Accessibility Skip to Top Navigation Skip to Main Content Home  |  Change Text Size  |  Contact IRS  |  About IRS  |  Site Map  |  Español  |  Help  

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 5472, or has filed an incomplete or inaccurate Form 5472, or

    3. Has failed to maintain records of transactions with related parties.

    Note:

    Generally, the records that must be maintained pursuant to section 6038A must be maintained within the U.S. However, a reporting corporation may maintain such records outside the U.S. if such records are not ordinarily maintained in the U.S. and if the reporting corporation satisfies the requirements under Treas. Reg. section 1.6038A-3(f)(2)(i) and (ii).

  2. Meeting Records Requirements. Generally, a taxpayer meets the requirement by complying with the request for books, records or documents.

20.1.9.5.3  (11-20-2007)
Penalty Computation

  1. Initial Monetary Penalty. Reference Number 625. Section 6038A authorizes an initial penalty in the amount of $10,000 for each failure during a taxable year of a reporting corporation to: (1) timely file a separate complete and accurate Form 5472 with respect to each related party with which it had a reportable transaction during such taxable year, (2) maintain the required records relating to a reportable transaction, or (3) (in the case of records maintained outside the U.S.) meet the non-U.S. record maintenance requirements. The penalty will apply to a timely filed Form 5472 that is deemed to be substantially incomplete.

    1. The initial penalty is asserted once per related party per taxable year even if multiple infractions have occurred, e.g., failure to file Form 5472 and failure to maintain records for the same related party.

    2. Prior to July 2005 all IRC section 6038A assessments were made using Reference Number 619.

  2. Reasonable Cause. To show that reasonable cause exists, the reporting corporation must make an affirmative showing of all the facts alleged as reasonable cause for the failure in a written statement containing a declaration that it was made under the penalties of perjury. See Treas. Reg. 1.6038A–4(b).

    1. Treas. Reg. 1.6038A-4(b)(2)(ii) provides a separate reasonable cause exception for small corporations. This provision states that reasonable cause will be applied liberally when the small corporation had no knowledge of the section 6038A requirements, has limited presence in (and contact with) the United States, and promptly and fully complies with all requests to file Form 5472, and to furnish books and records relevant to the reportable transaction. A "small corporation" for this section is defined as a corporation whose gross receipts for a taxable year are $20 million or less.

  3. Increase in Penalty Where Failure Continues After Notification. Reference Number 619. The penalty applies separately to each related party failure.

    1. If the requested information is not submitted within 90 days after the Service mails notice of such failure to the taxpayer, an additional penalty will apply with respect to each related party for which a failure occurs.

    2. The increase in penalty is $10,000 for each 30-day period (or fraction thereof) during which the failure continues after the expiration of the 90-day notice period.

    3. The increase of the penalty for a failure that continues after notification is not capped.

    4. Under certain circumstances, an additional penalty for a taxable year may be imposed if, at a time subsequent to the time of imposition of the initial monetary penalty, a second failure is determined and the second failure continues after notification. See Treas. Reg. section 1.6038A-4(d)(2) and (f)(Example2).

    5. If the continuation penalty is asserted for multiple infractions, the penalty is asserted separately for each infraction.

20.1.9.6  (11-20-2007)
IRC Section 6038A(e) – Noncompliance Penalty

  1. A foreign related party must authorize the reporting corporation to act as its limited agent for the purpose of an IRS summons regarding transaction(s) with the related party. The penalty for failure to authorize an agent or for failure to produce records is described in IRC section 6038A(e)(3). For applicable definitions, see IRM 20.1.9.5.1.

  2. A taxpayer meets the requirement by providing an executed authorization of agent within 30 days of a request by the Service or, in the case of production of records, by complying with the request for books, records or documents. The penalty is not imposed if a taxpayer quashes a summons other than on grounds that the records were not maintained as required by IRC section 6038A(a).

  3. Statute of Limitations. The running of any period of limitations under IRC sections 6501 and 6531 may be suspended as provided in IRC section 6038A(e)(4)(D).

20.1.9.6.1  (11-20-2007)
Penalty Assertion

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

    1. The reporting corporation has failed to respond substantially and timely to a proper summons for records, or

    2. A foreign related party, upon request, fails to authorize the reporting corporation as its agent for IRS summons purposes, pursuant to the requirements set forth in Treas. Reg. 1.6038A-5.

  2. Reasonable Cause. There is no reasonable cause exception to this penalty.

  3. The noncompliance penalty is reflected in the notice of deficiency.

20.1.9.6.2  (11-20-2007)
Penalty Computation

  1. The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information available to the Service. See IRC Section 6038A(e)(3).

20.1.9.7  (11-20-2007)
IRC Section 6038B(c) – Failure to Provide Notice of Transfers to Foreign Persons

  1. IRC section 6038B provides a penalty for failure to file information with respect to certain transfers of property by a U.S. person to certain foreign persons. Form 8865, Schedule O, Transfer of Property to a Foreign Partnership, and Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, are used for reporting purposes.

  2. Reporting/Filing Requirement to Foreign Corporations. IRC section 6038B(a) and the temporary regulations issued thereunder require that any U.S. person that transfers property (including stock or securities) in an exchange described in IRC section 367(a) or (d) to a foreign corporation must report certain information concerning the transfer. See Treas. Reg. 1.6038B–1T(a).

    1. Temporary regulation 1.6038B–1T(b)(1) states that notwithstanding any statement to the contrary on Form 926, the form and attachments must be filed with the transferor’s tax return for the taxable year that includes the date of the transfer.

    2. Taxpayers meet the requirement by filing Form 926 with their income tax return by the due date of the return (including extensions) at the Campus where they are required to file.

  3. Reporting/Filing Requirement to Foreign Partnerships. IRC section 6038B(a) and the regulations issued under 1.6038B-2 require that any U.S. person that transfers property to a foreign partnership in a contribution described in IRC section 721 must report certain information concerning the transfer.

    1. These rules are generally effective with respect to transfers occurring after January 1, 1998, except as otherwise provided in the regulations.

    2. Taxpayers meet the requirements by filing Form 8865, Schedule O with their federal income tax return by the due date of the return (including extensions) at the Campus where they are required to file.

  4. Description of Transfer to Foreign Corporations. A transfer described in IRC section 367(a) occurs if a U.S. person transfers property to a foreign person in connection with an exchange described in IRC section 332, 351, 354, 355, 356, or 361, provided an exception in IRC section 367(a) is not applicable. An exchange described in IRC section 332 is subject to IRC section 6038B only in limited instances.

    Note:

    A transfer described in IRC section 367(d) occurs if a U.S. person transfers intangible property to a foreign corporation in an exchange described in IRC section 351 or 361.

  5. Description of Transfer to Foreign Partnerships. A transfer described in IRC section 721 occurs if a U.S. person transfers property to a foreign partnership under the nonrecognition of gain or loss on contribution rule. See Treasury Regulation 1.6038B-1(b)(2) for exceptions for transfers to certain foreign corporations.

    1. This rule applies only if the U.S. person holds at least a 10% interest in the partnership immediately before or after the contribution.

    2. Also, this rule applies only if the value of the property transferred exceeds $100,000 which includes the value of all property transferred during the 12 month period ending on the date of the transfer.

    Note:

    The value of any property transferred is the fair market value at the time of its transfer.

