21.8.2  BMF International Adjustments (Cont. 2)

21.8.2.12 
Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons

21.8.2.12.6 
Failure To Deposit Penalties - Form 1042

21.8.2.12.6.1  (10-01-2013)
Form 1042 FTD Penalty Resulting From Line 66 Entry

  1. Form 1042 returns with an entry on line 66 (posted as a TC 766) may have resulted in the generation of a CP 276-B notice or the assessment of an FTD penalty. A programming change to correct this problem was implemented on 01-01-2009. Use the following procedures when addressing inquiries concerning these FTD penalties generated prior to the programming change:

    1. To determine if all or a portion of the penalty is caused by the TC 766 credit application date, subtract the TC 766 amount from the December 31 amount on the liability page (first page) of FTDPN. Press enter to recalculate. The result will calculate the correct FTD penalty for the account. Adjust the FTD penalty accordingly. Attach a print of the FTDCOMP page to the case or capture the FTDPN calculation if working on CIS.

    2. Send a Letter 1447C, or other appropriate letter, to explain the new penalty amount if there is a change to the FTD penalty other than a full abatement.

    3. If the taxpayer is responding to a CP 276-B (the penalty is not assessed), explain the notice is an educational notice to taxpayers whose deposit penalty is waived and apologize for the inconvenience.

      Caution:

      ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

    4. If a payment is submitted in response to a CP 276-B because the taxpayer perceived this to be a bill, do not assess the FTD penalty. Inform the taxpayer that this is an educational notice to explain the deposit requirements and does not require a response. Also inform the taxpayer that the payment will be released for refund or offset.

21.8.2.12.7  (10-01-2009)
Exemptions from Chapter III Withholding (CTW)

  1. A withholding agent must withhold income tax at the statutory rate or lower treaty rate, unless one of the following conditions are met:

    • The income is exempt by treaty.

    • The income is exempt by an IRC section.

    • The income is considered foreign source.

    • The income is considered "effectively connected with a U.S. trade or business."

    • The foreign individual or entity is considered a resident of the United States for income tax purposes.

  2. All exempt or reduced withholding must be based on the applicable alien withholding certificate (1078, W-8BEN, W-8ECI, W-8EXP, W-8IMY, or W-8CE) or a statement signed under the penalties of perjury attesting to the recipient's country of residence for income tax purposes. See IRM 21.8.2.17, Withholding Certificates.

  3. Effective January 1, 2001, Form W-8 series documents (listed below) replaced the following forms:

    Obsolete Form New Form W-8 Series Replacement
    W-8, Certificate of Foreign Status W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. See IRM 21.8.2.17.2
    Form 1001, Ownership, Exemption, or Reduced Rate Certificate W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. See IRM 21.8.2.17.2
    Form 4224, Exemption From Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the U.S. W-8ECI, Certificate of Foreign Person's Claim for Exemption From Withholding on Income Effectively Connected With the Conduct of a Trade or Business in the United States. See IRM 21.8.2.17.3
    Form 8709, Exemption From Withholding on Investment Income of Foreign Governments and International Organizations W-8EXP, Certificate of Foreign Government or Other Foreign Organization for U.S. Tax Withholding. See IRM 21.8.2.17.4
      W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for U.S. Tax Withholding. This is a new form and does not replace a prior form. See IRM 21.8.2.17.5
      W-8CE, Notice of Expatriation and Waiver of Treaty Benefits. See IRM 21.8.2.17.6

21.8.2.12.8  (10-01-2013)
Amended Returns - Form 1042

  1. Form 1042 reports money withheld from nonresident alien individuals and businesses.

    1. The withheld amounts are paid to IRS and do not belong to the withholding agent if they consist entirely of funds withheld from the nonresident alien or entity.

    2. For deposit rules, see IRM 21.8.2.12.4 and for deposit due dates, see Exhibit 20.1.4-8, Form 1042 Deposit Requirements For All Periods, in IRM 20.1.4, Penalty Handbook - Failure to Deposit Penalty.

    3. Tax decreases are examination criteria. See IRM 21.8.2.1.13, Examination Criteria.

  2. Most requests for adjustments occur when payers mistakenly withhold tax at the wrong rate, or from recipients exempt from taxation, either under treaty provisions or for reasons described in IRC § 1441 and IRC §1442.

  3. The same criteria is used to decide the validity of issues raised by the taxpayer whether submitted as amended Form 1042 (the "Amended Return" box at the top of the Form 1042 is checked), Form 843, or a correspondence request for adjustment or abatement.

  4. When claims are received without enough information to determine if the special procedural criteria listed below have been met, correspond with the taxpayer. See IRM 21.8.2.12.9, Processing Claim Adjustments for Form 1042.

  5. Refunds by the IRS to the withholding agent or payer can only be done if the conditions set forth in IRC § 1461, IRC § 1464, and IRC § 6414 are met. The following is a list of situations where refunds of amounts claimed are acceptable:

    1. The amount was not actually withheld: Math error only in computing the tax liability on Form 1042:

      Example:

      Two separate divisions within the same company (payer) duplicate their reported liability, without actually withholding the amounts twice.

    2. Error was made only in the amounts deposited:

      Example:

      The withholding agent only withheld $300 tax, but mistakenly deposited $350. The $50 error can be refunded to the withholding agent, since the withholding agent is the actual owner of the erroneous amount.

    3. The amount was actually withheld, but discovered before the close of the tax year. If the withholding agent/payer over withholds, or withholds on an exempt recipient, they may treat the amount as erroneously withheld, and refund it to the payee only if made prior to the last deposit, but before the Form 1042 is filed, and the Form 1042-S is issued.

  6. The Form 1042-S must reflect the correct lower withholding and the deposits for the year should be reduced accordingly. Only the correct amount of withholding should be reported on the Form 1042. The excess deposits will be refunded under normal settlement procedures.

  7. If a complete package is received, but the error was discovered after the close of the calendar year, refer to Examination. They usually recommend disallowance of the claim and/or amended Form 1042 when the:

    • Last deposit has been made for the tax year

    • Form 1042 has been filed, and

    • 1042-S forms have been issued to the recipient(s)

  8. Overpayments discovered after the return has been filed (March 15) can be claimed only by the recipient on an Income Tax Return (Form 1040NR or 1120-F) with the credit substantiated by attaching a Form 1042-S.

  9. Follow the procedures in the following table for processing amended 1042-S forms (submitted with or without Form 1042):

    If... Then...
    Making adjustments for prior years to the amount of tax reported, or to amounts that were actually withheld resulting in a tax decrease Reject and advise, using a Letter 916C, that an income tax return must be filed to claim the overwithheld amount. Input TC 290.00, Blocking Series 18 or 15 for cases worked in CIS.
    The change is for the correction of a math error only in the liability reported on the original return, or to correct errors in ownership Allow (Form 1042 must be attached). Send original/amended 1042-S forms to Ogden Submission Processing Campus at Internal Revenue Service, P.O. Box 409101, Ogden, UT 84409
    Change accepted by Examination Adjust the Form 1042. Input the adjustment (TC 29X) with Reference Code 011.
    An amended Form 1042 return is received showing an underpayment or under withholding resulting in a tax increase The withholding agent is liable for the entire tax and interest from the due date. Assess the additional tax. Adjust penalty if necessary. See IRM 20.1.4.21.3, Amended or Supplemental Return (Tax Decrease or Non-interest-free Tax Increase), for additional information.

    Caution:

    If an additional payment is not on the account, research IDRS for corresponding payment that may have posted to the current tax period, a different tax liability or for a TC 650 for an amount greater than zero, which may indicate a misapplied payment. If an additional payment is located, transfer using CC ADD/ADC 24 or ADD/ADC 34.

    Reminder:

    The amount of tax withheld on income for foreign persons under sections 1441 through 1446, and the amount of tax assumed under section 1451 are chapter 3 taxes. Accordingly, to the extent that an overpayment arises from those taxes being deducted, withheld and reported on Form 1042, the 180-day period applies. See IRM 21.8.2.9.6.1, 180-day interest-free Period for Chapter 3 Withholding.

    Note:

    With the large amounts of gross income now being reported, there may not be enough space to enter the full amount for Reference Code 011 on REQ54. Enter as much as the system allows and initiate additional TC 290.00, Hold Code 3, Reference Code 011 REQ54 adjustments until the total of these adjustments reflect the full amount needed.

  10. Amended/corrected 1042-S forms are sometimes submitted with the amended Form 1042. In this case, the corrected 1042-S form is regarded as a supporting schedule for adjustments. If the corrected 1042-S form is with the amended Form 1042, attach copies of the 1042-S forms to the adjustment document. Send the original corrected/amended 1042-S forms to:

    Internal Revenue Service
    Ogden Submission Processing Campus
    P.O. Box 409101
    Ogden, UT 84409

  11. TRNS 193 notices are generated for all duplicate (multiple) return conditions processed through pipeline.

  12. Follow general guidelines in IRM 21 and specific adjustment procedures in IRM 21.7.9.4,Duplicate Filing Conditions Procedures, to resolve the "-A" freeze unless the entity is a Qualified Intermediary (QI), in which case apply those specific procedures contained in Qualified Intermediary Agreements (QI). See IRM 21.8.2.12.10.

21.8.2.12.9  (10-01-2013)
Processing Claim Adjustments for Form 1042

  1. An adjustment to the Form 1042 account is made using:

    • MFT 12

    • Blocking Series 00, if made with the original

    • Blocking Series 15, if made without the original

    • Blocking Series 18 if working in CIS

  2. An adjustment to the gross income paid (item reference number 011) can be done at any time.

  3. However, no tax decrease adjustment can be made to the withholding tax after the due date of the Form 1042, unless special criteria exists. See IRM 21.8.2.12.8, Amended Returns - Form 1042.

    Note:

    Use IDRS to ensure each individual recipient's account does not contain a TC 766 credit for the same amount of the withholding agents amended return decrease.

  4. When a claim for tax decrease is received, verify that the taxpayer has submitted substantiation.

    1. If the taxpayer has submitted substantiation, request the original return, secure research on the withholding agent and each Form 1042-S recipient, and forward the case to Examination.

    2. If the taxpayer did not provide substantiation with the claim for tax decrease, input a TC 290 .00, Blocking Series 18 or 15 for cases worked in CIS, and send Letter 916C rejecting the claim stating that: "We are unable to consider your claim because you failed to provide the specific reason for the claim for decrease as required by Treas. Reg. 301.6402." Also include the following open paragraph:

      Letter Paragraph
      Please state your reasons for making changes to the amounts reported as being withheld on the original Form 1042-S(s). Were taxes actually withheld from payments and all withheld taxes deposited? Were original Form 1042-S(s) issued? Was the change in withholding discovered after the close of the calendar year? Please supply copies of the corrected and voided Form 1042-S(s) affected by the amendment.

  5. When a taxpayer replies to the Letter 916C by submitting substantiation for the Form 1042 tax decrease:

    1. Request the original return and the claim we were unable to consider (Blocking Series 18 or 15 for cases worked in CIS).

    2. Secure research on the withholding agent and each Form 1042-S recipient to see if they filed for a refund of the same withholding, and

    3. Forward the case to Examination with all research. See IRM 21.8.2.1.13, Examination Criteria.

  6. P.L. 111-347, The 911 Healthcare Bill, signed on January 2, 2011 introduced a 2% excise tax payable by federal agencies on government foreign procurement payments. The requirement to report and pay this tax began in 2011.

  7. This excise tax is reportable on line 71 of Form 1042 and is included in the ROFTL.

  8. Masterfile has been programmed to identify line 71 entries as reference item 298.

  9. If an amended return is received correcting line 71 of Form 1042, follow all general adjustment guidelines. Use REQ 54 to input TC 290 with reference code 298 to make the correction. If the correction results in a decrease, follow all Cat-A guidelines, use TC 291 and reference code 298 with a (-) minus to input the decrease.

21.8.2.12.10  (10-01-2007)
Qualified Intermediary Agreements (QI)

  1. Under Treas. Reg. § 1.1441-1(e)(5), the IRS signed an agreement which became effective on January 1, 2001 in which Qualified Intermediaries can be:

    • Foreign financial institutions (e.g., banks, brokerage houses), other than a U.S. branch of such institution

    • Foreign branches of U.S. financial institutions or U.S. clearing organizations

  2. A foreign partnership or trust cannot become a QI. However, a foreign partnership, or a foreign simple or grantor trust, can enter into a Withholding Foreign Partnership (WP) or Withholding Foreign Trust (WT) agreement with the IRS under Treas. Reg. § 1.1441-5(c)(2) and (e)(5)(V). See Rev. Proc. 2003-64 and Rev. Proc. 2005-77 for agreement and application procedures. A partnership or trust that has entered into a WP or WT agreement assumes Non-Resident Alien (NRA) withholding responsibilities.

  3. The benefits of becoming a Qualified Intermediary include:

    • Maintaining confidentiality of non U.S. customers by providing withholding rate information to U.S. custodians on a pooled basis

    • Simplified information reporting procedures

    • Use of collective refund procedures so customers do not have to file refund claims individually

  4. Refer taxpayers, who question how or where to apply for QI status, to Rev. Proc. 2000-12 and Rev. Proc. 2005-77, which give guidance for entering into a QI Agreement. Applications are sent to:

    Internal Revenue Service
    LB&I:FS:QI
    290 Broadway - 12th Floor
    New York, NY 10007–1867

  5. There is a web site established for Qualified Intermediaries on http://www.irs.gov. Additional information can also be found in Publication 515.

    Caution:

    Taxpayers may incorrectly use a Qualified Intermediary (QI ) Number to file returns or make deposits or payments. The EIN's for Qualified Intermediaries are in the range from ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . Tax examiners need to be aware of this when resolving payment tracers and duplicate filing conditions. Contact with the taxpayer may be necessary to determine the correct EINs that should have been used. Do not reinput a return under a different EIN when the QI number is involved. Have the taxpayer submit a signed return using the correct EIN and have it processed. Adjust the other account accordingly, after applying guidelines for examination criteria.

    Note:

    When contacting taxpayers, follow procedures in IRM 21.1.3.2.3, Required Taxpayer Authentication, for purposes of identification and to prevent unauthorized disclosures of tax information. Also, use caution when leaving information on answering machines or voice mails. (See IRM 11.3.2.6.1, Leaving Information on Answering Machines/Voice Mail.)

  6. If taxpayers question the time frame for approval of QI status, advise them that a QI in the range mentioned above will be issued upon receipt of the SS-4 application. Acceptance of a QI application currently takes approximately 85 days for approval and will be issued from the New York office. If there is a question on the QI status, ENMOD can be researched to see if the application was rejected. Entity will be notified to update ENMOD if the number is being revoked. See IRM 21.7.13, Assigning Employer Identification Numbers.

  7. Ann. 2000-48 and IRB 2006-35 Notice 2006-35 provide additional guidance for financial institutions that are considering the QI regime.

  8. Withholding Foreign Trusts and Foreign Partnerships can find procedures in Notice 2002-41.

  9. A QI agreement generally has a duration of 6 years and is based in part on a Treasury Department Certification that the country has effective rules and/or procedures for providing tax information to the U.S. Treasury and the IRS regarding know-your-customer (KYC) rules as a vital component of adequate self-regulation. The IRS generally does not extend the QI system to any country that does not have acceptable KYC rules.

