginning on or after November 7, 2007.

20.1.9.19.4  (03-21-2013)
Penalty Computation

  1. The examiner determines the deficiency attributable to the foreign tax redetermination and to this deficiency is added a penalty computed as follows:

    1. 5 percent of the deficiency if the failure to file a notice of foreign tax redetermination is for not for more than 1 month,

    2. An additional 5 percent of the deficiency for each month (or fraction thereof) during which the failure continues, but not to exceed in the aggregate 25 percent of the deficiency, and

    3. If this penalty applies, then the penalty under IRC 6662(a) and IRC 6662(b)(1), relating to the failure to pay by reason of negligent or intentional disregard of rules and regulations, shall not apply.

20.1.9.19.5  (03-21-2013)
Reasonable Cause

  1. Reasonable cause should only be considered if the taxpayer has filed amended returns for all affected years for which the particular foreign tax redetermination results in a U.S. tax deficiency and for which amended returns are required under former temporary Treas. Reg. 1.905-4T.

  2. IRC 6689(a) provides for such a penalty unless it is shown that such failure is due to reasonable cause and not due to willful neglect.

20.1.9.20  (04-22-2011)
IRC 6712 – Failure to Disclose Treaty-Based Return Position

  1. IRC 6712 provides a penalty for failure to disclose a treaty-based return position as required by IRC 6114.

20.1.9.20.1  (04-22-2011)
Reporting and Filing Requirements

  1. IRC 6114 generally requires that if a taxpayer takes a position that any treaty of the U.S. overrules or modifies any provision of the Code, the taxpayer must disclose the position. A taxpayer meets the disclosure requirement by attaching Form 8833, Treaty-Based Return Position Disclosure under section 6114 or 7701(b), or appropriate successor form to his or her timely filed tax return (including extensions).

    Note:

    A taxpayer may be able to treat payments or income items of the same type (e.g., interest items) received from the same ultimate payor (e.g., the obligor of a note) as a single separate payment or income item. See Treas. Reg. 301.6114-1(d)(3)(ii) for guidance on rules for single separate payment or income item.

  2. If an individual would not otherwise be required to file a tax return, the individual must file Form 8833 at the IRS Service Center where he or she would normally file a return to make the treaty-based return position disclosure under IRC 6114. See Treas. Reg. 301.6114-1(a)(1)(ii) or Treas. Reg. 301.7701(b)-7.

20.1.9.20.2  (04-22-2011)
Penalty Letters, Notice Letters and Notices

  1. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:

    1. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 664 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15 Sample CP 15 Notice.

    2. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 664 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-16, Sample CP 215 Notice.

20.1.9.20.3  (03-21-2013)
Penalty Assertion

  1. The penalty is subject to deficiency proceedings. It is asserted on Form 8278 using Penalty Reference Number (PRN) 664 when the examiner determines that:

    1. The taxpayer failed to meet the requirements of IRC 6114 by not filing the proper form (i.e., Form 8833), and

    2. Does not have reasonable cause for such failure.

20.1.9.20.4  (03-21-2013)
Penalty Computation

  1. Individuals—For an individual, the penalty is $1,000 for each separate treaty-based return position taken and not properly disclosed.

  2. Corporations—For a C corporation, the penalty is $10,000 for each separate failure to disclose a treaty-based return position.

20.1.9.20.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed all open years (not on extension).

  2. IRC 6712(b) provides that the Secretary may waive all or any part of the penalty on a showing by the taxpayer that there was reasonable cause for the failure and that the taxpayer acted in good faith.

  3. Waiver Criteria—Treas. Reg. 301.6712-1(b) provides the authority to waive, in whole or in part, the penalty imposed under IRC 6712 if the taxpayer’s failure to disclose the required information is not due to willful neglect. An affirmative showing of lack of willful neglect must be made by the taxpayer in the form of a written statement setting forth all the facts alleged to show lack of willful neglect and must contain a declaration by the taxpayer that the statements is made under penalties of perjury.