  6. Statute of Limitations. The exception of IRC section 6501(c)(8) applies to the income tax deficiency from items required to be reported under IRC section 6038B, but not to the penalty under that section.

20.1.9.7.1  (11-20-2007)
Penalty Assertion

  1. A penalty is asserted, on Form 8278 using Reference Number 676, when the examiner establishes that the taxpayer:

    1. Is a U.S. person and has made a transfer to a foreign corporation or a foreign partnership as described above,

    2. Has failed to timely file Form 926 and attachments, or Form 8865, as specified in IRC section 6038B, and

    3. Has not shown that such failure to comply was due to reasonable cause.

  2. The penalty under IRC section 6038B(c) follows deficiency procedures.

20.1.9.7.2  (11-20-2007)
Penalty Computation

  1. If a U.S. person fails to furnish information in accordance with IRC section 6038B regarding some or all of the property transferred, then, with respect to such property:

    1. It is not considered to have been transferred for use in the active conduct of a trade or business outside the U.S. and does not qualify for any other exception under the regulations of IRC section 367(a), and gain must be recognized with respect to that property to the extent provided in IRC section 367(a) if transferred to a foreign corporation; and

    2. The U.S. person must pay a penalty equal to 10% of the fair market value of the property on the date of transfer, not to exceed $100,000, unless the failure was due to intentional disregard.

    3. If the property was contributed to a foreign partnership, in addition to the monetary penalty, gain must be recognized by the transferor.

  2. The period for limitations on assessment of tax on the transfer of such property does not begin to run until the date on which the U.S. person complies with the reporting requirements.

    Note:

    The exception of IRC section 6501(c)(8) applies to the income tax deficiency from items required to be reported under IRC section 6038B, but not to the penalty under that section.

  3. See examples under Treasury Regulations 1.6038B-1 and -2.

20.1.9.8  (11-20-2007)
IRC Section 6038C(c) – Information with Respect to Foreign Corporations Engaged in U.S. Business

  1. IRC section 6038C makes foreign corporations engaged in U.S. business subject to the same information reporting and record maintenance requirements that apply under IRC section 6038A to U.S. 25 percent foreign-owned corporations, and penalizes them in the same manner. See IRM 20.1.9.5.

  2. Reporting/Filing Requirements. Foreign corporations subject to this section must maintain any records that were in existence on or after March 20, 1990.

    Caution:

    Regulations under IRC section 6038C have not been issued. Therefore, no penalty can be asserted at this time unless the taxpayer has destroyed records in existence on or after March 20, 1990. See Treas. Reg. 1.6038A–3(h).

  3. Use RN 603 on Form 8278.

20.1.9.9  (11-20-2007)
IRC Section 6038C(d) – Noncompliance Penalty

  1. IRC section 6038C(d) requires that a foreign related party authorize the reporting corporation to act as its limited agent for summons purposes and requires that the reporting corporation maintain and produce records regarding transactions with the foreign related party. This penalty parallels the penalty discussed in IRM 20.1.9.6.

    1. The difference is that the IRC section 6038A(e) penalty applies to 25 percent foreign-owned U.S. corporations, and

    2. IRC section 6038C(d) penalty applies to foreign corporations engaged in a trade or business in the U.S. at any time during the taxable year, within the meaning of IRC section 864(b).

  2. Reporting/ Filing Requirements. The requirement is the same as that of IRC section 6038A(d). See IRM 20.1.9.5(2). Foreign corporations subject to this section must maintain any records that were in existence on or after March 20, 1990.

    Caution:

    Regulations under IRC section 6038C have not been issued. Therefore, no penalty can be asserted at this time unless the taxpayer has destroyed records in existence on or after March 20, 1990. See Treas. Reg. 1.6038A–3(h).

  3. Definitions. See the definitions discussed in IRM 20.1.9.5.1. above.

  4. IRC section 6038C(d) follows deficiency procedures.

20.1.9.10  (11-20-2007)
IRC Section 6039F(c) – Gifts from Foreign Persons

  1. IRC section 6039F contains reporting requirements for U.S. individuals who receive large gifts from foreign persons, effective for amounts received after August 20, 1996.

  2. Reporting/Filing Requirements. U.S. persons who receive gifts from foreign individuals during the taxable year which exceed $10,000 must file Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. The threshold for gifts received from foreign corporations or foreign partnerships after December 31, 1996 was originally $10,000 but the amount is adjusted each year for inflation. For TY 2006, the initial $10,000 threshold for a filing requirement has been raised to $12,760. The instructions for Form 3520 for any year will have the dollar threshold for the filing requirement for that year.

  3. Form 3520 is required to be filed separately. Starting with the 2006 processing year, they will be filed in Ogden (prior years were filed in the Philadelphia campus). It is not attached to the related income tax return. The due date for filing is the same as the due date for the reporting U. S. person’s income tax return, including extensions. A Form 3520 is filed once a year for all reportable gifts within the year with respect to each U.S. person. See Notice 97-34 and the Form 3520 instructions for more specific information.

  4. Filing Verification. Form 3520 has been processed to Master File since 1997. It is on the Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust and for foreign gifts, the filing is further identified with a plan number.

    1. Begin research with a BMFOL"I" .

    2. BRTVU is also available and includes all lines on the Form 3520, including reasons for filing the return.

    3. If the U.S. person is an individual, the TIN will be immediately followed by the letter "V" . If a "W" appears immediately after the TIN, it indicates an invalid SSN. If there is "no record" of this TIN, no returns have been filed.

  5. Penalty Assessment. A penalty is assessed when the examiner determines that:

    1. A U.S. person received a reportable monetary gift from a foreign person,

    2. Has failed to timely file Form 3520, and

    3. Has not shown that failure to file was due to reasonable cause.

    4. This penalty is assessed on Form 8278.

  6. Monetary Penalty. Reference Number 668. The penalty for failure to file a timely, complete Form 3520 is 5 percent of the amount of such foreign gift for each month for which the failure continues after the due date of the reporting U. S. person’s income tax return (not to exceed 25% of such amount in the aggregate).

  7. Penalty tax adjustment. IRC section 6039F(c)(1)(A) states that the Secretary will determine the tax consequence of the receipt of such gift if the information is not filed timely. This adjustment is subject to deficiency procedures.

20.1.9.11  (11-20-2007)
IRC Section 6039G – Expatriation Reporting Requirements

  1. P.L. 108-357 (American Jobs Creation Act of 2004) made significant amendments to IRC section 6039G for individuals who expatriate after June 3, 2004. This section provides a requirement to file Form 8854, Initial and Annual Expatriation Information Statement, for individuals who abandon their United States citizenship or lose their U.S. long-term resident status.

  2. Reporting/Filing Requirements.

    1. Pre-AJCA 2004: For individuals that expatriated prior to June 4, 2004, a Form 8854 was due on the date of expatriation (for U.S. citizens) or the due date of the individual’s U.S. income tax return (for long-term residents). There was no annual requirement to file a Form 8854 after the initial form was filed.

    2. Post-AJCA 2004: For individuals who expatriate after June 3, 2004, there is no due date for the initial Form 8854. But their expatriation will not be recognized for tax purposes until a complete initial Form 8854 is filed with the IRS. If the expatriate is subject to the alternate expatriation tax regime (under IRC section 877) on the date of expatriation, an annual Form 8854 is then required for each of 10 tax years after the date of expatriation.