  10. The following is a list of countries that have submitted approved KYC rules:

      KYC Approved Countries  
    Andorra Finland Monaco
    Anguilla France Netherlands
    Antigua Germany Netherlands Antilles
    Argentina Gibraltar Norway
    Aruba Greece Panama
    Australia Guernsey Poland
    Austria Hong Kong Portugal
    Bahamas Iceland Saint Vincent and The Grenadines
    Bahrain Ireland Singapore
    Barbados Isle of Man Slovenia
    Belgium Israel Spain
    Bermuda Israeli Bank St. Lucia
    British Virgin Islands Israeli Brokers and Broker-dealers Sweden
    Brunei Italy Switzerland
    Canada Japan The Republic of China (Taiwan)
    Cayman Islands
    Japanese Trust Banks
    Turks and Caicos Islands
    Chile
    Japanese Securities Dealers
    United Arab Emirates

    Chilean Stock Brokers

    Japanese Investment trust Management Companies

    United Arab Emirates - Non - IFSC
    Colombia Jersey
    Dubai - IFSC
    Cyprus Korea United Kingdom
    Czech Republic Luxembourg Uruguay
    Denmark Liechtenstein
    Uruguay Banks
    Estonia Malta
    Uruguayan Stock Brokers

  11. If the EIN is in the range noted in paragraph (5) above and the INTERMEDIARY IND on the BRTVU is 1, the entity is a Qualified Intermediary. If the indicator is "2" , the entity is a NON-QI. This indicator comes from the top portion of Form 1042 below the address stating "Check if you are a QI/Withholding foreign partnership or trust" . If these conditions are present, the taxpayer is a Qualified Intermediary and there may be a Line 66 entry.

  12. If an unnumbered Form 1042 is received without a QI EIN, but the QI box is checked, send it back to the taxpayer with an explanation of the requirements.

21.8.2.12.10.1  (01-01-2007)
Refund Adjustments for Non-Resident Alien (NRA) Over-Withholding

  1. Qualified Intermediaries, Withholding Foreign Partnerships, Withholding Foreign Trusts or a U.S. branch treated as a U.S. person, can request adjustments of amounts over-withheld on Form 1042 under Chapter Three Withholding (CTW) of the code, from a Non-Resident Alien (NRA). Specific procedures are contained in Rev. Proc. 2000-12.

  2. This credit withheld is claimed on Form 1042, Line 66 (amount withheld by a third party withholding agent).

  3. Credit can only be requested, and refund of over withheld amounts granted to a:

    • Qualified Intermediary (QI)

    • Withholding Foreign Partnership

    • Withholding Foreign Trust, or

    • U.S. branch treated as a U.S. person.

    Reminder:

    The requester must have an EIN in the range from ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ . This number identifies a Qualified Intermediary. If not, disallow the refund claim and send a Letter 105C advising of the special EIN application requirement for a QI.

  4. A filer claiming a line 66 credit on an original return can have it refunded (without pre-examination approval) only if they are one of entities listed in (3) above. Decreases on amended returns require examination approval. See IRM 21.8.2.1.13, Examination Criteria.

  5. There is a possibility that a non-QI can list a credit on Line 66. During initial processing, the line 66 entry may not have been accepted. A math error notice generates, and the tax recomputed at 30% (or treaty rate) of the line 62a entry (gross income paid).

  6. If an amended return is received after the disallowance, or if it was missed in initial processing, the non-QI's line 66 entry can be allowed up to the amount of the tax (TC 150). They must provide documentation (Form 1042-S) to substantiate the credit.

    Note:

    If there are other credits (e.g., electronic deposits, or subsequent payments), these amounts may be requested and allowed for refund, but only after Examination approval.

21.8.2.12.10.1.1  (10-01-2007)
Adjustments for Non-Resident Alien (NRA) Over-Withholding by a Withholding Agent

  1. When the withholding agent has over-withheld under chapter three withholding (CTW), a Qualified Intermediary (QI) may request a withholding agent to make an adjustment for amounts paid to the QI by applying either the reimbursement procedure or the offset procedure.

    Note:

    Only a QI can request refund of all or part of line 66 amounts over-withheld. Use procedures in Credit or Refund Procedures for NRA Over-Withholding by a Qualified Intermediary on an Amended Return. See IRM 21.8.2.12.10.1.4, Credit or Refund Procedures for NRA Over-Withholding by a Qualified Intermediary on an Amended Return. Non QI's cannot get a refund from a line 66 entry.

    • The reimbursement procedure must be requested by the QI from the withholding agent prior to the due date and/or filing of the Form 1042 (without regard to extensions). The withholding agent repays the QI any amount over-withheld and the withholding agent reimburses itself.

      Note:

      This type of adjustment does not appear on IRS records since the Form 1042 has not yet been filed. Only the proper amount will be reported on Form 1042 when it is filed.

    • The offset procedure requires the withholding agent to repay the QI by applying the amount over-withheld against any other amount that would be subject to CTW on income paid by the withholding agent to the QI. The QI must make this request before the earlier of the due date for the withholding agent to file Form 1042-S for the calendar year (without regard to extensions) or the date that the Form 1042-S is actually filed with the IRS.

21.8.2.12.10.1.2  (10-01-2007)
Adjustments For Non-Resident Alien (NRA) Over-Withholding by a Qualified Intermediary

  1. A Qualified Intermediary (QI) may make an adjustment for amounts paid to its account holders that it has over-withheld under CTW by applying either the reimbursement or offset procedures within the time period prescribed for those procedures.

    Note:

    These are not the same as adjustments for NRA over-withholding by a withholding agent.

  2. The reimbursement procedure requires that the QI may repay its account holders an amount over-withheld. The QI then reimburses itself by reducing the amount of a subsequent tax deposit. An amount over-withheld may be applied to reduce a deposit in the following calendar year only if:

    • The QI states on a Form 1042-S the amount of tax withheld and the amount of any actual repayment. The Form 1042-S is issued, if applicable, to the account holder of the income or to a reporting pool. The document must be filed by 2 and one half months after the calendar year ends, and

    • The QI states on a Form 1042 that the filing of the Form 1042 constitutes a claim for credit in accordance with the Treas. Reg. § 1.6414-1. The document must be filed 2 and one half months after the calendar year ends.

  3. The offset procedure requires the QI repay its account holders by applying the amount over-withheld against any amount which otherwise would be subject to CTW from a payment made by a QI to the account holder before the earlier of March 15 of the calendar year or the date that the Form 1042-S is actually filed with the IRS.

21.8.2.12.10.1.3  (10-01-2007)
Repayment of Backup Withholding

  1. If a Qualified Intermediary (QI) erroneously withholds, as defined under Treas. Reg. § 31.6413(a)-3, an amount under IRC § 3406 from an account holder, the QI may refund the amount erroneously withheld as provided in Treas. Reg. § 31.6413(a)-3.

  2. The withholding agent can adjust the repayment of backup withholding by using the reimbursement or offset procedures. See IRM 21.8.2.12.10.1.1, Adjustments for Non-Resident Alien (NRA) Over-Withholding by a Withholding Agent.

21.8.2.12.10.1.4  (10-01-2013)
Credit or Refund Procedures for NRA Over-Withholding by a Qualified Intermediary on an Amended Return

  1. Over-withholding on amounts subject to NRA withholding, paid to a Qualified Intermediaries account holders during a calendar year (and the amount has not been recovered under the reimbursement or offset procedures explained above), can be requested if ALL of the following conditions are met:

    • The QI must not have issued 1042-S forms to the account holders that received the payment that was subject to over-withholding.

    • The QI must submit together with its amended return, on which it claims a credit or refund, a statement of the reason for the over-withholding.

    • The QI must submit together with its amended return, on which it claims a credit or refund, a statement that it has repaid the amount of over-withholding to the appropriate account holders prior to filing the claim for credit or refund.

    • The QI must retain a record showing that it repaid the account holders the amount of the over-withholding.

  2. Correspond if any of the above information cannot be verified and/or the statements are not provided.

  3. If all of the above information is provided, send the package to Examination Classification. See IRM 21.8.2.1.13, Examination Criteria.

  4. If Examination Classification accepts the issue, allow the adjustment on ADJ54 with a TC 291 and reference code 011.

    Reminder:

    The amount of tax withheld on income for foreign persons under sections 1441 through 1446, and the amount of tax assumed under section 1451 are chapter 3 taxes. Accordingly, to the extent that an overpayment arises from those taxes being deducted, withheld and reported on Form 1042, the 180-day period applies. See IRM 21.8.2.9.6.1, 180-day interest-free Period for Chapter 3 Withholding.

21.8.2.12.10.2  (10-01-2007)
Adjustments for NRA Under-Withholding Before Form 1042 is Filed

  1. If a Qualified Intermediary (QI) knows that an amount should have been withheld under CTW from a previous payment to an account holder but was not withheld, the QI may:

    • Either withhold from future payments made to the same account holder, or

    • Satisfy the tax from property that it holds in custody for the account holder or property over which it has control. For example, stocks, bonds etc.

  2. The additional withholding or satisfaction of the tax owed may only be made before the due date of the Form 1042 (not including extensions) for the calendar year in which the under-withholding occurred.

  3. QI's responsibilities are met if it informs a withholding agent, from which it received the payment, of the under-withholding and the withholding agent satisfies the under-withholding.

21.8.2.12.10.2.1  (10-01-2007)
NRA Under-Withholding After Form 1042 is Filed

  1. If, after a Form 1042 has been filed for a calendar year, and the QI's external auditor, or the IRS, determines that due to QI's failure to carry out its obligations under the QI agreement, the QI must file an amended Form 1042 to report and pay the under-withheld tax.

  2. Increase the tax with TC 290 and Reference Code TC 011.

    Note:

    The QI is responsible to pay the under-withheld tax, the interest due, and any applicable penalties resulting from the amended return adjustment.

  3. If the required amended return is not filed, the IRS has authority to make such return under IRC § 6020.

  4. This procedure also applies if a QI number was issued based on the SS-4 filing, then after the QI application was reviewed, it was determined not to grant QI status and a QI Form 1042 had already been filed.

21.8.2.12.10.2.2  (10-01-2013)
Special Rule Regarding Failure to Deposit Penalties

  1. QI filers who report a line 66 entry only, must show the liability on the ROFTL as occurring on the last day of the year. This should suppress the FTD penalty. If not, and adjusting Line 66 with a TC 766, input a TC 181 to abate the penalty. Use Penalty Reason Code 045.

21.8.2.12.10.3  (10-01-2013)
Amended Form 1042 Returns with Line 66 Changes for Qualified Intermediaries

  1. The line 66 (credit for amounts withheld by other withholding agents) entry from Form 1042 is reflected on IDRS as TC 766 (Miscellaneous Credit) and is for amounts withheld by other withholding agents that pertain to the total net liability reported on Form 1042, line 63c (total net tax liability).

  2. Adjustments to line 66 entries are permitted if made by a QI, withholding foreign partnerships, withholding foreign trusts, or a U.S. branch treated as a U.S. person.

    Note:

    See IRM 21.8.2.12.6.1, Form 1042 FTD Penalty Resulting From Line 66 Entry.

  3. Certain documentation/statements must be provided before allowing an amendment to a line 66 credit that was claimed on an original return by a QI. If a refund is requested, the QI's EIN must be in the range from ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ .

  4. Most requests for adjustments occur when payers mistakenly withhold tax at the wrong rate, or from recipients exempt from taxation, either under treaty provisions or for reasons described in IRC § 1441 or IRC § 1442.

  5. An amended return can be filed to increase the credit originally claimed on line 66 without increasing the tax amount. Follow procedures when a refund is requested.

  6. The following substantiation must be provided when an adjustment is requested for line 66 after the due date of the return:

    • A signed amended Form 1042

    • The reason for requesting the adjustment, and

    • A copy of the original, voided original and corrected Form 1042-S

  7. Correspond or call the taxpayer to request the proper documentation.

  8. If a decrease in tax is requested, and the proper documentation has been submitted, send to Examination Classification prior to allowing. See IRM 21.8.2.1.13, Examination Criteria.

  9. If the issue is accepted by Classification, make the adjustment (if tax is affected, use TC 29X). If the line 66 credit is affected, use TC 766 to allow or increase credit. TC 767 is used to reverse all or part of a previous credit.

    Note:

    There are no requirements under IRC § 1441 for the Form 1042 filer to substantiate reported credits by attaching copies of the 1042-S forms. Qualified Intermediary filers currently do not need to support the line 66 entries when initially filed. ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ If an amended return or claim is filed, proper documentation listed in paragraph 6 above must be provided.

  10. The amount of tax withheld on income for foreign persons under sections 1441 through 1446, and the amount of tax assumed under section 1451 are chapter 3 taxes. Accordingly, to the extent that an overpayment arises from those taxes being deducted, withheld and reported on Form 1042, the 180-day period applies. See IRM 21.8.2.9.6.1, 180-day interest-free Period for Chapter 3 Withholding.

21.8.2.12.10.3.1  (10-01-2007)
Adjusting Form 1042 when Credit for Line 66 Entry Was Not Posted to Accounts During Initial Processing for Calendar Years 2001, 2002 and 2003

  1. Qualified Intermediary (QI) filers are permitted to take a credit for amounts withheld by other withholding agents that pertain to the total net tax liability reported on line 63c.

    Example:

    A QI entered an amount on line 63c that includes amounts withheld by a U.S. withholding agent. The QI may take credit on line 66 for the amounts that were withheld by the U.S. withholding agent.

  2. A Non-Qualified Intermediary (NQI) can claim a credit on line 66, but cannot request a refund. The NQI can be identified by the INTERMEDIARY IND on the BRTVU as "2." Only the beneficial owner can request a refund. In addition, the refund can only be released if the beneficial owner attached the Form 1042-S showing the withholding.

    Caution:

    If the QI is requesting a refund, the QI must attach the corresponding 1042-S forms received to support the amount claimed on line 66. Failure to do so will result in the denial of the claim.

  3. A QI filer can be identified by an EIN in the QI range with the INTERMEDIARY IND: on the BRTVU as "1." This indicator comes from the top portion of Form 1042 below the address stating "Check if you are a QI/Withholding foreign partnership or trust." If these conditions are present, the taxpayer is a Qualified Intermediary and there may be a line 66 entry.

  4. Due to programming problems, the amounts entered on line 66 of Form 1042 for returns processed in 2001, 2002 and 2003 DID NOT generate the applicable credit on Master File. This problem was corrected for processing year 2004.
    Scenario #1 - If a QI files a Form 1042 with an entry on line 66 and the account on IDRS (CC TXMOD/BMFOL) does not show the credit, take the following action:

    • Immediately input a STAUP on the account.

    • Research Command Code (CC) BRTVU to determine if the withholding agent is a QI and verify that the EIN falls within the range listed in (3) above.

    • If agent is a QI, allow the credit claimed on line 66 without further verification.

    • On CC ADJ54, enter SD remark: "Correction of line 66 credit entry."

    • Attach all documents and notice prints to the adjustment document and close IDRS control base.


    Scenario #2 - A Qualified Intermediary filed Form 1042, but there is no entry on Line 66 and the taxpayer advises that there was a credit for amounts withheld by other withholding agents and the entry should have been on line 66:

    • Research Command Code (CC) BRTVU to determine if the withholding agent is a QI and verify that the EIN falls within the range listed in (3) above.

    • Contact the QI via telephone and advise the QI that an amended return must be filed reflecting the credit on line 66 in order for us to allow the credit. The QI must also provide the supporting documentation (Form 1042-S). Input a STAUP for 4 cycles.

    • If unable to contact the QI via telephone, send a Letter 418C and input a STAUP for 8 cycles. Follow established guidelines and suspend the case.

    • If an amended return is received with the required supporting forms/documentation, allow the credit with a TC 766.

    • If no reply is received within the allotted time-frame, follow established procedures and formally disallow the claim.

    Caution:

    Follow Examination Criteria procedures if the claim is for a tax decrease and/or refund after the due date of the return. See IRM 21.8.2.1.13, Examination Criteria.

    • If the issue is "accepted as filed" by Examination, allow the credit using a TC 766.

    • On CC ADJ54, input remark: "Allowance of line 66 credit entry shown on amended return."

    • Attach all documents and notice prints to the adjustment document and close IDRS control base.

    Reminder:

    Only qualified intermediaries, withholding foreign partnerships, withholding foreign trusts, or a U.S. branch treated as a U.S. person will have a line 66 entry.