20.1.9.21  (04-22-2011)
IRC 6039E – Failure to Provide Information Concerning Resident Status (Passports and Immigration)

  1. IRC 6039E provides a penalty for failure to provide information concerning resident status.

20.1.9.21.1  (03-21-2013)
Reporting and Filing Requirements

  1. Passports—IRC 6039E generally requires that any individual, who applies for a United States (U.S.) passport, must include with such application the taxpayer’s TIN (if the individual has one), any foreign country in which such individual is residing, and any other information as the Secretary may prescribe.

  2. Immigration—IRC 6039E generally requires that any individual, who applies to be lawfully accorded the privilege of residing permanently in the U.S. as an immigrant in accordance with the immigration laws, must include with such application the taxpayer’s TIN (if the individual has one), information with respect to whether such individual is required to file a return of the tax imposed by Chapter 1 for such individual’s most recent 3 taxable years, and any other information as the Secretary may prescribe.

20.1.9.21.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Passports—The following letters should be used:

    1. Letter 4318, IRC 6039E Initial (Passport), and attachment Form 13997, Validating Your TIN and Reasonable Cause, will be issued to propose the penalty.

    2. Letter 4319, IRC 6039E No Penalty (Passport), will be issued after reviewing (and accepting) the information received from the taxpayer to notify the taxpayer that no penalty will be asserted.

    3. Letter 4320, IRC 6039E Penalty (Passport), will be issued to notify the taxpayer that he or she did not have reasonable cause and that the penalty will be asserted.

  2. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, an IMFCP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 679 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

  3. ImmigrationReserved.

20.1.9.21.3  (04-22-2011)
Penalty Assertion

  1. The penalty is not subject to deficiency proceedings. It is asserted on Form 8278 using Penalty Reference Number (PRN) 679 when the examiner determines that:

    1. The individual failed to meet the requirements of IRC 6039E by not providing complete passport application information, or

    2. The individual failed to meet the requirements of IRC 6039E by not providing complete resident application information.

20.1.9.21.4  (04-22-2011)
Penalty Computation

  1. The penalty is $500 for such failure.

  2. Only one $500 penalty may be asserted per application.

20.1.9.21.5  (04-22-2011)
Reasonable Cause

  1. IRC 6039E provides for such penalties unless it is shown that such failure is due to reasonable cause and not to willful neglect.

20.1.9.22  (03-21-2013)
IRC 6038D – Information with Respect to Foreign Financial Assets

  1. IRC 6038D was added by P.L. 111-147, the Hiring Incentives to Restore Employment (HIRE) Act, for any individual failing to disclose information with respect to specified foreign financial assets during any taxable year beginning after March 18, 2010.

    Caution:

    IRS Notice 2011-55 suspends the requirement for individuals to attach Form 8938, Statement of Specified Foreign Financial Assets, to income tax returns that are filed before the release of Form 8938 in November 2011. Therefore, no penalty under IRC 6038D can be asserted on individuals who file during, or before November 2011.

20.1.9.22.1  (03-21-2013)
Reporting and Filing Requirements

  1. A complete and accurate Form 8938, Statement of Specified Foreign Financial Assets, attached to a timely filed tax return fulfills the reporting requirements.

  2. The required information for such specified foreign financial assets include:

    1. For all accounts and assets, the maximum value of each account and asset during the year.

    2. In the case of any account, the name and address of the financial institution in which such account is maintained and the number of such account.

    3. In the case of any stock or security, the name and address of the issuer and such information as necessary to identify the class or issue of which such stock or security is a part.

    4. In the case of any other instrument, contract or interest:
      i. Such information as is necessary to identify such instrument, contract, or interest, and
      ii. The names and addresses of all issuers and counter-parties with respect to such instrument, contract, or interest.

20.1.9.22.2  (03-21-2013)
Penalty Letters, Notice Letters and Notices

  1. Letter 4618—This is a notice letter required to be mailed to the taxpayer under the provisions of IRC 6038D(d).

  2. Computer Paragraph (CP) Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, an IMFCP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with Penalty Reference Number (PRN) 700 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-15, Sample CP 15 Notice.