  3. The following information is required on the initial and annual statements by the individual who expatriates:

    1. Taxpayer’s TIN,

    2. Mailing address of such individual’s foreign residence,

    3. Foreign country in which the individual resides,

    4. Foreign country of which the individual is a citizen,

    5. Information detailing the income, assets, and liabilities of such individual,

    6. Number of days the individual was present in the U.S. during the taxable year, and

    7. Such other information the Secretary shall prescribe.

  4. Penalty Assessment. The penalty under IRC section 6039G(c) is assessed when the examiner determines that the required Form 8854 is not filed or the individual failed to include all of the required information on the statement or included incorrect information.

    1. Pre-AJCA 2004: For individuals who expatriated prior to June 4, 2004, if the individual has failed to file a complete, accurate and timely initial Form 8854, the penalty for failure to file the initial Form 8854 is asserted.

    2. Post-AJCA 2004: For individuals who expatriate after June 3, 2004, the penalty applies for failure to file a required annual Form 8854 for each of the 10 tax years after the date of expatriation.

    3. This penalty is assessed using Form 8278 with Reference Number 671.

      Note:

      Since there is no due date for the initial Form 8854, there is no penalty associated with such form.

  5. Reasonable Cause. The penalty (whether pre-AJCA or post-AJCA) will not be asserted if the failure to provide the required statement and information was due to reasonable cause and not to willful neglect.

  6. Penalty Computation. The penalty computation under IRC section 6039G is different for individuals who expatriate prior to June 4, 2004 and individuals who expatriate after June 3, 2004.

    1. Pre-AJCA 2004: For individuals who expatriated prior to June 4, 2004, if the individual has failed to file a complete, accurate and timely initial Form 8854, the penalty is the greater of 5% of the tax required to be paid under IRC section 877 or $1,000 for each taxable year that the Form 8854 was not filed.

    2. Post-AJCA 2004: For individuals who expatriate after June 3, 2004, the penalty for failure to file an annual Form 8854 is $10,000 per required annual form for each of the 10 tax years after the date of expatriation.

20.1.9.12  (11-20-2007)
IRC Section 6652(f) – Foreign Persons Holding U.S. Real Property Investments

  1. IRC section 6652(f) provides a penalty for failure to meet reporting requirements under IRC section 6039C.

    Caution:

    Regulations under IRC section 6039C have not been issued. Therefore, the penalty is not to be assessed for failure to file as required by this section.

  2. Reporting/Filing Requirements. IRC section 6039C requires any foreign person holding a direct investment in U.S. real property interests for a calendar year to file a return. The requirement is met by providing information such as name and address, a description of all U.S. real property interests, and other information prescribed by regulation.

  3. Penalty Assessment. The penalty is applicable when it has been established that the foreign person has failed to meet the above requirements. Assess this penalty with RN 604 on Form 8278.

20.1.9.13  (11-20-2007)
IRC Section 6677(a) – Foreign Trust Information Return

  1. IRC section 6677(a) provides a penalty for failure to file an information return with respect to a foreign trust as required under IRC section 6048.

    1. The reporting requirements and penalty provisions were substantially changed by the Small Business Job Protection Act of 1996 (P.L. 104-188) for events after August 20, 1996.

    2. Notice 97-34 provides additional guidance on the filing requirements and penalties. This section reflects the law after August 20, 1996.

  2. Reporting/Filing Requirement. Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is required to be filed by a U.S. person who creates, transfers property to or receives a distribution from, or is considered to be the owner of a certain foreign trust. The form must be complete and accurate to be considered filed. IRC section 6048 authorizes the Secretary to prescribe the information required to be reported. Notice 97-34 and the instructions for Form 3520 describe the information required to be reported.

  3. U. S. Owners/Creation or Transfer. IRC section 6048(a) generally provides that any U.S. person who directly or indirectly transfers money or other property to a foreign trust (including a transfer by reason of death) must report such transfer on Form 3520. Generally, a U.S. owner who creates and or transfers property to a foreign trust is considered the owner of that portion of the foreign trust unless there is no possibility of the trust having a U. S. beneficiary. IRC section 679 and regulations more specifically describe individuals who are considered owners of foreign trusts and describe exceptions to the general rule.

    1. Frequently, U.S. persons who make transfers to Canadian Registered Retirement Savings Plans (RRSPs) are not required to file. See Notice 2003-75 and Revenue Procedure 2002-23.

    2. Generally, foreign trusts described in IRC sections 402(b), 404(a)(4), 404A, or 501(c)(3) are not reportable under these requirements. See IRC section 6048(a)(3)(B)(ii).

    3. Transfers involving fair market value sales are also not reportable. See IRC section 6048(a)(3)(B)(i), Notice 97-34 and IRC section 679 for additional information.

  4. Instructions require the annual filing of Form 3520 by U.S. owners with an attached copy of the owner's statement from Form 3520-A. (There is no penalty for failure to file the Form 3520 if there was no contribution or distribution for that accounting period. However, a penalty will apply if the Form 3520-A was not timely filed. Also, the filing history of this return will have an impact on reasonable cause for not filing a return).

  5. Distributions/U.S. Beneficiaries. IRC section 6048(c) generally requires a U.S. person who receives a distribution, directly or indirectly, from a foreign trust after August 20, 1996, to report on Form 3520 the name of the trust, the aggregate amount of distributions received from the trust during the taxable year and such other information as the Secretary may prescribe. Refer to Notice 97-34 and instructions for more information.

    1. Distributions to the grantor or owner of the foreign trust must be reported.

    2. Distributions from non-grantor foreign trusts must be reported.

    3. Generally, loans to a U.S. person are considered distributions.

    4. Indirect distributions must be reported. For example: Distributions by use of a credit card, where the charges on that credit card are paid or otherwise satisfied by a foreign trust or guaranteed or secured by the assets of a foreign trust must be reported as distributions under IRC section 6048(c) for the year in which the charge occurs.

    5. Distributions reported as taxable compensation on the income tax return of the recipient are generally not required to be reported.

  6. Forms 3520 are required to be filed separately. Starting with the 2006 processing year, they will be filed in Ogden (prior years were filed in the Philadelphia Campus) . They are not attached to the related income tax return. In addition:

    1. Form 3520 is filed once a year for all reportable transactions within the year with respect to each U. S. person and each foreign trust. A separate Form 3520 is required for each foreign trust.

    2. Form 3520, filed by a U.S. owner, is required to have a copy of the owner's statement from Form 3520-A attached to the Form 3520.

    3. Form 3520 is required to be filed by the due date of the income tax return of a U.S. person, including extensions.

    4. A separate Form 3520 must be filed by each U.S. owner. However, married individuals who file Married Filing Joint may file one Form 3520.

  7. Filing Verification. Form 3520, processed to Master File since 1997, is on the Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust, the filing is further identified with a plan number.

    1. Begin research with a BMFOL "I." BRTVU is also available and includes all lines on the return including the foreign trust information that the Form 3520 provides.

    2. If the U.S. person is an individual, the TIN will be immediately followed by the letter "V" . If a "W" appears immediately after the TIN, it indicates an invalid SSN.