21.8.2.12.11  (10-01-2013)
Loose Forms 1042-S

  1. Send loose, timely filed original (March 15 due date) copy(s) A of Form 1042-S to Ogden Code and Edit for processing.

  2. Process late-filed original copy(s) A of Form 1042-S documents as follows:

    1. IMF tax examiners forward these type cases to Ogden BMF/International for research.

    2. Cincinnati and/or Ogden BMF/International tax examiners research for the Form 1042 return.

  3. BMF/International tax examiners must use the following chart when researching for the Form 1042 return.

    If... Then...
    A return is located Associate the Copy A of the Form 1042-S with the return's corresponding DLN.
    No return is located Suspend the case for 45 days and correspond with the Withholding Agent for the original Form 1042 return.

  4. If an amended Copy A of the Form 1042-S is received in the Accounts Management area, correspond with the withholding agent to inquire whether this amended Form 1042-S indicates that an adjustment is necessary on their Form 1042 account.

  5. Accounts Management International Units must use the following chart for handling responses from the Withholding Agent.

    If... Then...
    A response is received from the Withholding Agent An adjustment is necessary on their Form 1042 account. The withholding agent must include a copy of the amended Form 1042 return with their reply and the statement of why the adjustment is necessary. If sending to Exam, send all documentation with the package.
    There is no reply to this correspondence Associate the amended Form 1042-S with the original Form 1042 return.

  6. When a copy A of a Form 1042-S is attached to a dummy Form 1042 return, the tax examiners must research for the DLN of the original Form 1042 return.

    1. When a DLN is found, associate the dummy with that DLN.

    2. When a DLN is not found, process the dummy Form 1042 as an original return.

  7. Associate all loose/corrected copies B, C or D of the Form 1042-S with the recipient's tax return, if on file.

    1. When no return is located, the tax examiner must correspond with the recipient by returning the Form 1042-S and advising them that they need to file an income tax return if they are attempting to obtain a refund of any taxes withheld.

    2. If the recipient is attempting to obtain a refund of over-withheld tax, they must file Form 1120-F if it is a corporation, or Form 1040NR if an individual (or other income tax return), along with their Form 1042-S.

  8. Return loose copy(s) E of the Form 1042-S to the Withholding Agents for their records. Close the control bases.

  9. Forward 1042-S forms received that are marked "Additions to Mag Tape" to Code and Edit for processing as original documents.

  10. 1042-S forms marked "Corrections to Mag Tape" are considered amended 1042-S forms and are processed as indicated in (4) above.

  11. Send all original corrected/amended 1042-S forms to:

    Internal Revenue Service
    Ogden Submission Processing Campus
    P.O. Box 409101
    Ogden, UT 84409

21.8.2.12.12  (10-01-2007)
Withholding at Source Refund Requests from Exempt Organizations and Private Foundations

  1. Return claims for refund of withholding at source received from Exempt Organizations and Private Foundations, with Form 1042-S, advising the taxpayer to file either Form 990-T or Form 990-PF as appropriate.

  2. A Form 1042-S is required before sending the claim to Ogden Campus Examination.

21.8.2.12.13  (10-01-2013)
Central Withholding Agreements

  1. Refer questions concerning Central Withholding Agreements (CWAs) to (702) 868-5267. This number is for public use. The following is background information on the program.

  2. Generally, IRC § 1441(a) requires that withholding agents withhold 30 percent of the gross income of nonresident alien entertainers and athletes performing personal services or participating in athletic events in the United States. However, they may be able to enter into withholding agreements with the IRS for reduced withholding provided certain conditions are met.

    Note:

    A withholding agent cannot reduce taxes withheld to less than the anticipated amount of income tax liability.

  3. A Centralized Withholding Agreement (CWA) is an agreement entered into by the nonresident alien athlete or entertainer, a designated withholding agent, and an authorized representative of the IRS. The agreement is for a specific tour or series of events and the withholding is based on the budget provided and net profit estimates.

  4. Nonresident alien entertainers and athletes requesting a CWA must have filed and paid, or made payment arrangements, for all previous U.S. taxes and they must agree to timely file Form 1040NR or 1040NR-EZ. They must submit the information contained in Form 13930, Instructions on How to Apply for a Central Withholding Agreement.

    Note:

    If an entertainment group consists of more than one NRA, generally each NRA will need to apply for a CWA.

  5. When the IRS approves the estimated budget and the designated central withholding agents, the IRS will prepare the CWA. The agreement must be signed by a designated withholding agent, the NRA covered by the CWA, and the authorized IRS representative.

  6. The withholding agent must agree to withhold income tax from the payments made to the nonresident alien and will be required to file Form 1042 and Form 1042-S for each year in which income is paid to the NRA covered by the withholding agreement. They will issue Form 1042-S to each NRA athlete or entertainer affected by the agreement.

  7. CWA's must be sent at least 45 days before the agreement is to take effect to the following address:

    Central Withholding Agreement Program
    Mail Stop: 1441
    2001 Butterfield Road
    Downers Grove, IL 60515-1050

  8. Additional information about the CWA program can be found on irs.gov at http://www.irs.gov/Individuals/International-Taxpayers/Central-Withholding-Agreements or by e-mail at mailto:CWA.Program@irs.gov.

21.8.2.13  (10-01-2007)
Exchange of Information With Treaty Countries, Form OECD

  1. Form OECD (Organization of Economic Cooperation & Development) is used to exchange information with the 30 member treaty countries/states.

  2. The information for the Form OECD comes from Form 1042-S filings.

  3. Withholding agents file Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons, with the accompanying 1042-S forms, Foreign Person's U.S. Source Income Subject to Withholding, reporting income paid and tax withheld at source to nonresident aliens and/or foreign corporations.

  4. Once OECD forms are generated, they are exchanged electronically with the Competent Authorities in the various treaty countries.

  5. This process is completely automated and is controlled by the Office of the Deputy Commissioner (International), LB&I. The Philadelphia IRS Campus no longer has any role in this exchange of information.

21.8.2.14  (10-01-2007)
Withholding Tax on Foreign Partners - Form 8804

  1. Form 8804, Form 8805, and Form 8813 are used to pay and report only the §1446 withholding tax that is based on effectively connected taxable income allocated to foreign partners, without regard to distribution.

  2. Prior to 1/1/2005, Form 8804, Annual Return for Partnership Withholding Tax, was processed to the Non-Master File (NMF). For tax periods 200412 and subsequent, Form 8804 is processed to the Business Master File under MFT 08. The form was processed at the Philadelphia Accounts Management Campus through 2006 and is now processed at the Ogden Submission Processing Campus.

21.8.2.14.1  (10-01-2013)
Applicable Forms - W/H Tax on Foreign Partners

  1. The total withholding tax liability of the partnership for its tax year is reported on Form 8804, Annual Return for Partnership Withholding Tax.

  2. Form 8805, Foreign Partner's Information Statement of § 1446 Withholding Tax, is used to show the amount of effectively connected taxable income and the withholding tax attributable to each foreign partner for the partnership's tax year. If the foreign partner is a foreign trust or estate, the foreign trust or estate must provide a copy of the Form 8805 furnished by the partnership to each of its beneficiaries. In addition, the foreign trust or estate must complete Schedule T for each of its beneficiaries and must provide that Schedule T information to each beneficiary. The partnership may need to provide additional information on the Form 1065 K-1 regarding the components making up the amount of effectively connected taxable income reported to the partner in order for the partner to prepare its tax return.

    • A separate Form 8805 must be filed for each foreign partner.

    • A copy of each Form 8805 must be attached to the Form 8804 when filed.

  3. The foreign partner must attach Form 8805 to its return in order to claim a credit on Form 1040NR, Form 1120-F, or Form 8804.

  4. Any U.S. person erroneously made subject to the withholding tax would also receive Form 8805 from a partnership and must attach the form to its income tax return to obtain credit.

  5. A foreign partnership that is a partner in another partnership that has withheld and paid over amounts under IRC § 1446 must treat the tax withheld by the lower-tier partnership as though it were an amount paid by the upper-tier partnership for purposes of §1446. Accordingly, the upper-tier partnership must complete and file Form 8804 and Form 8805 as appropriate to satisfy its §1446 withholding tax obligation and report the amount of tax withheld on their behalf to its partners.

  6. Form 8813, Partnership Withholding Tax Payment Voucher (§1446), is used to transmit installment payments to the IRS.

  7. If a discrepancy exists between the amounts shown on the Form 8804 and the posted IDRS data, resolve the matter at the Campus level. Where appropriate, ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

  8. The due date for filing Form 8804 and for paying any amount due with the return is generally the 15th day of the 4th month after the close of the partnership's tax year. However, for partnerships who keep their books and records outside the United States and Puerto Rico, the due date is the 15th day of the 6th month after the close of the Partnership's tax year. Taxpayers may request an extension of time to file Form 8804 by filing Form 7004. The extension is generally for five months. However, partnerships who keep their books and records outside the United States and Puerto Rico may only receive a 4 month extension beyond their initial due date. Filing Form 7004 does not extend the time to pay.

    Note:

    The Form 7004 extension of time to file was reduced from 6 months to 5 months for Form 8804 that has a tax year ending on or after September 30, 2008.

  9. Generally effectively connected taxable income (ECTI) allocated to a foreign partner is subject to withholding at 35%.

    • However, a partnership is permitted to consider the highest rate of tax applicable to a particular type of income or gain allocable to a partner (e.g., for these types of income allocable to individual partners: 15% for long-term capital gains, 25% for unrecaptured section 1250 gain, and 28% for collectibles gain under section 1(h)), to the extent of a partners allocable share of such income or gain.

    • If the application of the preferential rate depends upon the corporate or non-corporate status of the person reporting the income or gain, a partnership may consider the highest rate of tax applicable to a particular type of income or gain only if the necessary documentation has been provided to the partnership under §1.1446-1 to establish the corporate or non-corporate status of the partner required to pay tax on the income or gain.

    • Refer to IRM 21.8.2.12.7 for the documentation certificates. See e.g., §1.1446–1(c)(2) (for documentation certificates), §1.1446–1(c)(3) (presumption of foreign status in absence of documentation) and §1.1446–5(c)(2) (requirement to pay 1446 tax at highest of rates in section 1446(b) where a lower-tier partnership cannot reliably associate income with a partner of the upper-tier partnership).

  10. As indicated in the Form 8804 instructions, if a foreign partner has allocated to it an amount included on line 4d that includes both a net capital gain and qualified timber gain (QTG), an alternative maximum 15% capital gain may apply to the qualified timber gain. For this purpose, a qualified timber gain means the net gain described in IRC § 631 (a) and (b), determined by taking into account only trees held more than 15 years. Only qualified timber gains for the period that begins after May 22, 2008 and before May 23, 2009, are eligible for the alternative tax. The instructions also require that the partnership enter "QTG" on the dotted line to the left of the line 5e entry.

21.8.2.14.2  (10-01-2013)
Form 8804 Estimated Tax Penalty

  1. Tax due on Form 8804, Annual Return for Partnership Withholding Tax (§ 1446), is required to be paid as estimated tax following essentially the same rules as those existing for corporations, except as modified by Internal Revenue Regulation 1.1446-3. For specific information regarding the estimated tax requirements and the penalty computation, see the Form 8804 Schedule A instructions.

    Note:

    Requests for abatement or reduction of estimated tax penalties on Form 8804 filings prior to the release of the revised form were made using Form 2220. The estimated payments are due the 15th day of the 4th, 6th, 9th and 12th months of the partnership's tax year.

  2. The following are the requirements that a partnership must have met in order to qualify for the prior year safe harbor:

    • The partnership information return (Form 1065) for the prior year must have been filed on time (including extensions).

    • The prior taxable year must have been a full year comprising 12 months.

    • The effectively connected taxable income (ECTI) for the prior year must have been at least 50% of ECTI for the current year.

    • The average of the total of estimated tax installments paid by the due date of any installment must be at least 25% of prior year tax computed without regard to the adjustments allowed under Internal Revenue Regulation 1.1446-6.

      Example:

      If the prior year ended 12/31/2010, prior year tax would be computed by finding the sum of Form 8804, line 4a times .35, plus line 4e times .28, plus line 4i times .25, plus line 4m times .15.

  3. Programming to identify taxpayers who have met the "prior year safe harbor" requirements is not yet in place. If the necessary information is not available via cc BRTVU or via cc TRDBV, it may be necessary to request the return for the prior year to determine if the requirements have been met, and the penalty should be removed.

  4. The partnership may elect to use the annualized income installment method, or the adjusted seasonal method in lieu of the prior year safe harbor method. If the taxpayer elects to use the safe harbor method, that method must be used for all installments, with one exception: If, in an installment period following the first installment, the partnership determines that current year ECTI will exceed twice prior year ECTI, the partnership may elect to change its installment method at that time to the annualization method.

  5. There is no provision for the estimated tax penalty under IRC § 6655 to divide the withholding credit equally among the required installments as exists in IRC § 6654(g) (relating to individuals, trusts, and estates). Since the penalty for Form 8804 is assessed under IRC § 6655 in conjunction with Treas. Reg. § 1.1446-3, the computer will not re-compute the ES penalty for Form 8804 when TC 766 withholding credit is applied to an account.

    Note:

    This situation does not apply to TC 660 estimated tax payments.

  6. Without data on when tax was actually paid, Master File cannot accurately compute the ES penalty when withholding credit is claimed.

  7. Advise partnerships who question the assessment of an estimated tax penalty that they must file Form 8804, Schedule A, if they claimed withholding credit on their return, and they do not meet the requirements for the prior year tax "safe harbor" . For more information on the "safe harbor" requirements, see IRM 20.1.3.3.1.1.8, Tax Withheld by Partnerships Under IRC § 1446, paragraphs (4) and (5).

  8. These estimated tax penalties must be addressed manually if a TC 766 credit is being added to an account and there is a TC 176 present. Adjust account using TC 290 .00 with a TC 17X.

  9. A CP 234 generates when the computer computation of the estimated tax penalty (TC 176) differs from the amount computed by the taxpayer (TC 170). Process CP 234 notices generated on Form 8804 returns using procedures in IRM 21.7.11.4.8, CP 234 - Processing Potential ES Penalty Notices.

21.8.2.14.3  (10-01-2013)
Processing Amended Form 8804 and TRNS 193 Notices

  1. Use the following instructions to supplement the general guidelines for processing TRNS 193 notices found in IRM 21.7.9, BMF Duplicate Filing Conditions.

  2. Verify the entity data on the TRNS 193 notice with the entity data on the return and input any necessary changes or corrections.

    Note:

    The entity data on the account was established on Master File as a result of the Form 1065 filing requirement.

  3. If the duplicate filing appears to be a "true duplicate " , verify via CC BMFOLR or BRTVU that the taxable income is the same as reported on the original return before inputting a TC 290 for .00 to release the -A freeze.

    Reminder:

    Resolve any misapplied or subsequent payment application issues as necessary.

  4. Input Form 8804 tax increases with a TC 290 for the amount of the tax increase. If the adjustment is made without the original return, use Blocking Series 15. If the original return is attached, use Blocking Series 00. If worked in CIS use Blocking Series 18.

  5. A partnership that has filed a Form 8804 may not file an amended Form 8804 and obtain a refund of any amount shown on the 8805 Forms filed. See Regulations §1.1446-3(d)(2)(iv). These claims should be disallowed. For information on disallowance procedures, see IRM 21.5.3.4.6.1Disallowance and Partial Disallowance Procedures.