20.1.9.22.3  (03-21-2013)
Penalty Assertion

  1. An initial penalty is asserted on Form 8278 using Penalty Reference Number (PRN) 700 when the examiner determines that the taxpayer failed to disclose information on Form 8938 with respect to specified foreign financial assets and to the extent described in IRC 6038D(c) and such other information as the Secretary may prescribe.

    Caution:

    IRS Notice 2011-55 suspends the requirement for individuals to attach Form 8938 to income tax returns that are filed before the release of Form 8938 in November 2011. Therefore, no penalty under IRC 6038D can be asserted on individuals who file during or before November 2011.

20.1.9.22.4  (03-21-2013)
Penalty Computation

  1. Initial Penalty—The initial penalty is $10,000 for each taxable year with respect to which such failure occurs.

  2. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 using PRN 710. The maximum continuation penalty is limited to $50,000 per failure.

20.1.9.22.5  (03-21-2013)
Reasonable Cause

  1. No reasonable cause should be considered until the taxpayer has filed all open years (not on extension).

  2. IRC 6038D(g) provides that no penalty shall apply if the individual shows that the failure is due to reasonable cause and not to willful neglect.

  3. An individual will not have reasonable cause merely because a foreign jurisdiction would impose a civil or criminal penalty on any person for disclosing the required information.

Exhibit 20.1.9-1 
Quick Reference Guide to International Penalties

Taxpayer Filing Requirement IRC Penalty section
U.S. person with interest in: Foreign Corporation (FC) Form 5471 IRC 6038(b)
Foreign Partnership (FP) Form 8865
FC or FP with Foreign Disregarded Entity Form 8858
Penalty reducing Foreign Tax Credit: Foreign Corporation (FC) Form 5471 IRC 6038(c)
Foreign Partnership (FP) Form 8865
FC or FP with Foreign Disregarded Entity Form 8858
25 percent foreign-owned U.S. corporations Form 5472 IRC 6038A(d)
25 percent foreign-owned U.S. corporations that fail to: 1) authorize the reporting corporation to act as agent of a foreign related party, or 2) substantially comply with a summons for information Not applicable IRC 6038A(e)
Transferor of certain property to foreign persons: Foreign Corporation Form 926 IRC 6038B(c)
Foreign Partnership Form 8865 Schedule O
Foreign corporations engaged in U.S. business Form 5472 IRC 6038C(c)
Individuals receiving gifts from foreign persons exceeding $100,000 or $10,000 in the case of a gift from a foreign corporation or foreign partnership (adjusted annually for cost of living) Form 3520 IRC 6039F(c)
Individuals that relinquish their U.S. citizenship or abandon their long-term resident status Form 8854 IRC 6039G(c)
Foreign persons holding direct investments in U.S. real property interests Not applicable IRC 6652(f)
U.S. person who creates a foreign trust, transfers property to a foreign trust or receives a distribution from a foreign trust Form 3520 IRC 6677(a)
U.S. Owner of a foreign trust Form 3520-A IRC 6677(b)
Failure to file returns with respect to acquisitions of interests in: Foreign Corporation Form 5471 Schedule O IRC 6679,
Foreign Partnership Form 8865 Schedule P IRC 6679,
IC-DISC, or FSC failure to file returns or supply information: IC-DISC Form 1120-IC-DISC IRC 6686
FSC Form 1120-FSC
Allocation of Individual Income Tax to Guam or the CMNI Form 5074 IRC 6688
Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession Form 8898 IRC 6688
Taxpayer’s failure to file notice of foreign tax redetermination under IRC 905(c) or IRC 404A(g)(2) Form 1116 or Form 1118 (attached to Form 1040-X or Form 1120-X) IRC 6689
Taxpayer’s failure to file notice of foreign deferred compensation plan under IRC 404A(g)(2) Not applicable IRC 6689
Taxpayer’s failure to disclose treaty-based return position Form 8833 or statement IRC 6712
Failure to Provide Information Concerning Resident Status (Passports and Immigration) Not applicable IRC 6039E(c)
Information with Respect to Foreign Financial Assets Form 8938 IRC 6038D(d)