    3. If there is "no record" of this TIN, no returns have been filed.

20.1.9.13.1  (11-20-2007)
Penalty Assessment

  1. Reference Number 659. A penalty is assessed when the examiner determines that Form 3520 returns were required to be filed and were not timely filed or were not complete and accurate, and that the failure was not due to reasonable cause.

  2. Reasonable Cause. IRC section 6677 provides specific exceptions for reasonable cause and Notice 97-34 provides additional information:

    1. Refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause.

    2. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the trustee (or other person) for disclosing the required information. See IRC section 6677(d).

  3. The fact that the trustee did not provide the taxpayer with a copy of the owner’s statement of Form 3520-A is not reasonable cause. The taxpayer owner is also the person responsible for ensuring that the Form 3520-A is filed and that he receives a copy of the owner’s statement.

  4. Reference Number 619. IRC section 6677 provides for a continuation penalty if the required returns are not filed within 90 days after the Service mails notice of such failure to the taxpayer.

  5. Prior to 2003, assessments were made using Reference Number 677 for both Forms 3520 and Forms 3520-A.

20.1.9.13.2  (11-20-2007)
Penalty Computation

  1. Initial Monetary Penalty. Reference Number 659. The initial penalty for failure to file a timely, complete and accurate Form 3520 is 35 percent of the gross reportable amount. The gross reportable amount is defined in IRC section 6677(c) as:

    1. Contributions to the foreign trust: The gross value of the property involved in the event (determined as of the date of the event) in the case of a failure relating to IRC section 6048(a),

    2. Distributions from the foreign trust: The gross amount of the distributions in the case of a failure relating to IRC section 6048(c).

    3. Inaccurate reporting: The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person transfers property worth $1,000,000 to a foreign trust, but reports only $400,000 of that amount, penalties may be imposed only on the unreported $600,000. See Notice 97-34.

    4. Also, if the return is not filed and the Service assesses a penalty based on available information, additional assessments can be made if additional information is received.

  2. Continuation Penalty. Reference Number 619. If the information is not submitted within 90 days after the Service mails notice of such failure to the taxpayer, an additional penalty will apply. The continuation penalty is $10,000 for every 30-day period (or fraction thereof) that the information is not received. The maximum penalty for failure to file Form 3520 is the gross reportable amount described above. When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, the Service can mail notice of such failure to the taxpayer and if the taxpayer does not respond, the continuation penalty can be assessed.

    Example:

    The IRS has information that a taxpayer created a foreign trust and transferred $1,000,000 (cash or property) to the foreign trust in the same year and has not filed a return. The taxpayer was issued a notice letter and had not filed the return after 35 days following the expiration of the 90-day period:

      First assessment after 125 days:
      Reference Number 659 $350,000
    $1,000,000 X .35 = $350,000.
      Reference Number 619 $ 20,000
    2 months of the continuation portion of the penalty.

  3. Non-Compliance Tax Adjustment. IRC section 6048(c)(2) provides that any distribution from a foreign trust, whether from income or corpus, to a U.S. beneficiary will be treated as an accumulation distribution includible in the gross income of the distributee if adequate records are not provided to the Secretary to determine the proper treatment of the distribution. This adjustment follows deficiency procedures.

20.1.9.14  (11-20-2007)
IRC Section 6677(a) & (b) – Foreign Trusts with U.S. Owners

  1. IRC section 6677 reporting requirements and penalty provisions were substantially changed for annual accounting periods beginning after December 31, 1995. Notice 97-34 provides additional guidance on the filing requirements and penalties.

  2. IRC section 6677(b) modifies the penalty percentage under IRC section 6677(a) to 5 percent of the gross reportable amount for failure to file an information return with respect to U.S. owners of a foreign trust as required under IRC section 6048(b).

  3. Reporting/Filing Requirement. Form 3520-A, Annual Return of Foreign Trust With a U.S. Owner, is due by the 15th day of the third month after the end of the trust’s tax year. Each U.S. person treated as an owner of a foreign trust under IRC sections 671 through 679 is responsible for ensuring that the foreign trust files an annual return setting forth a full and complete accounting of all trust activities, trust operations and other relevant information as the Secretary prescribes. See IRC section 6048(b)(1). In addition, the U.S. owner is responsible for ensuring that the trust annually furnishes such information as the Secretary prescribes to U.S. owners and U.S. beneficiaries of the trust. See IRC section 6048(b)(1)(B).

  4. IRC section 6048 authorizes the Secretary to prescribe the information required to be reported. The instructions to Form 3520–A include all information required to be provided.

  5. U. S. Owners. IRC section 6048(a) generally provides that any U.S. person who directly or indirectly transfers money or other property to a foreign trust (including a transfer by reason of death) is considered an owner of that portion of the foreign trust.

    1. The U.S. person who creates and/or transfers property to a foreign trust is considered the owner of that portion of the foreign trust unless there is no possibility of the trust having a U. S. beneficiary. IRC section 679 and regulations more specifically describe individuals who are considered owners of foreign trusts and describe exceptions to the general rule.

    2. Frequently, U. S. persons who made transfers to Canadian Registered Retirement Savings Plans (RRSPs) are not required to file. See Notice 2003-75 and Revenue Procedure 2002-23.

    3. Generally, foreign trusts described in IRC sections 402(b), 404(a)(4), 404A, or 501(c)(3) are not reportable under these requirements. See IRC section 6048(a)(3)(B)(ii) and Notice 97-34.

    4. Transfers involving fair market value sales are also not reportable. See IRC section 6048(a)(3)(B)(i), Notice 97-34 and IRC section 679 for additional information.

    5. Form 3520-A is required to be filed separately in the Philadelphia Campus, but starting in the 2006 processing year it will be filed in Ogden. It is not attached to the related income tax return.

    6. Form 3520-A is required to give a full annual accounting of activities of the foreign trust as defined by the Secretary in the instructions.

  6. Form 3520-A includes an owner's statement for each U.S. person considered to be an owner of a portion of the foreign trust. The owner's statement is required to be provided to each U.S. owner of the foreign trust.

  7. Form 3520-A includes a beneficiary's statement for any distributions made to U.S. persons. The beneficiary's statement is required to be provided to each U.S. beneficiary.

  8. U.S. Agent. A copy of the authorization of agent must be attached to the Form 3520-A and must be substantially identical to the format shown in the instructions. The U.S. agent has a binding contract with the foreign trust to act as the foreign trust’s limited agent for purposes of applying IRC sections 7602, 7603, and 7604 with respect to a request by the IRS to examine records, produce testimony, or respond to a summons by the IRS for such records or testimony.

  9. Trusts without U.S. agents must have the following attached to the Form 3520-A to be considered complete:

    1. A summary of the terms of the trust including a summary of oral agreements that the U.S. owner(s) has with the trustee whether or not legally enforceable.

    2. Copy of any of the following that have not been previously provided:

      1. All trust documents and instruments,
      2. Any amendments to the trust agreement,
      3. All letters of wishes prepared by the settlor,
      4. Memorandum of wishes by trustee summarizing the settlor’s wishes, and
      5. Any other similar documents.

  10. Filing Verification. Forms 3520-A are processed to MFT 42 as a BMF account under the TIN of the foreign trust. These returns have been processed to MF since 2000. There is a separate extension for this return. It will post as a TC 460 with a date.