  6. Refer to the following table if the listed Forms are attached to the Form 8804:

    If... Then...
    Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Copy A ONLY Refer to local Maildex for routing to data input area.
    Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Copy B ONLY Leave attached.
    Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Copy C or D ONLY Return to Taxpayer.
    Form 1042-S, Foreign Person’s U.S. Source Income Subject to Withholding, Copy E ONLY Return to Withholding Agent.
    Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns If the extension is for a different period, route to Receipt and Control for processing.
    Form 8804 Schedule A, Penalty for Underpayment of Estimated § 1446 Tax by Partnerships Verify with estimated tax penalty posted on module and adjust if necessary.
    Form 8804-C, Certificate of Partner-Level Items to Reduce § 1446 Withholding Route to:
    Internal Revenue Service
    Examination Branch BLN 4-E08.142
    2970 Market Street.
    Philadelphia, PA 19104
    Form 8804-W, Installment Payments of § 1446 Tax for Partnerships Leave attached to Form 8804.
    Treas. Reg. § 1.1446-6 Notation Withholding Certificate or any associated reasonable cause request Route to:
    Internal Revenue Service
    Examination Branch BLN 4-E08.142
    2970 Market Street.
    Philadelphia, PA 19104
    Form(s) 8805 are attached and they are not in substantiation of any credits claimed on Form 8804 After working the TRNS 193, detach and route Form(s) 8805 to Batching and Numbering for processing to the International Database/IRMF.
    Form(s) 8805 are attached and they support withholding claimed on Form 8804 Do not detach the Form 8805. These types of Form 8805 reflect the foreign partnership entity data on the left side of the Form 8805 and can be verified on the FIRPTA database.
    Form 8288-A is attached to the Form 8804 The credit must be verified on the FIRPTA database.

    Note:

    For attachments not listed, refer to IRM 3.11.154.2.8, Routing Guide for Attachments.

  7. When allowing withholding credit claimed on Form 8804 and Form 1042-S, use the appropriate Credit Reference number (331, 332, etc.). See Document 6209.

    Reminder:

    Withholding credits claimed on Form 8804 and 1042-S are considered Chapter 3 Withholding Credits and are subject to the 180-day interest-free period. See IRM 21.8.2.9.6.1, 180-day interest-free Period for Chapter 3 Withholding.

    Note:

    When issuing a manual refund from a Form 8804 account, use Line Number 15.

21.8.2.14.4  (10-01-2012)
Form 8804 §1.1446 Elections

  1. The final §1.1446 regulations were effective for partnership taxable years beginning after May 18, 2005 (see IRM 21.8.2.14.1). However, a partnership whose taxable years began after December 31, 2004, and before May 19, 2005, could elect to apply the final regulations to the partnership by attaching a statement to Form 8804. If this partnership attached the necessary election to Form 8804, it could take advantage of the provision in the final regulations allowing partnerships to withhold at the reduced rates applicable to preferential rate income rather than the rate applicable to ordinary income. However, making the election subjects the partnership to all of the other provisions of the final regulations.

    Note:

    An election under §1.1446-6T or §1.1446-7 is not required to be attached to returns for tax periods 200605 and later.

  2. Partnerships are instructed to attach withholding certificates Form 8804-C, filed under Reg. §1.1446-6 that support the reduced §1446 withholding, along with a computation of the reduction in withholding relating to each partner for which it is submitting a certificate, to their Form 8805 and Form 8813. Partnerships must file these items even if the certificate(s) reduce the §1446 withholding to zero. Route any loose withholding certificates, or those attached to a Form 8804, to the Low Income Housing Team at the Philadelphia Campus: Building Location Number 4-E08.143.

  3. §1.1446-6T was finalized on April 29, 2008. The regulations are effective for partnership taxable years ending after December 31, 2007. The final regulations have a transition rule providing that any certificate submitted on or before July 28, 2008, that met the requirements of the temporary regulation, is not defective solely because it does not meet the requirements of the final regulations. However, any certificate (including any updated certificates and status reports) submitted, or required to be submitted after July 28, 2008, must comply with the requirements of the final regulations and be submitted using Form 8804-C.

  4. Process amended returns requesting the reduced tax rate if the §1.1446-7 election is attached.

21.8.2.14.5  (10-01-2013)
IRC § 1446 Withholding Tax on Foreign Partners

  1. When a taxpayer claims credit for §1446 withholding (Form 8805) on amended Form 1040NR, Form 1120-F, etc., and Form 8805 is attached:

    • Verify the credit from Line 10 of Form 8805. Also verify the name of the partner and TIN/ITIN on the Form 8805 with the TIN/ITIN or name provided on the Form 1040NR, 1120-F, etc.

    • Verify the name and TIN/ITIN. Allow credits that can be verified using CC IRPTR without further research. The taxpayer must submit the Form 8805 to receive the credit.

    • Credits claimed on Form 8805 of ≡ ≡ or over must be verified using CC IRPTR.

    • For IMF, input a TC 290.00, Credit Reference Code 331, Reason Code 069 and adjust the tax if necessary.

    • For BMF Form 1120-F, allow the credit with and adjust the tax if necessary. For Form 8804, use credit reference number 331.

      Reminder:

      These credits are considered Chapter 3 Withholding Credits and are subject to the 180-day interest-free period. See IRM 21.8.2.9.6.1, 180-day interest-free Period for Chapter 3 Withholding.

  2. If the name of the partner or the TIN/ITIN of the partner (or both) provided on Form 8805 does not match the information on the U.S. tax return of the partner, correspond with the taxpayer for the information before allowing the credit amount shown.

  3. If this credit is claimed on either the Form 1040NR or Form 1120-F, and Form 8805 is not attached, correspond with the taxpayer for the information before allowing the credit amount shown.

  4. If the taxpayer fails to supply Form 8805, or fails to supply information that clarifies who is the appropriate partner entitled to the credit, reject the claim for credit using a Letter 916C.

21.8.2.15  (10-01-2013)
Form 1040-NR, U.S. Nonresident Alien Income Tax Return

  1. A foreign estate or trust must use a Form 1040-NR, U.S. Nonresident Alien Income Tax Return, to report income tax.

  2. Correspondence or amended returns submitted by a fiduciary of a foreign estate or trust are worked by the Cincinnati Accounts Management Center (CAMC) NMF team. Forward any correspondence or amended returns to Stop 6222G ATTN: Team 203. For additional information on processing Form 1040NR Fiduciary returns, see IRM 21.7.12.5 , Form 1040NR (Fiduciary), U.S. Nonresident Alien Income Tax Return.

21.8.2.15.1  (10-01-2013)
Form 1041-QFT, U.S. Income Tax Return for Qualified Funeral Trusts

  1. The trustee of a trust that elected to be taxed as a qualified funeral trust (QFT) uses Form 1041-QFT to report its income, deductions, gains, losses, etc., and income tax liability of the QFT.

  2. Cincinnati Submission Processing Campus (CSPC) processes, as BMF, Form 1041-QFT submitted by domestic taxpayers. Adjustment procedures are found in IRM 21.7.4.4.1.1.4, Qualified Funeral Trusts, Form 1041-QFT.

  3. Ogden Submission Processing Campus (OSPC) processes Form 1041-QFT submitted by international taxpayers. Adjustment procedures are the same as for domestic filers. See IRM 21.7.4.4.1.1.4, Qualified Funeral Trusts, Form 1041-QFT.

  4. Form 1041-QFT shows on IDRS TXMOD as MFT 05, tax class 2, document code 39, and on ENMOD, the Filing Requirement Code (FRC) is 1041-9 for both Domestic or International filers.

  5. Calendar year returns are due on April 15 regardless of the address of the taxpayer. International taxpayers are not given a two month extension to file.

21.8.2.16  (10-01-2013)
Form 1065, U.S. Return of Partnership Income

  1. Form 1065 is an annual return which is used to report each partner's share of the income, losses, expenses, and operations of a partnership. Each partner is issued a Schedule K-1 which must be attached to their income tax return.

  2. Form 1065 is an information return. However, there are a few that are taxed. See IRM 21.7.4, Income Taxes/Information Returns.

  3. Form 1065 is due by the 15th day of the 4th month after the close of the taxable year.

    Exception:

    For a partnership that keeps its books and records outside the U.S. and Puerto Rico, the return is due by the 15th day of the 6th month after the close of the taxable year.

  4. Form 1065 may be subject to a penalty under IRC § 6698 either for failure to file (TC 160/166) or for failure to provide required information (TC 240/246). Either penalty is charged for each person who was a partner at any time during the year, for each month or part of a month after the return due date that the failure continued. For applicable penalty rates see IRM 20.1.2.3.2, Penalty Computation. For detailed information about these penalties, including penalty relief, see IRM 20.1.2.3, Failure to File a Partnership Return - IRC 6698.

    Note:

    Reasonable Cause consideration applies to Form 1065 penalties.

  5. For additional information on Form 1065, refer to Publication 541 and for specific procedures refer to IRM 21.7.4.4.2, Form 1065, U.S. Return of Partnership Income.

  6. Refer international callers with questions regarding waiver requests by large partnerships required to file electronically to the non toll-free number, 01-512-416-7750.

21.8.2.16.1  (10-01-2013)
CP 282 - Form 1065

  1. The CP 282 was developed to notify taxpayers of possible additional filing requirements related to the partnership's foreign partner(s).

  2. When Form 1065, Schedule B, Question 16 or Form 1065-B, Schedule B, Question 4 is answered "yes" , this notice is generated.

  3. The additional filing requirement is related to IRC § 1446 which requires the partnership to report and pay a withholding tax to the IRS when the partnership had taxable income effectively connected with the conduct of a trade or business within the United States that is allocated to a foreign partner.

  4. If the IRC §1446 withholding requirements apply, the taxpayer is required to file:

    • Form 8804, Annual Return for Partnership Withholding Tax (§ 1446)

    • Form 8805, Foreign Partner's Information Statement of § 1446 Withholding Tax, and

    • Form 8813, Partnership Withholding Tax Payment Voucher (§ 1446)

  5. Penalties and/or interest may be assessed if the partnership does not comply with the IRC §1446 reporting and withholding tax requirements. Interest on the failure to file penalty for partnership returns (assessed per IRC §6698) starts on the assessment date. See IRM 20.2.5.3, Interest on Penalties and Additions to Tax, and IRM 20.2.10.2.2, Interest on Adjustments to FTC, for specific information.

  6. Final and temporary IRC §1446 regulations were published on May 18, 2005. The final and temporary regulations are effective for partnership taxable years beginning after May 18, 2005. However, a partnership may elect to apply the final regulations to partnership years beginning after December 31, 2004, by attaching a statement to Form 8804 indicating that the partnership is making the election under regulation § 1.1446-7. A partnership may apply the temporary regulations to partnership years beginning after December 31, 2004 by electing to apply the final regulations and electing under Treas. Reg. § 1.1446-6(f) to apply the temporary regulations.

    Note:

    An election under §1.1446-6 or §1.1446-7 is not required to be attached to returns for tax periods 200605 and later.

  7. Treas. Reg. § 1.1446-6T was finalized on April 29, 2008. The regulations are effective for partnership taxable years ending after December 31, 2007. The final regulations have a transition rule providing that any certificate submitted on or before July 28, 2008, that met the requirements of the temporary regulation, is not defective solely because it does not meet the requirements of the final regulations. However, any certificate (including any updated certificates and status reports) submitted, or required to be submitted after July 28, 2008, must comply with the requirements of the final regulations and be submitted using Form 8804-C.

  8. A sample of a CP 282 notice can be found on the Notice Gatekeeper Web site at http://gatekeeper.web.irs.gov. See IRM 21.7.4.4.2.11, CP 282 Notice, Notification of Possible Filing Requirements Form 1042 and Form 1042-S, for specific procedures.

21.8.2.17  (10-01-2007)
Withholding Certificates

  1. Several withholding certificates are available and must be filed with a withholding agent if exemption or reduced rates are being claimed under IRC § 1441, IRC § 1442 , or IRC § 1446. These certificates are prepared solely by the taxpayer and not a determination by the Service.

  2. In recent years, some of the forms were obsolete and others replaced with a form in the W-8 series.

  3. Additional information and the purpose for each is contained in the following subsections.

21.8.2.17.1  (10-01-2009)
Form W-8, Certificate of Foreign Status

  1. As of December 31, 2000, Form W-8 became obsolete. Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, replaced it. Only the new forms from foreign recipients of income subject to withholding are acceptable.

  2. The change in the form was necessary to reflect changes made to the regulations under IRC § 1441. Further changes to the Form W-8 series were required to reflect the new regulations under IRC § 1446.

  3. The chart below shows the forms that became obsolete on December 31, 2000 and their replacements.

    Obsolete Form New Form W-8 Series Replacement
    W-8, Certificate of Foreign Status Form W-8BEN , Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
    Form 1001, Ownership, Exemption, or Reduced Rate Certificate Form W-8BEN , Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding
    Form 4224, Exemption From Withholding of Tax on Income Effectively Connected with the Conduct of a Trade or Business in the U.S. Form W-8ECI , Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States
    Form 8709, Exemption From Withholding on Investment Income of Foreign Governments and International Organizations Form W-8EXP , Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding
      Form W-8IMY , Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding

    Note:

    This is a new form and does not replace a prior form.

      Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits
  4. CAUTION: When the nonresident alien files a claim for erroneous backup withholding:

    1. Return the claim to the taxpayer, and

    2. Advise the taxpayer to file the appropriate tax Form (1040NR Individual, 1120-F Corporation) with a copy of the 1099INT or Form 1042-S attached.

21.8.2.17.2  (10-01-2013)
Form W-8 BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding

  1. If the income is considered "fixed or determinable annual or periodic income" , such as interest, dividends, rents, royalties, premiums, annuities, profits, gains, etc., the nonresident alien recipient must provide Form W-8 BEN to the withholding agent in order to claim a reduced, or exemption from, withholding under a United States tax treaty.

  2. A foreign partner may submit Form W-8 BEN to qualify a partnership to use a preferential rate of withholding under § 1446 relating to the foreign partner submitting the form.

  3. If an individual taxpayer submits a loose Form W-8 BEN or any W-8 series document, return it to the individual. The taxpayer must provide the form to their withholding agent/financial institution. Form W-8 BEN should not be sent to the Service.

  4. Associate loose Form W-8 series documents sent in by business taxpayers with their withholding tax return (i.e., Form 1042).

21.8.2.17.3  (10-01-2013)
Form W-8ECI, Certificate of Foreign Person’s Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States

  1. The Form W-8ECI is filed by foreign persons who are beneficial owners of U.S. source income that is, or is deemed to be, effectively connected with a trade or business in the United States and may be eligible for exemptions from Chapter 3 withholding. Effectively connected income from a U.S. trade or business is described as "income from services performed" or "fixed or determinable annual or periodic income" (e.g., interest, dividends, rents and certain similar amounts), if the income is from assets used in, or held for the conduct of that trade or business, or the activities of that trade or business were a material factor in the realization of the income.

  2. Income that is "effectively connected" , which is earned other than through a partnership, may be exempt from Chapter 3 withholding only if the nonresident alien is materially involved in the operation of the trade or business, as opposed to merely being a passive investor.

  3. Foreign persons are generally subject to U.S. tax at a 30% rate on income they receive from U.S. sources, however, no withholding under IRC § 1441 or IRC § 1442 is required on the following types of income when it is, or is deemed to be, income effectively connected with the conduct of a trade or business in the United States. The types of income are:

    • Personal service income

    • Income subject to withholding under IRC § 1445 (disposition of U.S. real property interests), and

    • Income subject to withholding under IRC § 1446 (foreign partner's share of effectively connected income)

  4. A foreign person is defined as a:

    • Nonresident alien individual

    • Foreign corporation

    • Foreign partnership

    • Foreign trust

    • Foreign estate, or

    • Any other person that is not a U.S. person

  5. The Form W-8ECI, Certificate of Foreign Person's Claim for Exemption from Withholding on Income Effectively Connected with the Conduct of a Trade or Business in the United States, is used by foreign persons to:

    • Establish that they are a foreign person

    • Claim that they are the beneficial owner of the income for which Form W-8ECI is being provided

    • Claim that the income is effectively connected with the conduct of a trade or business in the United States

  6. The Form W-8ECI is not filed with the IRS. It must be filed with, and maintained by, the withholding agent when a recipient considers their "effectively connected income" exempt from withholding. Return loose forms to the preparer of the form.