Exhibit 20.1.9-2 
Reference Guide to Forms

FORM DESCRIPTION
Form 886-A Explanation of Items
Form 870 Waiver of Restrictions on Assessment and Collection of Deficiency in Tax and Acceptance of Overassessment
Form 926 Return by a U.S. Transferor of Property to a Foreign Corporation
Form 1040-X Amended U.S. Individual Income Tax Return
Form 1041 U.S. Income Tax Return (for Estates and Trusts)
Form 1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons (Refer to IRM 4.10.21, Examination of Returns, U.S. Withholding Agent Examinations – Forms 1042 )
Form 1042-S Foreign Person’s U.S. Source Income Subject to Withholding (Refer to IRM 4.10.21)
Form 1116 Foreign Tax Credit (Individual, Estate or Trust)
Form 1118 Foreign Tax Credit—Corporations
Form 1120-FSC U.S. Income Tax Return of a Foreign Sales Corporation
Form 1120-IC-DISC Interest Charge Domestic International Sales Corporation Return
Form 1120-X Amended U.S. Corporation Income Tax Return
Form 3198 Special Handling Notice for Examination Case Processing
Form 3210 Document Transmittal
Form 3244 Payment Posting Voucher
Form 3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
Form 3520-A Annual Return of Foreign Trust with U.S. Owner
Form 3870 Request for Adjustment
Form 4549 Income Tax Examination Changes
Form 4549-A Income Tax Discrepancy Adjustments
Form 5074 Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands
Form 5344 Examination Closing Record
Form 5471 Information Return of U.S. Person With Respect to Certain Foreign Corporations
Form 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
Form 8278 Assessment and Abatement of Miscellaneous Civil Penalties
Form 8288 U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests
Form 8288-A Statement of Withholding on Disposition by Foreign Persons of U.S. Real Property Interests
Form 8689 Allocation of Individual Income Tax to the U.S. Virgin Islands
Form 8804 Annual Return for Partnership Withholding Tax (Section 1446)
Form 8805 Foreign Partner’s Information Statement of Section 1446 Withholding Tax
Form 8813 Partnership Withholding Tax Payment Voucher (Section 1446)
Form 8833 Treaty Based Return Position Disclosure Under Section 6114 or 7701(b)
Form 8854 Initial and Annual Expatriation Information Statement
Form 8858 Information Return of U.S. Persons with Respect to Foreign Disregarded Entities
Form 8865 Return of U.S. Persons With Respect to Certain Foreign Partnerships
Form 8898 Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession
Form 8938 Statement of Foreign Financial Assets
Form W-8CE Notice of Expatriation and Waiver of Treaty Benefits

Exhibit 20.1.9-3 
Quick Guide for Penalty Reference Numbers to Process International Penalty Assessments
(See Form 8278 for current updates)