    IF, for the foreign trust, THEN
    you have a TIN, first do a BMFOL "I" to see what returns have been filed. There may be other MFTs posted to that TIN.
      there is a MFT 42, request BMFOL "T" and BRTVU the BRTVU has all lines of the return transcribed.
      there is no MFT 42 posting, the return has not been filed.
    you do not have the TIN Research NAME for a TIN.
    Print out the listings of TINs with similar names but no match.
    Print out the research and include it in your case.

20.1.9.14.1  (11-20-2007)
Penalty Assessment

  1. Reference Number 660. A penalty is assessed when the examiner determines that the returns were required to be filed and were not timely filed or were not complete and accurate, and the failure was not due to reasonable cause.

  2. Form 3520-A is considered incomplete if:

    1. The U.S. owner and/or U.S. beneficiary is not timely provided with the required statements.

    2. A foreign trust without a U.S. agent does not provide all the required attachments, e.g., summary of the terms of the trust, copies of trust documents or amendments to trust documents, and other required information.

    3. The U.S. agent does not provide information with respect to the trust after a request in writing as required by the terms of the U.S. agent agreement. Reasonable cause does not apply to the penalty in situations relating to a failure to provide information when requested.

    4. Form 3520-A does not contain substantially all of the required information on the return, e.g., amount of contributions and distributions, amount deemed as owned by each U. S. person, and balance sheet and income statement information.

  3. Reasonable Cause. IRC section 6677 provides specific exclusions for reasonable cause and Notice 97-34 provides additional information:

    1. The U. S. owner is responsible for ensuring that Form 3520-A is filed timely and includes all required information. The failure of the trustee or agent to timely file complete and accurate returns or provide information when requested is not reasonable cause for this penalty.

    2. Refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause.

    3. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the trustee (or other person) for disclosing the required information. See IRC section 6677(d).

  4. Reference Number 619. IRC section 6677 provides for a continuation penalty if the required returns are not filed within 90 days after the Service mails notice of such failure to the taxpayer. Prior to 2003, assessments were made using Reference Number 677 for both Forms 3520 and 3520-A, including the continuation portion of the penalty.

20.1.9.14.2  (11-20-2007)
Penalty Computation

  1. Initial Monetary Penalty. The initial penalty for failure to file a timely, complete and accurate Form 3520-A is 5 percent of the gross value of the portion of the foreign trust owned by the U.S. person. See IRC section 6677(c).

    1. The initial penalty is computed for failure to provide information or inaccurate reporting. The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person reports the value of the account as worth $400,000 but the correct value is $1,000,000, penalties may be imposed on the unreported $600,000. See Notice 97-34.

    2. Also, if the return is not filed and the Service assesses a penalty based on available information, additional assessments can be made if additional information is received.

  2. Continuation Penalty.Reference Number 619. If the information is not submitted within 90 days after the Service mails notice of such failure to the taxpayer, 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 after the expiration of the 90-day period.

    2. The maximum penalty for failure to file Form 3520-A is the gross value of the portion of the trust owned by the U.S. person.

  3. Special Situations. When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued and, if the taxpayer does not respond, the continuation penalty can be assessed.

    Example:

    IRS has information that a taxpayer transferred $100,000 to a foreign trust defined in IRC section 679 in 2002. Therefore, the taxpayer has a requirement to file Form 3520-A for 2002 and for each year thereafter. Unless the taxpayer provides evidence to the contrary or files the required returns, the gross value of the assets owned by the U.S. person is considered to be not less than the $100,000 transferred. The IRS issued a notice letter to the taxpayer for 2002 through 2007 and the required returns have not been filed:

      a. Initial assessment after 125 days (includes initial 90-day period, one full 30-day period, and one fractional 30-day period) from the date of the notice letter for each year - 2002, 2003, 2004, 2005, 2006, and 2007.
    1. Reference Number 660 for $ 5,000 (5% of $100,000)
    2. Reference Number 619 for $20,000
    3. Total assessment: $25,000 for each of the 6 years or $150,000.
      b. If noncompliance continues, additional assessments in 3-month increments can be made until the assessment amount for each year equals the gross reportable amount for each year – 2002, 2003, 2004, 2005, 2006, and 2007 -- or until the required returns are filed or the amount of the total assessment for each year equals $100,000.
    1. Reference Number 660 for $00.00.
    2. Reference Number 619 for $30,000 for each year.
      c. If additional information is received that changes the gross value owned by the U.S. person, additional assessments can be made or the original assessments can be adjusted.

20.1.9.15  (11-20-2007)
IRC Section 6679 – Return of U.S. Persons With Respect to Certain Foreign Corporations and Partnerships

  1. IRC section 6679 provides a penalty for failure to furnish information and timely file a return required under IRC section 6046 or 6046A.

  2. For tax years that began before January 1, 2005, IRC section 6679 provided a penalty for failure to furnish information and timely file a return required under IRC section 6035. IRC section 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 with Schedule N by the due date of the taxpayer’s income tax return, including extensions.

    Note:

    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.

  3. IRC section 6046 requires Form 5471 with 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, if 10 percent or more of the value of the stock is owned by a U.S. person,

    2. A U.S. person who owns 10 percent or more in value of the stock of a foreign corporation,

    3. Each person who is treated as a U.S. shareholder under IRC section 953(c), or

    4. Each person who becomes a U.S. person while owning 10 percent or more in value of the stock of a foreign corporation.

  4. IRC section 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.

  5. Penalty Assertion. The examiner must establish that the taxpayer:

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

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

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

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

20.1.9.15.1  (11-20-2007)
Penalty Computation

  1. Reference Number 613. The penalty for failure to file Form 5471, Schedule O, is $10,000 per failure. The penalty for failure to file Form 8865, Schedule P, is $10,000 per failure.

  2. Reference Number 614. Per IRC section 6679(a)(3), for tax years beginning prior to January 1, 2005, the penalty for failure to file Form 5471, Schedule N, is $1,000 per failure. For failure to file Form 5471, Schedule N, there is no continuation penalty.

  3. Continuation Penalty. Reference Number 619. In addition, for failure to file Form 5471, Schedule O, and/or Form 8865, Schedule P, if any failure continues for more than 90 days after notice letter by the Service, such person shall pay a continuation penalty in the amount of $10,000 for every 30-day period (or fraction thereof) that the information is not received. The maximum continuation penalty is limited to $50,000 per failure.

20.1.9.16  (11-20-2007)
IRC Section 6683 (Repealed) – Personal Holding Company Tax of Foreign Corporation

  1. IRC section 6683 provided a penalty for failure to file a true and accurate return of the tax imposed by IRC section 541 (personal holding company tax). Foreign personal holding company provisions have been repealed for tax years of foreign corporations beginning after December 31, 2004 and for tax years of U.S. shareholders with or within which such tax year of the foreign corporation ends.

  2. Reporting/Filing Requirement. Any foreign corporation which was a personal holding company (as defined in IRC section 542) is subject to personal holding company tax with respect to its income from sources within the U.S. A Schedule PH must be filed with a Form 1120, due on the same date as the Form 1120.

  3. Penalty Assertion. The examiner must establish that the taxpayer:

    1. Was a foreign personal holding company for a taxable year beginning before January 1, 2005,

    2. Has failed to file Schedule PH (Form 1120) to report the tax under IRC section 541, and

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

  4. Penalty Computation. The penalty is computed by multiplying the personal holding company’s income tax (including personal holding company tax imposed by IRC section 541) by 10 percent. This penalty is subject to deficiency provisions.