21.8.2.17.4  (10-01-2007)
Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding

  1. Investment income (stock, bonds and other domestic securities, interest on deposits in banks, and payments from any other source) earned in the United States by foreign governments, international organizations, foreign central bank of issue, foreign tax-exempt organizations, foreign private foundations, or the government of a U.S. territory is exempt from Chapter 3 Withholding, if the income is not derived from a commercial activity or received from or by a controlled commercial entity.

  2. Foreign governments, international organizations foreign central bank of issue, foreign tax-exempt organizations, foreign private foundations, or the government of a U.S. Territory must file Form W-8EXP with the withholding agent to:

    • Establish that they are a foreign person

    • Claim that they are the beneficial owner of the income for which Form W-8EXP is being filed, and

    • Claim a reduced rate of, or exemption from, withholding

  3. The withholding agent must keep Form W-8EXP for at least four years after the end of the year in which the income to which it applies is paid. Form W-8EXP should not be sent to the IRS.

21.8.2.17.5  (11-07-2008)
Form W-8 IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. Branches for United States Tax Withholding

  1. Foreign persons are subject to U.S. tax at a 30% rate on income they receive from U.S. sources that consists of:

    • Interest

    • Dividends

    • Rents

    • Premiums

    • Annuities

    • Compensation for, or in expectation of services performed, or

    • Other fixed or determinable annual or periodical gains, profits or income

  2. This tax is imposed on the gross amount paid and is generally collected by withholding on that amount.

  3. A payment is considered to have been made whether it is directly to the beneficial owner or to another person, such as an intermediary, agent, trustee, executor, or partnership for the benefit of the beneficial owner.

  4. Form W-8 IMY must be provided to a withholding agent by:

    • A foreign person, or a foreign branch of a U.S. person, to establish that it is a qualified intermediary that is not acting for its own account, to represent that it has provided or provides a withholding statement for withholding responsibility

    • A foreign person to establish that it is a non-qualified intermediary that is not acting for its own account, and if applicable, that it is using the form to transmit withholding certificates that provides a withholding statement as required

      Note:

      A U.S. person cannot be a non-qualified intermediary.

    • A U.S. branch of certain foreign banks or foreign insurance companies to represent that the income it receives is not effectively connected with the conduct of a trade or business within the United States

    • A flow-through entity to represent that it is either a withholding foreign partnership or withholding foreign trust, and provides a withholding statement, as required, or a non-withholding foreign partnership or a non-withholding foreign simple or grantor trust (The income which it receives is not effectively connected with a U.S. trade or business, and it has provided a withholding statement as required.)

    • A partnership or grantor trust that is a partner in a partnership and is allocated effectively connected taxable income

  5. Form W-8 IMY must be provided to the withholding agent or payer before income is paid or credited on behalf of the beneficial owner. Form W-8 IMY should not be sent to the Service.

    Note:

    Failure to provide a Form W-8 IMY, or failure to provide necessary documentation and withholding statements, may lead to withholding at a 30% rate, or the backup withholding rate.

21.8.2.17.6  (10-01-2012)
Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits

  1. Form W-8CE, Notice of Expatriation and Waiver of Treaty Benefits, is used to notify a payer that a covered expatriate individual is subject to special tax rules under IRC § 877A.

  2. Covered expatriates are required to give Form W-8CE to the payer if they had any of the following items on the day before their expatriation date (as identified in boxes 1-4 on Form W-8CE):

    • Eligible deferred compensation item

    • Ineligible deferred compensation item

    • Specified tax deferred account

    • Interest in a nongrantor trust

  3. The Form W-8CE must be filed within 30 days of expatriation for each specified tax deferred account, item of deferred compensation, or interest in a nongrantor trust. The form is given to each payer of the identified income and is not filed with IRS. The Form 8854, Initial and Annual Expatriation Information Statement, is the corresponding form filed with the Service.

    Note:

    Expatriates must file Form 8854 with the Service.

21.8.2.17.7  (10-01-2007)
Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual

  1. If income is for independent personal services, or from dependent personal services by nonresident alien individuals, the recipient must file Form 8233 with the withholding agent to claim reduced or exempt withholding, when the recipient is eligible. Use the following chart to determine if Form 8233 should be used by nonresident alien individuals:

    If... Then...
    Receiving compensation for independent personal services performed in the United States Use Form 8233 to claim a tax treaty withholding exemption for part or all of that compensation and/or to claim the daily personal exemption amount.
    Receiving compensation for dependent personal services performed in the United States Use Form 8233 to claim a tax treaty withholding exemption for part or all of that compensation. Note: Do not use Form 8233 to claim the daily personal exemption amount.
    Receiving non-compensatory scholarship or fellowship income and personal services income from the same withholding agent Use Form 8233 to claim a tax treaty withholding exemption for part or all of both types of income.
  2. This form is not used if the taxpayer is a beneficial owner who is:

    If... Then...
    Receiving compensation for dependent personal services performed in the United States, and is not claiming a tax treaty withholding exemption for any part of that compensation Form W-4 is used.
    Receiving non-compensatory scholarship or fellowship income, and is not receiving any personal services income from the same withholding agent Form W-8BEN or, if elected by the withholding agent, Form W-4 is used for the non-compensatory scholarship or fellowship income.
    Claiming only foreign status or treaty benefits with respect to income that is not compensation for personal services Form W-8BEN is used.

    Note:

    This exemption is not retroactive.

  3. The Form 8233 is processed at the Philadelphia Accounts Management Campus. Processing procedures for this form are located in IRM 21.8.6, Exemptions from U.S. Withholding (Form 8233).

  4. Withholding agents keep a copy of Form 8233 for their records, give a copy to the nonresident alien, and attach a copy to Form 1042.

21.8.2.17.8  (10-01-2013)
Form W-9, Request for Taxpayer Identification Number and Certification

  1. Form W-9, , Request for Taxpayer Identification Number and Certification, replaced Form 1078, Certificate of Alien Claiming Residence in the United States, to comply with the new regulations under Chapter 3 (IRC §§ 1441-1446) and related sections of the Internal Revenue Code.

  2. A person who is required to file an information return with the IRS must obtain a correct Taxpayer Identification Number (TIN) to report:

    • Income paid to them

    • Real estate transactions

    • Mortgage interest they paid

    • Acquisition or abandonment of secured property

    • Cancellation of a debt

    • Contributions they made to an IRA

  3. The form is used by a U.S. person (including a resident alien) to give their correct TIN to a requester, when applicable, to:

    • Certify that the TIN is correct (or to show that the taxpayer is waiting for a number to be issued)

    • Certify that the taxpayer is not subject to backup withholding, or

    • Claim exemption from backup withholding if the taxpayer is a U.S. exempt payee

  4. Due to regulatory changes, Form W-9 serves a triple function:

    • Vehicle for U.S. persons to report Taxpayer Identification Numbers (ITINs) to certain withholding agents

    • Vehicle for informing withholding agent that the payee is a U.S. person

    • Vehicle for a U.S. person to claim tax treaty exemptions

21.8.2.18  (10-01-2012)
Information Reporting Under IRC § 6048

  1. The Small Business Job Protection Act of '96 (SBJPA) expanded information reporting under IRC § 6048 for:

    • U.S. persons who make transfers to foreign trusts, and

    • U.S. owners of foreign trusts

  2. The SBJPA also added:

    • Reporting requirements for the U.S. beneficiaries receiving direct or indirect distributions from foreign trusts (IRC § 6048(c)), and

    • Revised civil penalty procedures

  3. U.S. persons treated as owners of a foreign trust under § 671 through IRC § 679 ("U.S. owner(s)" are responsible for ensuring that the foreign trust annually furnishes the IRS prescribed information to:

    • The U.S. owner(s), and

    • U.S. beneficiaries

  4. U.S. owners also are responsible for ensuring that the foreign trust files an annual return on Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner (Under § 6048(b)) containing a full and complete accounting of all:

    • Trust activities

    • Trust operations, and

    • Other relevant information

  5. U.S. owners also must complete and file Part II of Form 3520 even if they are not required to complete Part I or Part III with respect to the foreign trust.

  6. The Hiring Incentives to Restore Employment (HIRE) Act of 2010 confirmed that U.S. owners of foreign trusts must file Form 3520 and complete Part II of Form 3520 even if there were no transactions with the foreign trust in that particular year, and even if they are not required to complete Part I or Part III with respect to the foreign trust.

21.8.2.18.1  (09-09-2011)
Penalties Assessed Under § 6677 - Form 3520 & Form 3520-A

  1. Organization Function Program (OFP) code 710-12320 is designated for Form 3520 & Form 3520-A activity. However, Accounts Management in Philadelphia has been approved to report work performed relating to Form 3520 & Form 3520-A to a fifth digit OFP 710-33039. This includes related Civil Penalty adjustments (CP 15 & CP 215) and duplicate filing conditions (TRNS 193) for:

    • Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts, and

    • Form 3520-A, Annual Information Return of Foreign Trust with a U.S. Owner (Under § 6048(b))

  2. Prompted by Service Center notice CP 223, penalties are assessed under §6677 of the Internal Revenue Code for each tax year in which the Form 3520 and/or 3520-A was not timely filed with the required information.

    Note:

    For more information on penalties assessed under § 6677 refer to IRM 20.1.9, International Penalties.

  3. For notices and returns required to be filed before January 1, 2010, the initial penalty is 35% of the gross reportable amount that was transferred to the foreign trust, (Form 3520 page 2, total line 13), or the amount received from the foreign trust (Form 3520 Page 4, line 27), and/or 5% of the gross value of the portion of the foreign trust's assets at the close of the year treated as owned by the U.S. person (Form 3520 page 4, line 23 and/or Form 3520-A page 3, line 9).

  4. For notices and returns required to be filed after December 31, 2009, the initial penalty for failure to complete and file Part I or Part III of Form 3520 generally is the greater of $10,000 or 35% of the gross reportable amount, which is either the amount that was transferred to the foreign trust (Form 3520 page 2, total line 13) or the amount received from the foreign trust (Form 3520 Page 4, line 27). The initial penalty for failure to file Form 3520-A generally is the greater of $10,000 or 5% of the gross value of the portion of the foreign trust's assets at the close of the year treated as owned by the U.S. owner (Form 3520 Page 4, line 23, or line 9 of the Foreign grantor Trust Owner Statement received from the foreign trust). If the aggregate penalty that is assessed with respect to a particular failure exceeds the gross reportable amount, abate the excess amount.

21.8.2.18.2  (05-19-2010)
Interim Reporting Regime for Canadian Registered Retirement Savings Plans and Registered Retirement Income Funds

  1. Notice 2003-75, 2003-50 IRB 1204, provides a new simplified reporting regime that Treasury and the IRS have developed for taxpayers who hold interests in Canadian Registered Retirement Savings Plans (RRSPs) and Canadian Registered Retirement Income Funds (RRIFs). The new reporting regime, which is effective for taxable years beginning after December 31, 2002, is in lieu of the Form 3520 (Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) and Form 3520-A (Annual Information Return of Foreign Trust With a U.S. Owner) filing obligations that otherwise apply to U.S. Citizens and resident aliens who hold interests in RRSPs and RRIFs, and to the custodians of such plans. The new simplified reporting regime is designed to permit taxpayers to meet their reporting obligations by using information that is readily available to them.

  2. Under the authority of IRC § 6001, Treasury and the IRS have designed a new Form 8891 (U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans) that a U.S. citizen or resident alien, who holds an interest in an RRSP or RRIF, must complete and attach to his or her Form 1040. The Form 8891 also coordinates the reporting rules with the procedure set forth in section 4 of Revenue Procedure 2002-23, 2002-1 C.B 744, for making the election under Article XVIII(7) of the U.S. - Canada income tax convention to defer U.S. income taxation of income accrued in the RRSP or RRIF.

    Note:

    Refer to IRM 21.5.1.4.4, Processing of Loose Forms or Schedules for loose filed Forms 8891.

  3. A U.S. citizen or resident alien who has received any distributions during the taxable year from an RRSP or RRIF must report the total amount of distributions received during the taxable year from all such RRSP's and RRIF's on line 16a of the Form 1040 and the taxable amount of all such distributions (as determined under section 72) on line 16b of the Form 1040.

  4. For purposes of the new simplified reporting regime described in this Notice, a beneficiary of an RRSP or RRIF is an individual who is subject to current U.S. income taxation on income accrued in the RRSP or RRIF, or would be subject to such taxation, had the individual not made the election under Article XVIII(7) of the U.S. - Canada income tax convention to defer U.S. income taxation of income accrued in the RRSP or RRIF. For these purposes, an annuitant of an RRSP or RRIF is an individual who is designated pursuant to the RRSP or RRIF as an annuitant.

  5. Taxpayers must retain supporting documentation relating to information required by the new reporting regime, including Canadian Form T4RSP, Form T4RIF, or Form NR4, and periodic monthly or annual statements issued by the custodian of the RRSP or RRIF.

  6. The new simplified reporting regime provides the information needed for tax compliance purposes. Therefore, pursuant to IRC § 6048(d)(4), no reporting is required under §6048 with respect to RRSP's and RRIF's that have beneficiaries and annuitants who are subject to the new simplified reporting regime. Accordingly, the associated penalties described in IRC § 6677 do not apply to such RRSP's and RRIF's and their beneficiaries and annuitants. A beneficiary or annuitant of an RRSP or RRIF may, however, be subject to other penalties (e.g., the penalty imposed by IRC § 6651 for failure to file a tax return or to pay tax).

21.8.2.18.3  (10-01-2012)
Form 3520 & Applicable Penalties

  1. A U.S. person must file Form 3520 to report certain trust activities and transactions with foreign trusts such as:

    • The creation of a foreign trust by a U.S. person

    • A direct or indirect transfer of any money or property to a foreign trust by a U.S. person

    • The death of a U.S. person, if such person was treated as an owner of a foreign trust, and reporting any portion of a foreign trust that was included in the decedent's estate

    • A direct or indirect distribution from a foreign trust received by a U.S. person

    • A U.S. person, regardless of whether such a person has an interest in a foreign trust, must use the Form 3520 to report the receipt of certain large gifts or bequests from foreign persons

    • A U.S. person treated as an owner of a foreign trust, without regard to when the trust was created, or whether there were any transactions involving the foreign trust in the current year

  2. This form is required of any U.S. person who, directly or indirectly transfers property to a foreign trust, whether or not the trust has one or more U.S. beneficiaries. An Individual, Partnership, Corporation, Trust or Estate may be required to file this return.

    Note:

    A separate Form 3520 must be filed for transactions with each foreign trust.

  3. Processing: The Form 3520 is processed at the Ogden Submission Processing Campus (OSPC) under MFT 68, to the Business Master File (BMF). Filing is done using the trust EIN or a social security number followed by a "V" (if valid) or "W" (if invalid) - like Form 706. The DLN used is 60383-XXX-XXXXX-X (98383-XXX-XXXXX-X for returns processed in Philadelphia prior to 2007).

  4. Due Date: In general, the due date is the same as the due date for income tax returns (1040, 1041 Series, 1041, 1065 & 1120 Series), including extensions. Most taxpayers are required to file some type of income tax return and the Form 3520 is generally due on the date that the income tax return is due, including extensions. In the case of a Form 3520 filed with respect to a U.S. decedent, Form 3520 is due on the date that Form 706, "United States Estate (and Generation-Skipping Transfer) Tax Return" , is due (including extensions), or would be due if the estate were required to file a return even if the executor of a decedent's estate made the special election under section 301(c) of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation act of 2010. Thus, the due date may vary. All required attachments must be submitted with Form 3520 for it to be considered a complete return.