PRN Penalty Description Penalty Rate or Amount IRC section
595 2009 Offshore Voluntary Disclosure Program, 2011 Offshore Voluntary Disclosure Initiative (OVDI), and the 2012 OVDI. Penalty is % of highest aggregate account and asset value in all foreign bank accounts and entities for the tax year, provided that required conditions were met. 5% In lieu of all other penalties that may apply
596 20%
597 12 1/2%
598 25%
594 27 1/2%
603 Initial Penalty—Failure of Foreign Corporation Engaged in a U. S. Business to Furnish Information or Maintain Records $10,000 per failure subject to continuation penalty IRC 6038C(c)
604 Failure of Foreign Person to File Return Regarding Direct Investment in U. S. Real Property Interests $25 each day of failure. Max at lesser of $25,000 or 5% of aggregate FMV of U.S. real property interest IRC 6652(f)
605 Failure to File (FTF) Returns or Supply Information by DISC or FSC $100 each failure (max $25,000) to supply info and $1,000 for each FTF Form 1120–DISC or Form 1120-FSC IRC 6686
613 Initial Penalty—FTF Form 5471 Schedule O (IRC 6046) or Form 8865 Schedule P (IRC 6046A) $10,000 per failure subject to continuation penalty IRC 6679
614 FTF Form 5471 Schedule N (IRC 6035) $1,000 per period for each failure Treas. Reg. 301.6679-1(a)
619 Continuation Penalty—Penalty for Continued Failure to Provide Information After 90-Day Period $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6038(b)(2) and (c)
623 Initial Penalty—FTF Form 5471 or Form 8865 $10,000 per failure plus FTC reduction within 90-day initial notification period IRC 6038(b)
625 Initial Penalty—Failure to Provide Information with Respect to Certain Foreign-Owned Corporations (Form 5472) $10,000 per taxable year subject to continuation penalty IRC 6038A
659 Initial Penalty—FTF Form 3520 transactions with foreign trusts (IRC 6048(a)) greater of $10,000 or 35% or 5% of the gross reportable amount IRC 6677(a), IRC 6039F
660 Initial Penalty—FTF Form 3520-A Foreign Trust with U.S. Owner (IRC 6048(b)) greater of $10,000 or 5% of the gross reportable amount IRC 6677(b)
664 Failure to disclose treaty-based return position (IRC 6114) $1,000 per failure ($10,000 in the case of a C corporation) IRC 6712
668 FTF Form 3520 for reporting receipt of certain foreign gifts 5% of the amount of the gift per month not to exceed 25% IRC 6039F
669 (IMF) FTF Form 8898 Regarding Residence in a U.S. Possession required by IRC 937(c) $1,000 per failure IRC 6688
FTF Form 5074 Allocation of Income Tax to Guam or CNMI required by IRC 7654 and Treas. Reg. 301.7654-1(d) $1,000 per failure IRC 6688
FTF Form 8689 Allocation of Income Tax to VI required by IRC 932(a) and Treas. Reg.1.932-1T(b)(1) $1,000 per failure IRC 6688
671 (IMF) Failure to File an Information Statement Regarding Loss of U. S. Citizenship or Long-term Permanent Residency FTF Form 8854 regarding expatriation $10,000 per failure IRC 6039G
676 FTF Form 926 or Form 8865 Schedule O 10% of the fair market value of property at time of transfer or exchange, not to exceed $100,000 unless the failure was caused by intentional disregard IRC 6038B
679 Failure to provide information concerning resident status (passports and immigration) $500 for each failure. IRC 6039E
700 Initial Penalty—Failure to provide information with respect to foreign financial assets $10,000 for each taxable year for failure IRC 6038D
701 Continuation Penalty—Penalty for Continued Failure to Provide Information After 90-Day Period $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6038A(d)(2)
702 Continuation Penalty—Penalty for Continued Failure to Provide Information After 90-Day Period - Form 3520 $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6677(a)
703 Continuation Penalty—Penalty for Continued Failure to Provide Information After 90-Day Period - Form 3520-A $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6677(a)
704 Continuation Penalty—Penalty for Continued Failure to Provide Information After 90-Day Period $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6679(a)(2)
705 Continuation Penalty—Penalty for Continued Failure to Provide Information After 90-Day Period $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6038C(c)
710 Continuation Penalty—Failure to provide information with respect to foreign financial $10,000 per each 30-day period after the expiration of the 90-day initial notification period IRC 6038D
1. Check current version of the Form 8278 on http://publish.no.irs.gov/cat12.cgi?request=CAT2&itemtyp=F&itemb=8278&items= for the most up to date listing of penalty reference numbers.

Exhibit 20.1.9-4 
International Penalties Subject to or Not Subject to Deficiency Procedures