  5. Statute of Limitations. The personal holding company tax may be assessed at any time within 6 years after the Form 1120 for such year was filed. Treas. Reg. 301.6501(f)

20.1.9.17  (11-20-2007)
IRC Section 6686 – Information Returns for DISCs and FSCs

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

  2. Reporting/Filing Requirement. IRC section 6011(c) requires DISCs, former DISCs, and FSCs and former FSCs for a taxable year to furnish certain information to the Secretary and to persons who were shareholders at any time during such taxable year, and to keep such records as may be required by regulations prescribed by the Secretary.

    1. A DISC is required to supply its shareholders such information on Schedule K (Form 1120 DISC ), which is due to the shareholders on or before the last day of the second month following the close of its taxable year;

    2. A FSC is required to file Form 1120–FSC by the 15th day of the third month after the end of the corporation’s tax year;

    3. A DISC or FSC shall keep records supporting its reporting of gross income, deductions, credits and other matters on its income tax forms.

  3. Penalty Assertion. A penalty is asserted when the examiner has established that:

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

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

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

  4. Penalty Computation. The penalty under IRC section 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–DISC or Form 1120–FSC, unless it is shown that such failure is due to reasonable cause. Assess this penalty with RN 605 on Form 8278.

20.1.9.18  (11-20-2007)
IRC Section 6688 – Reporting for Residents of U.S. Possessions

  1. Reporting/Filing Requirement. For tax years beginning after 2000, IRC section 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 purposes, they became or ceased to be bona fide residents of a U.S. possession and fail to meet the requirements under IRC section 937 by filing Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession.

    1. Penalty Computation. For tax years ending after October 22, 2004, the penalty is $1,000 for failure to file Form 8898 or filing incorrect or incomplete information. For tax years ending before October 23, 2004, the penalty is $100.

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

    3. Form 8898 is filed with the Philadelphia Campus, not with the individual's tax return.

  2. Reporting/Filing Requirement. For tax years beginning after 2000, the penalty under IRC section 6688 also applies for failure to meet the requirements:

    1. Under Treas. Reg. 301.7654-1(d) by filing the Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of Northern Mariana Islands, as required of individuals who file U.S. income tax returns (for tax years after 2000) with adjusted gross income of $50,000, $5,000 of which is from Guam or CNMI sources, or

    2. Under IRC section 932(a) and Treas. Reg.1.932-1T(b)(1) by filing Form 8689, Allocation of Individual Income Tax to the Virgin Islands, as required of U.S. citizens or residents who are not bona fide residents of the Virgin islands for the entire year, and have income from the Virgin Islands or from a trade or business there.

    3. Penalty Computation. For tax years ending after October 22, 2004, the penalty is $1,000 for failure to file Form 5074 or 8689 or filing incorrect or incomplete information. For tax years ending before October 23, 2004, the penalty is $100.

  3. IRC section 6689 penalties are assessed on Form 8278 using Reference Number 669.

  4. For tax years 2001 through 2004, Form 8898 must be filed by October 16, 2006.

20.1.9.19  (11-20-2007)
IRC Section 6689 – Failure to File Notice of Foreign Tax Redetermination

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

    1. The amount of foreign taxes paid or accrued pursuant to IRC section 905(c), or

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

  2. Reporting/Filing Requirement. A taxpayer is required to notify the Service of any foreign tax redetermination that may affect U.S. tax liability. A taxpayer must provide notification by filing Form 1040X or 1120X and Form 1116 or 1118 within 180 days after a foreign tax redetermination. See Treas. Reg. 1.905–4T(b).

    1. If a foreign tax redetermination results in an additional assessment of foreign tax, the taxpayer has the 10-year period provided by IRC section 6511(d)(3)(A) to file a claim for additional foreign tax credits.

    2. When a foreign tax redetermination affects the indirect or deemed paid credit under IRC section 902 for taxable years after 1986, the taxpayer must provide notification by filing Form 1120X and Form 1118 for all tax years affected by the foreign tax credit redetermination. See Treas. Reg. 1.905–3T(d)(2)(iii). Notwithstanding the requirement in (1) above, Treas. Reg. 1.905–4T(d) provides that in no event shall the notification be required prior to the issuance of an announcement or regulation concerning the manner in which the notification must be filed.

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

  4. Foreign Tax Redetermination. 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. A refund of foreign taxes,

    2. A difference between the dollar value of the accrued foreign tax and the dollar value of the foreign tax actually paid attributable to differences in the units of foreign currency paid and the units of foreign currency accrued, or

    3. A 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.

  5. Penalty Assertion. A penalty is asserted on Form 4549 when the taxpayer has failed to notify the Service of a foreign tax redetermination. It is scheduled to be assessable following deficiency procedures with Reference Number 683 after January 2008.

  6. Penalty Computation. 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 is 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.

      Note:

      If this penalty applies, then the negligence penalty under IRC section 6662(b)(1) shall not apply.

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

20.1.9.20  (11-20-2007)
IRC Section 6712 – Failure to Disclose Treaty-Based Return Position

  1. IRC section 6712 was added by P.L. 100–647, TAMRA 1988, for returns due (without extensions) after December 31, 1988. This section provides a penalty for failure to disclose a treaty-based return position as required by IRC section 6114.

  2. Reporting/Filing Requirement. IRC section 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.

    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.

  3. Penalty Assessment. The penalty is assessed when the examiner determines that the taxpayer failed to meet the requirements of IRC section 6114 by not filing the proper form and does not have reasonable cause for failure to file.

  4. Penalty Computation. For an individual the penalty is $1,000 for each separate treaty-based position taken and not properly disclosed. For a C corporation, the penalty is $10,000 for each separate failure to disclose a treaty-based position.

  5. Waiver Criteria. Treas. Reg. 301.6712–1(b) provides the Director International, Director of Field Operations (DFO), or Campus Director with the authority to waive, in whole or in part, the penalty imposed under IRC section 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 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 statement is made under penalties of perjury.