  5. Civil Penalties: A CP 215 and/or CP 15 is generated after Examination reviews Form 3520, and determines that it was filed late, or that the required information is incomplete or incorrect on the return. Because the Form 3520 due date is generally governed by the due date of the income tax return (but in the case of a decedent may be due on the due date for the estate tax return), it is not possible to have a computer-generated penalty. When the income tax return is under field or campus examination, the Form 3520 is reviewed for potential civil penalty and Examination may make assessments under MFT 13 (BMF account numbers) or MFT 55 (IMF account numbers), with civil penalty reference number 659. IDRS posts the assessment as a TC 240.

  6. Application of Penalties: The following general criteria are used: Failure to report or timely file the required information on Form 3520 is subject to an initial penalty of:

    • the greater of $10,000 or 35% penalty on the gross value of any property transferred by a U.S. person to a foreign trust, for failure by a U.S. transferor to report the transfer, followed by additional $10,000 penalties for each 30 day period during which the failure to report the transfer continues (beginning 90 days after notification of the failure by the IRS). The penalty is assessed against the U.S. transferor (using transferor's TIN under MFT 13 or MFT 55).

    • the greater of $10,000 or 5% penalty on the gross value of the portion of the foreign trust's assets at the close of the year treated as owned by the U.S. person, for failure by the U.S. person to report the U.S. owner information, followed by additional $10,000 penalties for each 30 day period during which the failure to report the transfer continues (beginning 90 days after notification of the failure by the IRS). The penalty is assessed against the U.S. person (using such person's TIN under MFT 13 or MFT 55).

    • the greater of $10,000 or 35% penalty on the gross value of the distributions received from a foreign trust, for failure by a U.S. person to report receipt of the distribution, followed by additional $10,000 penalties for each 30 day period during which the failure to report the distribution continues (beginning 90 days after notification of the failure by the IRS). The penalty is assessed against the U.S. person (using such person's TIN under MFT 13 or MFT 55).

      Note:

      A U.S. person is a Citizen, Resident, Domestic Corporation, Domestic Partnership, Domestic Estate or Domestic Trust.

    • 5% of the fair market value of a large foreign gift or bequest followed by additional 5% penalties for each month for which the failure to report continues (not to exceed a total of 25% of the fair market value of the gift or bequest). The penalty is assessed on the U.S. person receiving the gift (using such person's TIN under MFT 13 or MFT 55).

  7. When a Form 3520 is filed after the return due date, or if the gross value of the foreign trust on a timely filed return is reported as zero or is left blank, a campus notice CP 223 is generated to pull the return from Files. The CP 223 notice is sent to Accounts Management for penalty determination with the return attached, if it is located in Files.

    If... Then...
    The Form 3520 was filed late Request an explanation of late filing and/or a copy of an approved extension Form 7004.
    • If the conditions in Paragraph (8) below are met, do not assess a penalty. Close IDRS control base and classify waste the CP 223.

    • If the conditions in Paragraph (8) below are not met, assess a penalty equal to the greater of $10,000 or:

      • 35% of the amount shown on page 2, Line 13 or

      • 5% of the amount shown on page 4, Line 23 or

      • 35% of the amount shown on page 4, Line 27 or

        Exception:

        In the case of a failure to report foreign gifts, assess a penalty equal to 5% of the amount shown on page 6, Line 54.

    The Form 3520 is not attached to the CP 223 and the received date and/or the amount cannot be determined from IDRS research Suspend the case and request the return from Files.
    Return is charged out to another area Attempt to contact the area noted on the charge-out to secure the return.
    Return cannot be secured from files, P&A, or any other area. Send a Letter 3653C to the taxpayer to request a copy of the form.

    Caution:

    When composing the 3653C letter requesting a copy of the Form 3520, do not include paragraphs which imply that we have viewed the return, such as Paragraph M which begins "You answered, "YES" to the question on Line 3, Page 1 of Form 3520."

    The respective page of the Form 3520 is not attached to the return, or if the amount is missing
    1. Correspond for the missing information using a 3653C letter and suspend the case for 90 days.

    2. Send one copy of the letter to the Trust, and a second copy to the U.S. owner of the trust.

    3. Change IDRS category code to ITRQ if a follow up letter needs to be sent and suspend the case for longer than 45 days.

    The taxpayer replies to the IDRS 3653C letter and there is an amount shown
    • If the return was filed late, assess a penalty according to the procedures under the second bullet in the first "Then" box above.

    • If the return was timely filed, attach the 3653C letter response to the 3520 return and close the IDRS control base.

    The amount has not been secured from the taxpayer, and the 90-day suspense period has expired Assess a penalty according to the instructions in the first Then box above.

    Note:

    The manager of the employee processing a CP 223 must review any manual assessment of a §6039F(c) penalty on a Form 3520 account resulting from the processing of a CP 223. Authorization for the assessment may be in the form of the manager initialing the CP 223.

  8. Abatement Procedures - Reasonable cause criteria must be met:

    • If the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect, do not assess penalties. If penalties were assessed, abate them.

    • Proof of an approved extension of time to file an income tax return can be considered if the Form 3520 was filed within the approved extension period (Form 4868 or Form 7004).

    • Check MFT 68 and/or the income tax module as applicable for timely filing or the presence of a posted or unposted TC 460. Abate penalty if extended due date shown is equal to or greater than the filing date.

    • To abate, adjust the MFT 13 (BMF account numbers) or 55 (IMF account numbers) module with a 290 .00, Blocking Series 52, and Reference Number 659 with minus (–) after the abatement amount. As a result, transaction TC 241 generates on the Master File. Abatement requests for both BMF and IMF modules are worked in PAMC by the BMF International units.

    Note:

    Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, cannot be used to request an extension on Form 3520, unless it is filed for the taxpayer's business tax return. However, if the income tax return has an extended due date, the Form 3520 is due on the same extended due date. Be sure to check all applicable income tax MFTs, depending on filing requirements, to determine timely filing. Check all "XREF" TIN accounts for a TC 460 for the year in question to determine if an extension was filed.

  9. Non-Abatement Procedures:

    • Advise taxpayer if research shows that the Form 3520 was filed late and give the specifics. Make sure the income tax return due date is checked to determine timely filing of the Form 3520.

    • Research IDRS for prior year reasonable cause adjustments.

    • Allow the taxpayer to submit additional information for consideration of penalty abatement (i.e., copy of approved income tax return extension, certified mail receipt, reasonable cause statement).

    • If additional information is not accepted, deny the request. Input 290 .00, Penalty Reference Number 659 for .00, Blocking Series 98/99, and advise the taxpayer of their penalty appeals rights using an IDRS Letter 854C.

    • If a Form 843 claim is received and is being denied, follow normal penalty denial procedures.

    Caution:

    Most of these penalties are large dollar amounts since the penalty is based on the gross reportable amount transferred or distributed, and/or gross value of assets, property, receipts etc., which are usually a substantial amount. After checking for a large corporation indicator on IDRS, follow local procedures for Accounts Receivable Cases.

  10. Additional Information: For filing year 2002, a "Report Plan Number" (RPN) is shown on the tax module of Form 3520, MFT 68. This is a three-digit number shown on the second line of TXMOD on the IDRS module. This number generates from Line 2b (Employer Identification Number) and consists of the last three digits of that number. If line 2b is blank or contains a number other than an EIN, a default report plan number of "520" is shown. This field was created to capture foreign trust return information from multiple trusts filed by the same person that were previously "G" coded and refiled.

    Example:

    TXMODA98-XXXXXXX
    68 RPN 200112

21.8.2.18.4  (10-01-2012)
Form 3520-A & Applicable Penalties

  1. A foreign trust must annually file a Form 3520-A, Information Return of a Foreign Trust, when a U.S. person is treated as an owner of any portion of the foreign trust. Form 3520-A includes a Foreign Grantor Trust Owner Statement and a Foreign Grantor Trust Beneficiary Statement on pages 3 and 4.

  2. Form 3520-A is required for the foreign trust to satisfy the U.S. owner's annual obligation under IRC § 6048(b). If there are multiple Foreign Grantor Trust Owners or U.S. Beneficiaries, there may be several Foreign Grantor Trust Owner Statements/ or Foreign Grantor Trust Beneficiary Statements that must be provided. If Form 3520-A is mailed late (postmarked after the 15th day of the 3rd month from the end of the trust's tax year), the computer generates campus Notice CP 223. A CP 223 requires the tax examiner to manually calculate and assess the failure to file (FTF) Civil Penalty Reference Number 660 using the U.S. owner's TIN listed on Line 6b, Page 3 of Form 3520-A under MFT 13 (BMF account numbers) or 55 (IMF account numbers).

  3. Processing: Beginning with the 2000 year returns, Form 3520-A was processed at Philadelphia (PSPC) on the Business Master File (BMF) under MFT 42. Filing is done using the trust's EIN or the taxpayer's SSN. The DLN was shown as 98382-XXX-XXXXX-X. Returns prior to 2000 were not processed, but rather filed in Alpha order in the Document Retention (Files) area. Beginning in 2007, these returns are processed at the Ogden Submission Processing Campus with a DLN of 60382-XXX-XXXXX-X.

  4. Due date: This form is due the 15th day of the 3rd month (e.g., calendar year 2007 is due 3/15/08) following the end of the Trust's tax year or extended due date (Form 7004).

  5. When a Form 3520-A is filed after the return due date, or if the gross value of the portion of the trust treated as owned by the U.S. owner on a timely filed return is zero or blank, a campus notice CP 223 is generated to pull the return from Files. The CP 223 notice is sent to Accounts Management for penalty determination with the return attached if it is located in Files.

  6. Penalties are assessed on the Form 3520-A if the form is not filed timely.

    • The U.S. owner is generally subject to an initial 5% penalty equal to the greater of $10,000 or 5% of the gross value of the portion of the trust's assets treated as owned by that person at the close of the foreign trust tax year if (Form 3520-A, Page 3, Line 6a, 6b & 9) the trust fails to file a timely Form 3520-A and/or it does not furnish the information required by IRC § 6048(b).

    • Assess the FTF Penalty to the U.S. Owner's TIN account (using Page 3, Line 6b) under either MFT 13 (BMF, if EIN), or MFT 55 (IMF, if SSN) with TC 290 .00, Reference Number 660, if no reasonable cause was established or no approved Form 7004 was present. A TC 240 generates on IDRS for the penalty amount.

    • Additional penalties (Examination imposed) may be assessed if noncompliance continues after the IRS mails a notice of failure to comply with the required reporting.

    • Criminal penalties (Examination imposed) for failure to file on time and for filing a false or fraudulent return may be assessed.

      Note:

      The manager of an employee processing a CP 223 must review any manual assessment of a Form 3520-A penalty resulting from the processing of a CP 223 per §6751(b)(1). Authorization for the assessment may be in the form of initialing the CP 223.

    If... Then...
    The Form 3520-A was filed late Request an explanation of late filing and/or a copy of an approved extension Form 7004.
    • If the conditions in Paragraph (8) below are met, do not assess a penalty. Close IDRS control base. Input TC 290 .00 to refile the return or classify waste the CP 223 if the original return is not with the case.

    • If the conditions in Paragraph (8) below are not met, assess a penalty equal to the greater of $10,000 or 5% of the amount shown on page 3, line 9 on U.S. owner's account, MFT 13 or 55.

    The Form 3520-A is not attached to the CP 223 and the received date and/or the page 3, line 9 amount cannot be determined from IDRS research Suspend the case and request the return from Files.
    Return is charged out to another area Attempt to contact the area noted on the charge-out to secure the return.
    Page 3 of the Form 3520-A is not attached to the return, or if the amount on line 9 is missing
    1. Correspond for the missing information using a 3653C letter and suspend the case for 90 days.

    2. Send one copy of the letter to the Trust, and a second copy to the U.S. owner of the trust.

    3. Change IDRS category code to ITRQ if a follow up letter needs to be sent and suspend the case for an additional 45 days.

    Return cannot be secured from files, P&A or any other area Send a Letter 3653C to the taxpayer to request a copy of the form.
    The taxpayer replies to the IDRS 3653C letter and there is an amount shown on page 3, line 9
    • If the return was filed late, assess a penalty equal to the greater of $10,000 or 5% of the amount shown on page 3, line 9 on U.S. owner's account, MFT 13 or 15.

    • If the return was timely filed, attach the 3653C letter response to the 3520 return and close the IDRS control base.

    The amount on line 9 of page 3 of Form 3520-A has not been secured from the taxpayer, and the 90-day suspense period has expired Assess a penalty according to the instructions in the first Then box above.

    Exception:

    If the foreign trust does not file Form 3520-A, but the U.S. owner completes and attaches a substitute Form 3520-A for the foreign trust to the U.S. owner's timely filed Form 3520 in accordance with the instructions for Form 3520, the U.S. owner will not be subject to the penalty for failure to file Form 3520-A.

  7. Civil Penalties: A CP 215 generates after the CP 223 has been processed and the FTF Civil Penalty has been posted to the MFT 13 (BMF account numbers) or 55 (IMF account numbers) account of the U.S. Owner.

  8. Abatement Procedures - Reasonable Cause Criteria must be considered:

    • Abate penalty if the taxpayer can demonstrate that the failure to comply was due to reasonable cause and not willful neglect.

      Note:

      A taxpayer does not have reasonable cause merely because a foreign country imposes a civil or criminal penalty on the trustee (or other person) for disclosing the required information (§ 6677(d)). Also, 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, is not considered reasonable cause.

    • Proof of an approved extension of time to file an income tax return can be considered, if the Form 3520-A was filed within the approved extension period (Forms 4868 or Form 7004).

    • Check MFT 42 and/or the income tax module as applicable for timely filing or the presence of a posted or unpostable TC 460. Abate penalty if extended due date shown is equal to or greater than the filing date. (Check the SSN followed by "V" or "W" , or other TINs found through research on NAMEB, NAMEE, etc.).

    • Adjust the MFT 13 (BMF account numbers) or 55 (IMF account numbers) module with a 290 .00 and Reference Number 660 with a minus (–) after the abatement amount. Abatement requests for both BMF and IMF modules are worked in PAMC by the BMF International units.

  9. Non-Abatement Procedures:

    • Advise taxpayer if research shows that the Form 3520-A was filed late and give the specifics. Make sure the income tax return due date is checked to determine timely filing of the Form 3520-A.

    • Research IDRS for prior year reasonable cause adjustments.

    • Allow the taxpayer to submit additional information for consideration of penalty abatement (i.e., copy of approved income tax return extension, certified mail receipt, reasonable cause statement).

    • If additional information is not accepted, deny the request. Input 290 .00, Penalty Reference Number for .00, Blocking Series 98/99, and reason code 62. Advise the taxpayer of their penalty appeals rights using IDRS Letter 854C.

    • If a Form 843 claim is received and is being denied, follow normal penalty denial procedures.

  10. Per Period of Limitations IRC § 6501(c)(8): The time for assessment of any tax with respect to a period to which the information relates does not expire before 3 years after the date on which the information is furnished. This applies to all information on Form 3520 and 3520-A.

21.8.2.18.5  (10-01-2012)
Form 3520 & Form 3520-A Possible Duplicate Filing Conditions (TRNS 193)

  1. If a duplicate filing condition exists, a TRNS 193 generates. To resolve:

    • Review return to see if it is an exact duplicate. If it is, release the "A" freeze with a TC 290 .00 under MFT 68 or 42 as applicable.

    • If it is a true amended/supplemental return, the taxpayer should have checked the Amended box on line "A" of the Form 3520 (MFT 68) or Form 3520-A (MFT 42). Release the "A" freeze with a TC 290 .00.

    • Review to see if a copy was sent in reply to the Letter 3563C. If so, route to the originator of the 3653C Letter.