IRC section Description Form Deficiency Procedures
IRC 6038(b) Information Reporting With Respect to Certain Foreign Corporations and Partnerships—Penalty for Failure to Furnish Information Form 5471, Form 8858, or Form 8865 No
IRC 6038(c) Penalty of Reducing Foreign Tax Credit Plus Continuation Penalty Form 5471, Form 8858, or Form 8865 Yes
IRC 6038A(d) Information Reporting for Foreign-Owned Corporations Form 5472 No
IRC 6038A(e) Noncompliance Penalty for Failure to Authorize an Agent or Failure to Produce Records Not applicable Yes
IRC 6038B(c) Failure to Provide Notice of Transfers to Foreign Persons Form 926 or Form 8865 Schedule O No for penalty. Yes for tax on gain
IRC 6038C(c) Information With Respect to Foreign Corporations Engaged in U.S. Business Form 5472 No
IRC 6038C(d) Noncompliance Penalty for Foreign Related Party Failing to Authorize the Reporting Corporation to Act as its Limited Agent Not applicable Yes
IRC 6038D Failure to Provide Information With Respect to Foreign Financial Assets Form 8938 No
IRC 6039E Failure to Provide Information Concerning Resident Status (Passports and Immigration) Not applicable No
IRC 6039F(c) Gifts from Foreign Persons Form 3520 Yes if IRC 6039F(c)(1)(A). No if IRC 6039F(c)(1)(B).
IRC 6039G Expatriation Reporting Requirements Form 8854, Form W-8CE No
IRC 6652(f) Foreign Persons Holding U.S. Real Property Investments Not applicable No
IRC 6677(a) Failure to File a Foreign Trust Information Return Form 3520 No
IRC 6677(b) Failure to File an Information Return With Respect to U.S. Owners of a Foreign Trust Form 3520-A No
IRC 6679 Return of U.S. Persons With Respect to Certain Foreign Corporations and Partnerships Form 5471 Schedule O, Form 8865 Schedule P, or Form 5471 Schedule N No
IRC 6686 Information Returns for Former FSCs Form 1120-IC-DISC, or Form 1120-FSC Yes
IRC 6688 Reporting for Residents of U.S. Possessions Form 5074, Form 8689 or Form 8898 Yes
IRC 6689 Failure to File Notice of Foreign Tax Redetermination Form 1116 or Form 1118 (attach to Form 1040-X or Form 1120-X) No
IRC 6712 Failure to Disclose Treaty-Based Return Position Form 8833 Yes

Exhibit 20.1.9-5 
Reasonable Cause Relief

Reasonable cause should not be considered until the taxpayer is in full compliance for all open years (not under extension) with the respective provisions of the law.
Example : If a taxpayer requests abatement of old years for a failure to file, furnish, report, or maintain records, but has not filed, furnished, reported or maintained records for intervening years that are open, the taxpayer should be solicited to file, furnish, report or maintain the required information before consideration of any reasonable cause.

Penalty Section Form Reasonable Cause Relief
IRC 6038(b) FCs – Form 5471
FPs – Form 8865
FCs and FPs with Foreign Disregarded Entities – Form 8858
Yes
IRC 6038(c) FCs – Form 5471
FPs – Form 8865
FCs and FPs with Foreign Disregarded Entities – Form 8858
Yes
IRC 6038A(d) Form 5472 Yes
IRC 6038A(e) Not applicable Not applicable
IRC 6038B(c) Form 926
Form 8865 Schedule O
Yes
IRC 6038C(c) Form 5472 Yes
IRC 6038C(d) Not applicable Not applicable
IRC 6038D Form 8938 Yes
IRC 6039E Not applicable Yes
IRC 6039F(c) Form 3520 Yes
IRC 6039G Form 8854, Form W-8CE Yes
IRC 6652(f) Not applicable Yes
IRC 6677(a) Form 3520 Yes
IRC 6677(b) Form 3520-A Yes
IRC 6679 Form 5471 Schedule O for IRC 6046
Form 8865 Schedule P for IRC 6046A
Yes
IRC 6686 Form 1120-IC-DISC, or
Form 1120-FSC
Yes
IRC 6688 Form 5074
Form 8689
Form 8898
Yes
IRC 6689 Form 1116 or Form 1118
(attach to Form 1040-X or Form 1120-X)
Yes

Exhibit 20.1.9-6 
Pattern Letter for Failure to File Form 5471

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate annual information return on Form 5471 (including all required schedules), or the Form 5471 that you did file was substantially incomplete with respect to [name of related party] for the taxable year(s) ending [tax year]. Form 5471 is an Information Return of a U.S. Person With Respect to Certain Foreign Corporations required by IRC section 6038(a).
A penalty of $10,000 per failure will be imposed for the taxable year(s) ending [tax year] under IRC section 6038(b). If you fail to file the information return within 90 days after the date of this notice, an additional $10,000 penalty will be imposed for each 30 day period (or fraction thereof) until the complete Form 5471 has been filed, but in an amount not to exceed $50,000. The penalty is applicable to each year of failure.
Your failure puts you at risk for a penalty in the form of an adjustment that reduces your foreign tax credit under IRC section 6038(c) for the tax year(s) listed above. The foreign tax credit reduction is reflected in the notice of deficiency for each year of failure. If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 1.6038-2(k)(3).
In addition, according to IRC section 6501(c)(8), the Statute of Limitations for any items related to the failure to file will not expire until three years from the date that a complete and accurate Form 5471 is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-7 
Pattern Letter for Failure to File Form 8865