Exhibit 20.1.9-1  (11-20-2007)
Quick Reference Guide to International Penalties

Taxpayer Filing Requirement IRC Penalty Section
U.S. person with interest in a foreign corporation (FC) or a foreign partnership (FP). FCs (Form 5471).
FPs (Form 8865).
FCs & FPs w/Foreign Disregarded Entities (FDE), (Form 8858). 		6038(b)
Penalty reducing foreign tax credit. FCs (Form 5471).
FPs (Form 8865).
FCs & FPs w/Foreign Disregarded Entities, (Form 8858). 		6038(c)
25 percent foreign-owned U.S. corporations. Form 5472 6038A(d)
25 percent foreign-owned U.S. corporations that fail to (i) authorize the reporting corporation to act as agent of a foreign related party or (ii) substantially comply with a summons for information. N/A 6038A(e)
Transferor of certain property to foreign persons (corporations and partnership). Form 926
Form 8865 Sch O 		6038B(c)
Foreign corporations engaged in U.S. business Form 5472 6038C(c)
Foreign corporations engaged in U.S. business that fail to (i) authorize reporting corporation to act as agent of a foreign related party or (ii) substantially comply with a summons for information. N/A 6038C(d)
Individuals receiving gifts from foreign sources exceeding $10,000 (adjusted for cost of living). Form 3520 6039F(c) 6677(b)
Individuals that relinquish their U.S. citizenship or abandon their long-term resident status. Form 8854 6039G
Foreign persons holding direct investments in U.S. real property interests. N/A 6652(f)
U.S. person who transfers to or receives a distribution from a foreign trust. Form 3520 6677(a)
U.S. Owner of a foreign trust. Form 3520-A 6677(b)
Failure to file returns with respect to acquisitions of interests in foreign corporations or foreign partnerships under § 6046 or § 6046A, or foreign personal holding company information under § 6035. Form 5471, Sch. O for § 6046.
Form 8865 Sch. P for § 6046A.
Form 5471, Sch. N for § 6035. 		6679
Foreign corporation failure to file personal holding company tax return. Form 1120, Sch. PH 6683
DISC, IC-DISC, or FSC failure to file returns or supply information. Form 1120-DISC,
Form 1120-IC-DISC, or
Form 1120-FSC 		6686
Allocation of Individual Income Tax to Guam or the CMNI. Form 5074 6688
Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession. Form 8898 6688
Allocation of Individual Income Tax to the Virgin Islands. Form 8689 6688
Taxpayer’s failure to file notice of foreign tax redetermination under § 905(c) or § 404A(g)(2). Form 1116 or Form 1118
(attached to 1040-X or 1120-X) 		6689
Taxpayer’s failure to file notice of foreign deferred compensation plan under § 404A(g)(2). N/A 6689
Taxpayer’s failure to disclose treaty-based return position. Form 8833 or statement 6712

Exhibit 20.1.9-2  (11-20-2007)
Reference Guide to Forms

FORM DESCRIPTION
886-A Explanation of Items (Audit Report)
870 Waiver of Restrictions on Assessment and Collection of Deficiency in Tax & Acceptance of Overassessment
926 Return by Transferor of Property to a Foreign Corporation
1040-X Amended U.S. Individual Income Tax Return
1041 U.S. Fiduciary Income Tax Return (for Estates and Trusts)
1042 Annual Withholding Tax Return for U.S. Source Income of Foreign Persons
1042-S Foreign Person’s U.S. Source Income Subject to Withholding
1116 Computation of Foreign Tax Credit (Individual, Estate or Trust)
1118 Computation of Foreign Tax Credit - Corporations
1120-FSC U.S. Income Tax Return of a Foreign Sales Corporation
1120-DISC U.S. Income Tax Return of a Domestic International Sales Corporation
1120-IC-DISC U.S. Income Tax Return of an Interest Charge Domestic International Sales Corporation
1120-X Amended U.S. Corporation Income Tax Return
3198 Special Handling Notice
3210 Document Transmittal
3244 Payment Posting Voucher
3520 Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts
3520-A Annual Return of Foreign Trust with U.S. Owner
3645 Computation of Penalty for Failure to File Information Returns or Furnish Information
3870 Request for Adjustment
4549 Income Tax Examination Changes
4549-A Income Tax Examination Changes
5074 Allocation of Individual Income Tax to Guam or Commonwealth of the Northern Mariana Islands
5344 Examination Examined Closing Record
5471 Information Return of U.S. Person with Respect to Certain Foreign Corporations
5472 Information Return of a 25% Foreign-Owned U.S. Corporation of a Foreign Corporation Engaged in a U.S. Trade or Business
8278 Computation and Assessment of Miscellaneous Penalties
8288 U.S. Withholding Tax Return for Disposition by Foreign Persons of U.S. Real Property Interests
8288-A Statement of Withholding on Disposition by Foreign Persons of U.S. Real Property Interests
8689 Allocation of Individual Income Tax to the Virgin Islands
8804 Annual Return for Partnership Withholding Tax (Section 1446)
8805 Foreign Partner’s Information Statement of Section 1446 Withholding Tax
8813 Partnership Withholding Tax Payment (Section 1446)
8833 Treaty Based Return Position Disclosure Under Section 6114 or 7701(b)
8854 Initial and Annual Expatriation Information Statement
8858 Information Return of U.S. Persons with Respect to Foreign Disregarded Entities
8865 Return of U.S. Persons with Respect to Certain Foreign Partnerships
8898 Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession

Exhibit 20.1.9-3  (11-20-2007)
Quick Guide for Reference Numbers to Process International Penalty Assessments
(See Form 8278 for current updates)

Reference No. Penalty Penalty Rate/Amount IRC Section
603 Failure of Foreign Corporation Engaged in a U. S. Business to Furnish Information or Maintain Records $10,000 per failure within 90 days of initial notification, plus an additional penalty of $10,000 after the expiration of such 90-day period. No maximum penalty amount. 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 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 1120–DISC or -FSC 6686
613 FTF Form 5471 Sch O (Sec. 6046) / Form 8865 Sch P (Sec. 6046A) $10,000 per failure within 90 days of initial notification. Additional penalty of $10,000 for each 30-day period after the expiration of such 90-day period not to exceed $50,000 6679
614 FTF Form 5471 Sch N (Sec. 6035) $1,000 per period for each failure 6679
619 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. 6038
6038A
6677
6679
623 FTF Form 5471 / Form 8865 $10,000 per failure plus FTC reduction within 90-day initial notification period not to exceed $50,000. 6038(b)
625 Failure to Provide Information with Respect to Certain Foreign-Owned Corporations (Form 5472) $10,000 per failure within 90 days of initial notification, plus an additional penalty of $10,000 after the expiration of such 90-day period. No maximum penalty amount. 6038A
659 FTF Form 3520 transactions with foreign trusts (IRC Sec. 6048(a)) 35% of the gross reportable amount 6677(a)
660 FTF Form 3520-A Foreign Trust with U.S. Owner (IRC Sec. 6048(b)) 5% of the gross reportable amount 6677(b)
669 (IMF) FTF Form 8898 Regarding Residence in a U.S. Possession required by IRC sec. 937(c) $1,000 per failure for tax years ending after 10/22/04. $100 per failure for tax years ending before 10/23/04. 6688
FTF Form 5074 Allocation of Income Tax to Guam or CNMI required by IRC sec. 7654 and Regulations sec. 301.7654-1(d) $1,000 per failure for tax years ending after 10/22/04. $100 per failure for tax years ending before 10/23/04. 6688
FTF Form 8689 Allocation of Income Tax to VI required by IRC sec. 932(a) and Regulations sec. 1.932-1T(b)(1) $1,000 per failure for tax years ending after 10/22/04. $100 per failure for tax years ending before 10/23/04. 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 or the greater of 5% of the required tax OR $1,000 per failure for expatriation after or before June 4, 2004, respectively. 6039G
676 FTF Form 926/Form 8865 Sch O 10% of the fair market value of property at time of transfer or exchange, not to exceed $100,000. No maximum amount of penalty for failure due to intentional disregard. 6038B
668 FTF Form 3520 for reporting receipt of certain foreign gifts 5% of the amount of the gift per month not to exceed 25% 6039F
1. Prior to 2003 Reference Number 677 was used to assess IRC 6677/6048 in relation to Forms 3520 and 3520-A.
2. Check current version of the Form 8278 on publish.no.irs.gov,for the most up to date listing of penalty reference numbers.