    Note:

    These returns are for information only and tax is not assessed on them. However, penalties may be appropriate. Review the original return to see if it was timely filed. If it was filed late (without extension), a civil penalty may need to be assessed. It is assessed against the U.S. owner's TIN data located on Form 3520/3520-A. Check all MFT's, EIN's, SSN's, and SSN's with "V" or "W" for the U.S. person or trust to see if a penalty had already been assessed, or if an extension (TC 460) was processed.

  2. If the original Form 3520/3520-A was filed late, compare the amount of both the original and subsequent return to see if the amounts are the same. (If the original return is not available, the amount from the original return also appears on the TXMOD.) If the same, release the "A" freeze with TC 290 .00 under MFT 68/42. Check the U.S. Owner TIN listed on Form 3520/3520-A under MFT 13 (BMF account numbers) or 55 (IMF account numbers) for an assessment.

    If... Then...
    A penalty was assessed at the greater of $10,000 or 35%/5%, to the U.S. owner's TIN account No penalty adjustment is needed.
    A penalty has not been assessed Assess a penalty equal to the greater of $10,000 or 35%/5% of the amount on Form 3520/3520–A. The penalty is assessed under the U.S. owner TIN listed on the form under MFT 13 or 55. Use a TC 290 .00, Reference Number 659/660 respectively, with the amount of penalty.

  3. If the amounts differ, and the second return is an additional return, check to see if a penalty was assessed against the U.S. owner (Form 3520/3520-A)

    If... Then...
    A penalty was assessed on the original return The penalty must be increased to include the additional amount reported as long as it is the same U.S. owner. If a different U.S. owner, assess under the different TIN.
    A penalty was not assessed Compute a penalty using the appropriate percentage of both entries, if both were late. If both were not late, then assess a penalty equal to the greater of $10,000, or 35%/5% penalty respectively.

  4. If the amounts differ, and the second return is a correction to the original return, check to see if a penalty was assessed.

    If... Then...
    A penalty was assessed Determine the difference (+ or -) and assess or abate the appropriate percentage of the difference between the entries. If the line is blank, assess a penalty amount of $10,000.
    A penalty was not assessed Compute the penalty using the appropriate percentage on the amended return entry.

    Reminder:

    All Civil Penalty adjustments on Form 3520 & 3520-A are made to the Filer TIN (Form 3520), or U.S. owner TIN (Form 3520-A) under MFT 13 or 55 with a TC 290 .00 and Reference Number 659/660 respectively. Use minus (–) after the amount, if the difference is a decrease in the penalty.

21.8.2.19  (10-01-2013)
Form 5471 - Information Return of U.S. Persons With Respect to Certain Foreign Corporations

  1. Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is required to be filed by certain U.S. Citizens and residents who are officers, directors, or shareholders in certain foreign corporations to report their international activities.

  2. The Form 5471 is a four-page document that includes Schedules A, B, C, E, F, G, H, and I. There are also three separate Form 5471 Schedules connected with this Form - Schedules J, M, and O. Schedule O consists of Part I and Part II.

  3. The form and schedules are used to satisfy the reporting requirements of IRC § 6038, IRC § 6046, and related regulations.

  4. The Form 5471 (and schedules) is filed with the income tax return filed by the taxpayer.

  5. The Form 5471 and the related Schedules J, M, and O can be filed electronically, after receiving IRS approval, by submitting Form 9041, Application/Registration for Electronic/Magnetic Media Filing of Business Returns.

  6. The due date of the Form 5471 is the same as that of the related income tax return.

  7. An extension of time to file the income tax return is an extension of time to file Form 5471.

  8. Taxpayers are instructed to attach Form(s) 5471 to their income tax return and to file both by the due date for that return. Attach loose forms to the appropriate income tax return. If the income tax return cannot be located or has not been filed, fax the loose Form 5471(s) to the following number and close the case on IDRS:
    859-669-4043
    Attn: PIN Unit - Stop 97

21.8.2.19.1  (10-01-2013)
Form 5471 Penalties

  1. Failure to file Form 5471 and the appropriate schedule(s) can result in civil penalties under IRC § 6038. The penalties are assessed on civil penalty modules with Penalty Reference Numbers 599 and 623. These reference numbers are located in Document 6209.

  2. Form 5471 penalties assessed by Area Office Examination are manually assessed with Penalty Reference Number 623 using Document Code 47 or 54. Only Examination can recommend reconsideration of this penalty when it is assessed by Exam.

  3. Beginning in 2010, Master File systemically assesses IRC § 6038 penalties on Form 5471 returns attached to late-filed Form 1120 returns. The assessments contain a TC 240 for amounts in multiples of $10,000, Document Code 54, Tax Class 3, Penalty Reference Number 599, and 00 as the first two digits of the Blocking Series.

    Exception:

    In 2009 only, Master File systemically assessed IRC § 6038 penalties on Form 5471 returns attached to late-filed Form 1120 returns. The assessments contain a TC 240 for amounts in multiples of $10,000, Document Code 54, Tax Class 3, Penalty Reference Number 623, and 00 as the first two digits of the Blocking Series.

  4. BMF international units at the Ogden Accounts Management Campus process requests for reasonable cause relief on these systemically assessed Form 5471 FTF penalties. See IRM 21.8.2.19.2.

  5. Forward all requests for abatement of Examination assessed penalties, including Form 843 claims, to the area that assessed the penalty.

21.8.2.19.2  (10-01-2013)
Form 5471 Penalties Systemically Assessed from Late-Filed Form 1120

  1. Beginning in 2009, Master File systemically assesses IRC § 6038 penalties on Form 5471 returns that are attached to late-filed Form 1120 returns. The penalty amount is $10,000 for each attached Form 5471 and is assessed on a civil penalty module (MFT 13) as a TC 240 with Penalty Reference Number (PRN) 623 for 2009 or PRN 599 for 2010 and subsequent years. The systemically assessed penalties will post as a TC 240 for amounts in multiples of $10,000, Document Code 54, Tax Class 3, Penalty Reference Number 623 or 599, and 00 as the first two digits of the Blocking Series. The assessment will result in a CP 215 notice being issued to the taxpayer.

    Caution:

    Penalties manually assessed by Examination will have a Document Code 47 and generally contain a TC 300 but may be assessed using Document Code 54 without a TC 300. Accounts Management WILL NOT consider penalty abatement requests on Examination assessed penalties. Examination will consider all requests for Exam assessed 5471 FTF penalties.

  2. Ogden and Cincinnati Accounts Management will continue to process Form 1120 Failure to File penalty abatement requests while only Ogden Accounts Management International will process Form 5471 FTF penalty abatement requests for systemically assessed PRN 623 for 2009 or PRN 599 for 2010 subsequent years. Refer inquiries concerning Form 5471 to the International Department at the Ogden Accounts Management Center (OAMC). For telephone calls prepare a Form 4442, Inquiry Referral, and fax to ≡ ≡ ≡ ≡ ≡ ≡ (number is for internal use only). Route correspondence to OAMC at Mail Stop 6552.

  3. Research to determine if:

    1. there is an open Accounts Management IDRS control base on the "related Form 1120" account and

    2. all required Forms 1120 have been filed (or have a valid extension) for all years not on retention. Refer to the following chart:

      Caution:

      A "related Form 1120" includes Form 1120 calendar year filers as well as filers for any fiscal period that falls within the calendar year of the penalty module. For example, if the penalty module is for 201212, any Form 1120 filing for periods 201201 through 201211 will represent a “related Form 1120” account to which the penalty pertains.

    If... And Then...
    There is an open control base on the related Form 1120   Suspend case until the Form 1120 account failure to file (FTF) penalty determination is made.
    1. If the Form 1120 FTF is abated, abate the Form 5471 penalty.

      Caution:

      If the Form 1120 FTF penalty was abated because of a First-Time Abate, the Form 5471 penalty can be abated. However, the FTA penalty reason code cannot be used. Use PRC 043 instead.

    2. If the Form 1120 penalty abatement request is denied, proceed to Paragraph (4) below to determine whether to abate the Form 5471 penalty.

    There is not an open control base on the related Form 1120 account Not all required forms are posted to Master File (BMFOL) Contact the corporation regarding the status of the missing returns
    The corporation
    1. cannot be contacted,

    2. does not respond,

    3. has not filed the missing returns

      Follow no consideration procedures. Advise the corporation that the abatement request cannot be considered until the missing returns have been filed. Refer to IRM 21.5.3.4.6.3, No Consideration Procedures
    The corporation indicates they have filed the returns after their request for abatement.   Suspend the request until all the necessary returns have posted to master file.
    All required returns are posted to Master File   Use the Failure to File or Late-Filed Form 5471 - Decision Tree (see (4) below) to determine whether to abate the Form 5471 penalty. Do not address the Form 1120 penalty unless the taxpayer is also requesting abatement of that penalty.

    Note:

    If the tax due on Form 1120 is timely paid but the form is filed late, no FTF penalty will be assessed on the 1120. However, FTF on the late filed Form 5471 attached will be systemically assessed on the civil penalty module.

  4. Ogden Accounts Management will evaluate all reasonable cause requests, regardless of the Master file status, for penalties that are systemically assessed using the Failure to File or Late-Filed Form 5471 - Decision Tree and the information below. See Exhibit 21.8.2-1, Failure to File or Late-Filed Form 5471 - Decision Tree.

    • Question 1 - Research IDRS for the related Form 1120 filing. If the failure to file penalty was abated on the "related Form 1120" account, abate the 5471 penalty.

      Note:

      The First-Time Abatement (FTA) penalty relief provisions in the IRM 20.1.1.3.6.1(8) exception generally do not apply to event-based filing requirements such as with the Form 5471. However, where such penalty (i.e., PRN 599) is assessed in conjunction with a late-filed Form 1120, the taxpayer may receive FTA penalty relief for the Form 5471/PRN 599 penalty provided that the following two conditions are met:
      1) There was no penalty assessed on the related Form 1120 (i.e., no tax or fully paid) or the related abatement on the Form 1120 filing reflects an FTA Penalty Reason Code (PRC) 018, and
      2) No Form 5471 penalties have been assessed (either PRN 599 or 623) in any of the prior three periods for MFT 13. If both conditions are met, abate the Form 5471/PRN 599 penalty using PRC 018. If the related abatement on the Form 1120 filing reflects a PRC of other than 018, abate the Form 5471/PRN 599 penalty using the same PRC as shown on the abatement of the Form 1120 filing penalty.

      Reminder:

      A "related Form 1120" includes Form 1120 calendar year filers as well as filers for any fiscal period that falls within the calendar year of the penalty module. For example, if the penalty module is for 201212, any Form 1120 filing for periods 201201 through 201211 will represent a “related Form 1120” account to which the penalty pertains.

    • Question 2 - Refer to IRM 21.5.3.4.16.7, Identifying Frivolous Returns/Correspondence and Responding to Frivolous Arguments.

      Note:

      If the request for the Form 5471 penalty abatement ALSO requests abatement of the Form 1120 failure to file penalty, consider the Form 1120 penalty first and process request. Abate/deny the 5471 penalty consistent with that determination.

    If... Then...
    The Penalty Decision Tree determination is to:
    • Abate/Waive

    Input TC 290 .00 and appropriate PRN (599 or 623) with a minus (-) after the abatement amount. Use Blocking Series 52, Reason Code 062 and the appropriate 4th position Penalty Reason Code.
    The Penalty Tree determination is to:
    • Deny

    Input TC 290 .00 with appropriate PRN (599 or 623) for .00 and Blocking Series 98. Send Letter 854C.

    Note:

    Enter a CIS case note and notate which question, in which section of the Penalty Tree, led to your decision to abate or deny the reasonable cause request.

    Caution:

    If the caller does not otherwise have reasonable cause, but contends that the penalty is for a wrong period, and as such the penalty should be abated, AND the caller has a "related Form 1120" with a fiscal year that ends within the calendar year listed on the penalty notice, advise the caller to refer to page 2 of the civil penalty notice for an explanation of how the penalty applies to fiscal year filers. CONCLUSION: The penalty should NOT be abated for this reason.

  5. Advise callers that a request for reasonable cause relief for Failure to File Form 5471 penalties must be submitted in writing. The taxpayer must provide a written statement to request relief from failure to file information return penalties.

  6. Route ALL Form 5471 penalty issues, other than reasonable cause abatement requests on systemically assessed PRN 599 or 623 penalties, to the appropriate area that assessed the penalty.

21.8.2.20  (10-01-2013)
Form 5472 - Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

  1. Reporting corporations use Form 5472, Information Return of a Foreign Owned Corporation, to provide required information under IRC 6038A and IRC 6038C for reportable transactions that occur during the tax year with a foreign or domestic related party.

  2. The Form 5472 is a two-page document that consists of six parts.

  3. The form is used to satisfy the reporting requirements of IRC 6038A(d) and related regulations.

  4. The Form 5472 is filed as an attachment to the U.S. corporation 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. See IRM 20.1.9.5.1, Reporting/Filing Requirements, for additional information.

21.8.2.20.1  (10-01-2013)
Form 5472 Penalties

  1. Failure to file Form 5472 can result in civil penalties under IRC 6038A(d). The penalties are assessed on civil penalty modules with Penalty Reference Number 711.

  2. Form 5472 penalties assessed by Area Office Examination are manually assessed with Penalty Reference Number 625 using Document Code 47 or 54. Only Examination can recommend reconsideration of this penalty when it is assessed by Exam.

  3. Beginning in 2013, Master File systemically assesses IRC § 6038A penalties on Form 5472 returns attached to late-filed Form 1120 returns. The assessments contain a TC 240 for amounts in multiples of $10,000, Document Code 54, Tax Class 3, Penalty Reference Number 711, and 00 as the first two digits of the Blocking Series.

  4. BMF international units at the Ogden Accounts Management Campus process requests for reasonable cause relief on these systemically assessed Form 5472 FTF penalties. See IRM 21.8.2.20.2.

  5. Forward all requests for abatement of Examination assessed penalties, including Form 843 claims, to the area that assessed the penalty.

21.8.2.20.2  (10-01-2013)
Form 5472 Penalties Systemically Assessed from Late-Filed Form 1120

  1. Beginning in 2013, Master File systemically assesses IRC § 6038A penalties on Form 5472 returns that are attached to late-filed Form 1120 returns. The penalty amount is $10,000 for each attached Form 5472 and is assessed on a civil penalty module (MFT 13) as a TC 240 with PRN 711. The systemically assessed penalties will post as a TC 240 for amounts in multiples of $10,000, Document Code 54, Tax Class 3, Penalty Reference Number 711, and 00 as the first two digits of the Blocking Series. The assessment will result in a CP 215 notice being issued to the taxpayer.

    Caution:

    Penalties manually assessed by Examination will have a Document Code 47 and generally contain a TC 300 but may be assessed using Document Code 54 without a TC 300. Accounts Management WILL NOT consider penalty abatement requests on Examination assessed penalties. Examination will consider all requests for Exam assessed 5472 FTF or late-filed penalties.

  2. Ogden and Cincinnati Accounts Management will continue to process Form 1120 Failure to File penalty abatement requests while only Ogden Accounts Management International will process Form 5472 FTF and late-filed penalty abatement requests for systemically assessed PRN 711 penalties. Refer inquiries concerning Form 5472 to the International Department at the Ogden Accounts Management Center (OAMC). For telephone calls prepare a Form 4442, Inquiry Referral, and fax to ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ (number is for internal use only). Route correspondence to OAMC at Mail Stop 6552.

  3. Research to determine if:

    1. there is an open Accounts Management IDRS control base on the "related Form 1120" account and

    2. all required Forms 1120 have been filed (or have a valid extension) for all years not on retention. Refer to the following chart:

      Caution:

      A "related Form 1120" includes Form 1120 calendar year filers as well as filers for any fiscal period that falls within the calendar year of the penalty module. For example, if the penalty module is for 201212, any Form 1120 filing for periods 201201 through 201211 will represent a “related Form 1120” account to which the penalty pertains.