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate annual information return on Form 8865 (including all required schedules), or the Form 8865 that you did file was substantially incomplete with respect to [name of related party] for the taxable year(s) ending [tax year]. Form 8865 is an Information Return of a U.S. Person With Respect to Certain Foreign Partnerships required by IRC section 6038(a).
A penalty of $10,000 per failure will be imposed for the taxable year(s) ending [tax year] under IRC section 6038(b). If you fail to file the information return within 90 days after the date of this notice, an additional $10,000 penalty will be imposed for each 30 day period (or fraction thereof) until the complete Form 8865 has been filed, but in an amount not to exceed $50,000. The penalty is applicable to each year of failure.
Your failure puts you at risk for a penalty in the form of an adjustment that reduces your foreign tax credit under IRC section 6038(c) for the tax year(s) listed above. The foreign tax credit reduction is reflected in the notice of deficiency for each year of failure. If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 1.6038-3(k)(4).
In addition, according to IRC section 6501(c)(8), the statute of limitations for any items related to the failure to file will not expire until three years from the date that a complete and accurate Form 8865 is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-8 
Pattern Letter for Failure to File Form 5472

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate information return on Form(s) 5472, or the Form 5472 that you did file was substantially incomplete with respect to [name of related party]. Form 5472 is an Information Return of a Foreign Owned Corporation required by IRC section 6038A(b).
A penalty of $10,000 will be imposed for each failure for the taxable year(s) ending [tax year] under IRC section 6038A(d)(1). If you fail to file the information return within 90 days after the date of this notice, an additional $10,000 penalty will be imposed for each 30 day period (or fraction thereof) until the failure has been corrected. The penalty is applicable to each year of failure.
If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 1.6038A- 4(b).
In addition, according to IRC section 6501(c)(8), the statute of limitations for any items related to the failure to file will not expire until three years from the date that a complete and accurate Form 5472 is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-9 
Pattern Letter for Failure to Maintain Required Documents

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to comply with the non-U.S. record maintenance requirements with respect to transactions with [name of foreign related party]. The requirements are described in Treasury Regulation 1.6038A-3(f).
A penalty of $10,000 will be assessed for the taxable year(s) ending [tax year] under IRC section 6038A(d)(1). If you fail to produce the foreign based records within 90 days after the date of this notice, an additional penalty of $10,000 will be imposed for each 30 day period (or fraction thereof) until the records are produced. The penalty is applicable to each year of failure.
If reasonable causes exists for failure to maintain the required information, and you believe the penalty should not be imposed, you are directed to the provisions of Treasury Regulation 1.6038A-4(b).
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-10 
Pattern Letter for Failure to Authorize as Agent

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to provide us with an authorization to act as agent for [name of foreign related party], with whom you engaged in transactions.
A noncompliance penalty may be imposed under IRC section 6038A(e)(3) for the taxable year(s) ending [tax year]. The penalty will be reflected in the notice of deficiency.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-11 
Pattern Letter for Failure to File Form 926

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate annual information return on Form 926, or that the Form 926 that you did file was false or inaccurate, with respect to [name of related party] for the taxable year(s) ending [tax year]. Form 926 is an Information Return of a U.S. Transferor of Property to a Foreign Corporation, and is required by IRC section 6038B.
A penalty of 10% of the Fair Market Value of the property transferred will be imposed for the taxable year(s) ending [tax year] under IRC section 6038B(c), up to a maximum of $100,000 per failure. However, if the failure to file was due to intentional disregard of the rules and regulations, the penalty will be 10% of the fair market value of the property transferred, or $100,000, whichever is greater. The penalty is applicable to each year of failure. In addition, gain will be recognized as if contributed property had been sold for Fair Market Value at the time of the contribution. Gain on the contributed property will be reflected in the notice of deficiency.
If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 1.6038B-1(f)(3).
In addition, according to IRC section 6501(c)(8), the statute of limitations on the related income tax return regarding items related to the information required to be reported will not expire until three years from the date that a complete and accurate Form 926 is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-12 
Pattern Letter for Failure to File Form 8865 Schedule O