Exhibit 20.1.9-4  (11-20-2007)
International Penalties Subject to or Not Subject to Deficiency Procedures

Penalty Section Form Amount Deficiency Procedures Background
6038(b) FC 5471 $10,000 for initial failure and $10,000 continuation penalty for each 30 day period after 90 days notice (Continuation penalty not to exceed $50,000) (reflects increase for tax years beginning after 8/5/97). Note: FP penalties postponed for tax years after 8/5/97 until final regulations published on 7/22/98. No FCs – tax years beginning after 1962;
FPs – tax years ending after 12/31/00;
FCs & FPs w/ FDEs – tax years of tax owner (FC or FP) beginning on or after 01/01/ 2004.
6038(c) FCs – 5471.
FPs – 8865.FCs & FPs w/FDEs – 8858. 		10% reduction in foreign tax credit plus an additional 5% continuation penalty for each 3-month period after 90 days notice, total not to exceed the greater of $10,000 or foreign business income for accounting period of failure. NOTE: FP penalties for tax years beginning after 8/5/97, postponed until final regulations published on 7/22/98. Yes FCs – tax years beginning after 1962;
FPs – tax years ending after 12/31/00;
FCs & FPs w/ FDEs – tax years of tax owner (FC or FP) beginning on or after 01/01/2004.
6038A(d) 5472 $10,000 for initial failure and $10,000 continuation penalty for each 30-day period after 90 days notice. No Tax years beginning after 1982.
6038A(e) N/A Determination of deductions and costs for transaction based upon information available to Secretary. Yes Tax years beginning after 7/10/89.
6038B(c) 926 and 8865 Sch O 10% of FMV of property, not to exceed $100,000 (unless intentional disregard) and, if § 721 contribution to foreign partnership, the gain is recognized (reflects change for post- 8/5/97 transfers/exchanges). No, monetary.
Yes, gain. 		Transfers or exchanges to corporations after 1984 and to partnerships after 8/5/97.
6038C(c) 5472 $10,000 for initial failure and $10,000 continuation penalty for each 30-day period after 90 days notice. No Awaiting regulations
6038C(d) N/A Treatment of transaction based upon information available to Secretary. Yes Awaiting regulations
6039F(c) 3520 5% of the value of the gift for each month in which the gift is not reported (not to exceed 25%). Also, if the U.S. person fails to file, the tax consequences of the receipt of gift may be determined by the Secretary. Yes – § 6039F(c)– (1)(A).
No – § 6039F(c)- (1)(B). 		Amounts received after 8-20-96.
6039G 8854 For tax years prior to 06/04/2004: Greater of 5% of the tax required to be paid under IRC § 877 or $1,000 for each taxable year that the initial Form 8854 is not filed. For tax years after June 3, 2004: $10,000 per required annual statement. No Prior to 2004: Initial statement due for expatriations after 6/7/97.
After 2004: Annual statements due for 10 tax years after expatriation if IRC § 877 applies on date of expatriation.
6652(f) N/A $25 per day (limited to the lesser of $25,000 or 5% of the fair market value of U.S. real property interests owned during the year). Yes – § 6652(f)(1) Awaiting § 6039C regulations.
6677(a) 3520 35% of the gross reportable amount plus continuation penalty of $10,000 per 30-day period after 90 days notice not to exceed gross reportable amount. See Notice 97-34. No Reportable events and distributions after 8/20/96 (see Notice 97-34 and Ann. 98-30 for transition rules).
6677(b) 3520-A 5% of the gross reportable amount plus continuation penalty of $10,000 per 30-day period after 90 days notice not to exceed gross reportable amount. See Notice 97-34. No Tax years of U.S. person beginning after 1995 (see Ann. 98-30 for transition rules).
6679 5471, Sch O for § 6046.
8865 Sch P for § 6046A.
5471 Sch N for § 6035. 		For foreign corporations and foreign partnerships, $10,000 plus continuation penalty of $10,000 for each 30-day period after 90 days notice (continuation penalty not to exceed $50,000) (reflects increase for transfers/changes after 8/5/97); For foreign personal holding companies (FPHCs), $10,000 penalty per return for tax years of foreign corp. beginning before 1/1/05 (see note under effective date). No – § 6679(b) Corporations – 1/1/63
Partnerships – 1/1/00
FPHC 1/1/63- 12/31/04
NOTE: FPHC provisions repealed effective taxable years of foreign corp. beginning after 12/31/04, and to tax years of U.S. shareholders w/ or w/in which such tax year of foreign corp. ends.
6683 1120, Sch PH 10% of personal holding company income tax (including § 541 tax). Yes Tax years after 1966.
6686 1120 - DISC
1120-IC–DISC, or
1120-FSC 		$100 for each failure to supply information not to exceed $25,000; $1,000 for each failure to file return. Yes DISC – tax years beginning after 1971.
FSC – tax years ending after 1984.
6688 5074 and
8689 		$100 for each failure to file Form 5074 with U.S. income tax return.
Effective for tax years ending after 10-22-2004 – penalty is increased to $1,000 per failure. 		Yes Tax years beginning after 1972.
8898 New form effective for tax years ending after 10-22-2004 – Penalty is increased to $1,000 per failure. Yes New form effective for tax years ending after 10-22-2004.
Note: AJCA Section 908 made this provision retroactive 3 years to include tax years 2001, 2002, and 2003.
6689 1116 or 1118 (attach to 1040-X or 1120-X) Foreign tax redetermination under §905(c) or §404A(g)(2) – 5% of the deficiency if the failure is for not more than one month, and an additional 5% for each month or fraction thereof while the failure continues not to exceed 25% of the deficiency. Yes Awaiting regulations (applies to redeterminations after 1979).
N/A Foreign deferred compensation plan under §404A(g)(2) – 5% of the deficiency if the failure is for not more than one month, and an additional 5% for each month or fraction thereof while the failure continues not to exceed 25% of the deficiency. Yes Awaiting regulations (applies to employer contributions for tax years after 1979).
6712 8833 For each separate treaty-based position taken and not properly disclosed, $10,000 for C corporations and $1,000 for all other taxpayers. Yes Returns due after 1988.

Exhibit 20.1.9-5  (11-20-2007)
Reasonable Cause Relief

Penalty Section Form Reasonable Cause Relief
6038(b) FCs – 5471
FPs – 8865
FCs & FPs with Foreign Disregarded Entities – 8858 		Yes
6038(c) FCs – 5471
FPs – 8865
FCs & FPs with Foreign Disregarded Entities – 8858 		Yes
6038A(d) 5472 Yes
6038A(e) N/A N/A
6038B(c) 926
8865 Sch O 		Yes
6038C(c) 5472 Yes
6038C(d) N/A N/A
6039F(c) 3520 Yes
6039G 8854 Yes
6652(f) N/A Yes
6677(a) 3520 Yes
6677(b) 3520-A Yes
6679 5471, Sch O for § 6046
8865 Sch P for § 6046A
5471 Sch N for § 6035 		Yes
6683 1120, Sch PH Yes
6686 1120-DISC,
1120-IC-DISC, or
1120-FSC 		Yes
6688 5074
8689
8898 		Yes
6689 1116 or 1118
(attach to 1040-X or 1120-X) 		Yes

More Internal Revenue Manual