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate annual information return on Form 8865 (Schedule O), or that the Form 8865 (Schedule O) that you did file was false or inaccurate, with respect to [name of related party] for the taxable year(s) ending [tax year]. Form 8865 is an Information Return of a U.S. Transferor of Property to a Foreign Partnership, and is required by IRC section 6038B.
The penalty will be 10% of the fair market value of the property transferred, or $100,000, whichever is greater, for the taxable year(s) ending [tax year] under IRC section 6038B(c). However, if the failure to file was due to intentional disregard of the rules and regulations, there will be no limit on the penalty. In addition, gain will be recognized as if the contributed property had been sold for such value at the time of contribution. Gain on the contributed property will be reflected in a notice of deficiency. The penalty will be reflected in a separate notice and applies to each year of failure.
If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 1.6038B-2(h)(3).
In addition, according to IRC section 6501(c)(8), the statute of limitations for any items related to the failure to file will not expire until three years from the date that a complete and accurate Form 8865 (Schedule O) is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-13 
Pattern Letter for Failure to File Form 5471 Schedule O

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate annual information return on Form 5471 (including all required schedules), or the Form 5471 that you did file was substantially incomplete with respect to [name of related party] for the taxable year(s) ending [tax year]. Form 5471 Schedule O—Organization or Reorganization of Foreign Corporation and Acquisitions and Dispositions of its Stock—is an Information Return of a U.S. Person With Respect to Certain Foreign Corporations required by IRC section 6046.
A penalty of $10,000 per failure will be imposed for the taxable year(s) ending [tax year] under IRC section 6679. If you fail to file the information return within 90 days after the date this notice is mailed, an additional $10,000 penalty will be imposed for each 30 day period (or fraction thereof) until the complete Form 5471 has been filed, but in an amount not to exceed $50,000. The penalty is applicable to each year of failure.
If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 301.6679-1(a)(3).
In addition, according to IRC section 6501(c)(8), the statute of limitations for any items related to the failure to file will not expire until three years from the date that a complete and accurate Form 5471 and all required schedules is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-14 
Pattern Letter for Failure to File Form 8865 Schedule P

Internal Revenue Service   Department of the Treasury
     
[Name and current U.S. address of Reporting U.S. Shareholder   Person to Contact:
    Telephone Number:
    Refer Reply to:
    Date:
Sir or Madam:    
This is to notify you that you failed to file a complete separate annual information return on Form 8865 (including all required schedules), or the Form 8865 that you did file was substantially incomplete with respect to [name of related party] for the taxable year(s) ending [tax year]. Form 8865 Schedule P—Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership is an Information Return of a U.S. Person With Respect to Certain Foreign Partnerships required by IRC section 6046A.
A penalty of $10,000 per failure will be imposed for the taxable year(s) ending [tax year] under IRC section 6679. If you fail to file the information return within 90 days after the date this notice is mailed, an additional $10,000 penalty will be imposed for each 30 day period (or fraction thereof) until the complete Form 8865 has been filed, but in an amount not to exceed $50,000. The penalty is applicable to each year of failure.
If reasonable cause exists for failure to furnish the information, and you believe this penalty should not be imposed, you are directed to the provisions of Treasury Regulation 301.6679-1(a)(3).
In addition, according to IRC section 6501(c)(8), the statute of limitations for any items related to the failure to file will not expire until three years from the date that a complete and accurate Form 8865 and all required schedules is received.
If you have any questions, you may contact the person named above.
    Sincerely yours,
    [Signature]
    [Title]

Exhibit 20.1.9-15 
Sample CP 15 Notice

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Exhibit 20.1.9-16 
Sample CP 215 Notice

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