    If... And... Then...
    There is an open control base on the related Form 1120   Suspend case until the Form 1120 account failure to file (FTF) penalty determination is made.
    1. If the Form 1120 FTF is abated, abate the Form 5472 penalty.

      Caution:

      If the Form 1120 FTF penalty was abated because of a First-Time Abate, the Form 5472 penalty can be abated. However, the FTA penalty reason code cannot be used. Use PRC 043 instead.

    2. If the Form 1120 penalty abatement request is denied, proceed to Paragraph (4) below to determine whether to abate the Form 5472 penalty.

    There is not an open control base on the related Form 1120 account Not all required forms are posted to Master File (BMFOL) Contact the corporation regarding the status of the missing returns
    The corporation
    1. cannot be contacted,

    2. does not respond,

    3. has not filed the missing returns

      Follow no consideration procedures. Advise the corporation that the abatement request cannot be considered until the missing returns have been filed. Refer to IRM 21.5.3.4.6.3, No Consideration Procedures
    The corporation indicates they have filed the returns after their request for abatement.   Suspend the request until all the necessary returns have posted to master file.
    All required returns are posted to Master File   Use the Failure to File or Late-Filed Form 5472 - Decision Tree (see (4) below) to determine whether to abate the Form 5472 penalty. Do not address the Form 1120 penalty unless the taxpayer is also requesting abatement of that penalty.

    Note:

    If the tax due on Form 1120 is timely paid but the form is filed late, no FTF penalty will be assessed on the 1120. However, FTF on the late filed Form 5472 attached will be systemically assessed on the civil penalty module.

  4. Ogden Accounts Management will evaluate all reasonable cause requests, regardless of the Master file status, for penalties that are systemically assessed using the Failure to File or Late-Filed Form 5472 - Decision Tree and the information below. See Exhibit 21.8.2-2, Failure to File or Late-Filed Form 5472 - Decision Tree.

    • Question 1 - Research IDRS for the related Form 1120 filing. If the failure to file penalty was abated on the "related 1120 account" , abate the 5472 penalty.

      Note:

      The First-Time Abatement (FTA) penalty relief provisions in the IRM 20.1.1.3.6.1(8) exception generally do not apply to event-based filing requirements such as with the Form 5472. However, where such penalty is assessed in conjunction with a late-filed Form 1120, the taxpayer may receive FTA penalty relief for the Form 5472/PRN 711 penalty provided that the following two conditions are met:
      1) There was no penalty assessed on the related Form 1120 (i.e., no tax or fully paid) or the related abatement on the Form 1120 filing reflects an FTA Penalty Reason Code (PRC) 018, and
      2) No Form 5472 penalties have been assessed (either PRN 625 or 711) in any of the prior three periods for MFT 13. If both conditions are met, abate the Form 5472/PRN 711 penalty using PRC 018. If the related abatement on the Form 1120 filing reflects a PRC of other than 018, abate the Form 5472/PRN 711 penalty using the same PRC as shown on the abatement of the Form 1120 filing penalty.

      Reminder:

      A "related Form 1120" includes Form 1120 calendar year filers as well as filers for any fiscal period that falls within the calendar year of the penalty module. For example, if the penalty module is for 201212, any Form 1120 filing for periods 201201 through 201211 will represent a “related Form 1120” account to which the penalty pertains.

    • Question 2 - Refer to IRM 21.5.3.4.16.7, Identifying Frivolous Returns/Correspondence and Responding to Frivolous Arguments.

      Note:

      If the request for the Form 5472 penalty abatement ALSO requests abatement of the Form 1120 failure to file penalty, consider the Form 1120 penalty first and process request. Abate/deny the 5472 penalty consistent with that determination except in cases where the First-Time Abate was granted to the Form 1120.

    If... Then...
    The Penalty Decision Tree determination is to:
    • Abate/Waive

    Input TC 290 .00 and appropriate PRN 711 with a minus (-) after the abatement amount. Use Blocking Series 52, Reason Code 062 and the appropriate 4th position Penalty Reason Code.
    The Penalty Tree determination is to:
    • Deny

    Input TC 290 .00 with appropriate PRN 711 for .00 and Blocking Series 98. Send Letter 854C.

    Note:

    Enter a CIS case note and notate which question, in which section of the Penalty Tree, led to your decision to abate or deny the reasonable cause request

    .

    Caution:

    If the caller does not otherwise have reasonable cause, but contends that the penalty is for a wrong period, and as such the penalty should be abated, AND the caller has a "related Form 1120" with a fiscal year that ends within the calendar year listed on the penalty notice, advise the caller to refer to page 2 of the civil penalty notice for an explanation of how the penalty applies to fiscal year filers. CONCLUSION: The penalty should NOT be abated for this reason.

  5. Advise callers that a request for reasonable cause relief for Failure to File Form 5472 penalties must be submitted in writing. The taxpayer must provide a written statement to request relief from failure to file information return penalties.

  6. Route ALL Form 5472 penalty issues, other than reasonable cause abatement requests on systemically assessed PRN 711 penalties, to the area that assessed the penalty.

Exhibit 21.8.2-1 
Failure to File or Late-Filed Form 5471 - Decision Tree

Failure to File or Late-Filed Form 5471 - Decision Tree

1) Did taxpayer receive reasonable cause for failure to timely file Form 1120?

IF THEN
a) Yes Abate Penalty
b) No continue

2) Is the taxpayer’s request based on a frivolous position?

IF THEN
a) Yes Deny
b) No continue

3) Is the taxpayer claiming they are first time filer and were unaware of the filing requirements?

IF THEN
a) Yes Deny
b) No continue

Ordinary business care and prudence requires the taxpayer to determine their tax obligations when establishing a business in a foreign country.

4) Is the taxpayer requesting that the penalty be waived because of financial problems?

IF THEN
a) Yes Deny
b) If taxpayer refers to IRC § 7811 or Taxpayer Advocate Service (TAS) Follow procedures in IRM 21.8.2.1.8, Referrals to the Taxpayer Advocate Service (TAS).
c) No continue

Ordinary business care and prudence requires the taxpayer to determine their tax obligations when establishing a business in a foreign country.

5) Is the taxpayer claiming that the return was filed late because the transactions, laws or business structure was complicated?

IF THEN
a) Yes Deny
b) No continue

6) Is the taxpayer claiming that because the corporation was involved in multiple layers of ownership, it prevented them from filing timely?

IF THEN
a) Yes Deny
b) No continue

7) Is the taxpayer claiming that the return was filed late because of difficulty of obtaining foreign information?

IF THEN
a) Yes Deny
b) No continue

8) Is the taxpayer asserting that a Form 5471 is not required to be filed for the foreign corporation?

IF THEN
a) Yes Refer to Exam - attach penalty file
b) No continue
CATEGORIES
IRM Reference 20.1 Abatement Penalty Reason Code
REASON 1st position 4th position
ASSESSMENT ERROR   045
BANKRUPTCY 062 030
CASUALTY or DISASTER 062 025
EXTENSION 062 030
IGNORANCE OF THE LAW 062 030
IRS ERROR   045
MAIL PROBLEMS 062 022
RECORDS UNOBTAINABLE 062 025
RELIANCE 062 022
ASSESSMENT ERROR

1) What type of assessment error?

IF THEN
a) Wasn't given credit for an extension Go To EXTENSION
b) Claims the return was mailed timely Go To MAIL PROBLEM
c) Multiple $10,000 assessments Analysis of assessment document required **

2) Does research show any errors in the computation?

IF THEN
a) Yes Abate/Waive (Not RC)
b) No Deny (Explain computation)
BANKRUPTCY

1) When did the taxpayer file for bankruptcy?

a) Enter date

2) Is there a -V freeze (Bankruptcy) on the module?

IF THEN
a) Yes continue
b) No continue

3) Was the bankruptcy filed after the return due date, including extensions?

IF THEN
a) Yes Deny
b) No continue

4) Was the penalty assessed after the bankruptcy?

IF THEN
a) Yes continue
b) No continue

5) Identify type of bankruptcy ___________________________

6) What documentation is provided to confirm the bankruptcy?

IF THEN
a) Taxpayer is operating under protection of court Deny
b) Documentation available Deny
c) Lack of complete documentation Deny
CASUALTY or DISASTER (sudden or unexpected event)

1) What kind of casualty or disaster occurred?

IF THEN
a) A disaster recognized by FEMA continue
b) Officially declared local disaster, but not FEMA continue
c) Fire continue
d) Theft continue
e) Flood, wind or water damage continue
f) Vandalism continue
g) An accident continue
h) Some other casualty Deny

2) When did the casualty/disaster begin? _________________continue

3) When did the casualty/disaster end? __________________continue

4) What was destroyed or lost?

IF THEN
a) Necessary tax records were destroyed or stolen continue
b) The taxpayer's place of business was destroyed continue
c) Some other property was destroyed Deny
d) The casualty caused personal injury Deny
e) Other Deny

5) What documentation is provided to confirm the casualty?

IF THEN
a) Insurance claim or report continue
b) Police report continue
c) Newspaper clippings or credible documentation continue
d) Lack of complete documentation Deny

6) Did the casualty/disaster begin after the return due date, including extension(s)?

IF THEN
a) Yes Deny
b) No continue

7) Did the taxpayer file returns, or required forms, within a reasonable time after the disaster ended?

IF THEN
a) Yes Abate/Waive
b) No Deny
EXTENSION

1) What claim does the taxpayer make about the extension?

IF THEN
a) Requested first extension of time to file (FTF) continue
b) First extension lost in mail continue
c) Forgot to request an extension (FTF) Deny
d) Believed 3rd party filed (FTF) Deny
e) Other Deny

2) What documentation of the 1st extension request did the taxpayer provide?

IF THEN
a) Copy of a valid first extension request continue
b) Lack of complete documentation Deny

3) Was the Form 5471 filed by the extended due date?

IF THEN
a) Yes Abate/Waive
b) No Deny
IGNORANCE OF THE LAW

1) Why was the taxpayer ignorant of filing requirements?

IF THEN
a) U.S. resident investor Deny
b) Resided outside of U.S. with no U.S. tax representation Deny
c) Individual not aware of requirement to file U.S. tax returns Deny

2) Of what does the taxpayer claim ignorance?

IF THEN
a) Did not understand filing requirements continue
b) First year operating continue
c) CPA / Attorney ignorance Deny

3) Did the taxpayer receive tax help from a U.S., or International, experienced tax professional?

IF THEN
a) Yes Go To RELIANCE
b) No Deny
IRS - ERROR

1) What was the nature of the IRS error?

IF THEN
a) Error in an IRS publication continue
b) IRS employee gave incorrect technical advice continue
c) IRS advised taxpayer not to file during compliance activity continue
d) IRS incorrectly processed TP's return continue

2) When was the advice requested?

IF THEN
a) Enter Date:
b) Unknown -- not provided by taxpayer continue

3) What documentation of oral advice is provided?

IF THEN
a) Proof TP provided relevant information to IRS continue
b) Proof IRS addressed question, but was wrong continue
c) Name or ID of employee who gave the advice continue

4) What documentation of written advice is provided?

IF THEN
a) Documentation does not support the claim Deny
b) Taxpayer’s request & IRS response support claim continue
c) Copy only of taxpayer’s request Deny
d) Copy only of IRS response Deny
e) Lack of complete documentation Deny

5) What publication did the taxpayer rely on?

a) Publication number:
b) Publication date:

6) Was the IRS publication* in error?

IF THEN
a) Yes, pub indicated no return or form required Abate/Waive
b) No, in fact, the pub is factually correct Deny
MAIL - PROBLEM

1) What was the nature of the mail problem?

IF THEN
a) Form sent to other tax agency continue
b) Properly addressed, but insufficient postage continue
c) Form lost in mail continue
d) Form delayed in mail continue
e) TP claims error by the postal service continue
f) First extension request lost in the mail continue
g) Second extension request lost in the mail Go To EXTENSION

2) What documentation did the taxpayer provide?

IF THEN
a) Proof of timely mailed certified letter continue**
b) Proof of timely mailing and of U.S. postal error continue
c) Lack of complete documentation Deny
IF THEN
a) Postmark shows return was mailed timely (U.S.) Abate/Waive
b) Taxpayer's claim not supported Deny
RECORDS UNOBTAINABLE

1) Did the taxpayer file and receive an approved extension(s)?

IF THEN
a) Yes continue
b) No Deny

2) From whom was the taxpayer unable to obtain the records?

IF THEN
a) CPA or Accountant continue
b) Financial Advisor continue
c) Attorney continue
d) Tax Preparer continue
e) Responsible Officer / Partner continue
f) Court continue
g) Someone else Deny

3) Why was the taxpayer unable to obtain the records from person in #2?

IF THEN
a) The person went out of business continue
b) The person refused to provide the records Deny **
c) A disagreement about payment for services Deny

4) Did the taxpayer's representative go out of business after the return due date?

IF THEN
a) Yes Deny
b) No continue

5) What documentation did the taxpayer provide?

IF THEN
a) Proof of death, illness, or business closing continue
b) Credible level of detail continue
c) Lack of credible documentation Deny

6) What steps did the taxpayer take to secure the records?

 

7) What date did the records become available?

a) Enter Date:

8) Did the taxpayer file returns, or required forms, within 90 days of Records Unobtainable #7 (Date records became available)?

IF THEN
a) Yes Abate/Waive
b) No Deny

** 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. Also, 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. Failure to File, Cumulative Bulletin Notice 97-34, 1997-1 CB 422, (June 02, 1997)

RELIANCE (on others)

1) Who did the taxpayer rely on?

IF THEN
a) Responsible Officer / Partner continue
b) CPA or Accountant continue
c) Attorney continue
d) IRS Employee Go To IRS-ERROR
e) Bookkeeper Deny
f) Person assisting in establishment of Foreign Corporation Deny
g) Information in a tax plan or promotion Deny
h) Financial advisor Deny
i) Business associate Deny
j) Someone Else Deny

2) When did the taxpayer notify the advisor of the foreign corporation?

a) Enter Date:

3) Is the date in Reliance #2 prior to the return due date, including extension(s)?

IF THEN
a) Yes continue
b) No Deny

4) When was the taxpayer given the incorrect information?

a) Enter Date:

5) What was the nature of the reliance?

IF THEN
a) Person said taxpayer did not need to file continue
b) Person handled everything continue
c) Person was too busy to take timely action Deny
d) Person lost or wouldn’t return records Go To RECORDS-UNOBTAINABLE
e) Other Deny

6) What documentation is available?

IF THEN
a) Shows representative advised that taxpayer not liable continue
b) Shows representative professionally qualified to handle taxes continue
c) Copies of promotional material continue
d) Shows TP provided representative with records prior to RDD continue
e) Lack of complete documentation Deny

7) Was the taxpayer’s reliance unreasonable?

IF THEN
a) The reliance involved avoidance of substantial income Deny
b) The reliance was based on frivolous positions Deny
c) The taxpayer substantially changed filing patterns Deny
d) The taxpayer did not take reasonable steps to investigate Deny
e) The taxpayer did not request a 2nd opinion Deny

Exhibit 21.8.2-2 
Failure to File or Late-Filed Form 5472 - Decision Tree

Failure to File or Late-Filed Form 5472 - Decision Tree

1a) Did taxpayer receive reasonable cause for failure to timely file Form 1120?

IF THEN
a) Yes Abate Penalty
b) No continue

≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

Caution:

≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡

≡ ≡ ≡ ≡ ≡ ≡ ≡
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡ ≡
≡ ≡

2) Is the taxpayer’s request based on a frivolous position?

IF THEN
a) Yes Deny
b) No continue

3) Is the taxpayer claiming they are first time filer and were unaware of the filing requirements?

IF THEN
a) Yes Deny
b) No continue

Ordinary business care and prudence requires the taxpayer to determine their tax obligations when establishing a business in a foreign country.

4) Is the taxpayer requesting that the penalty be waived because of financial problems?

IF THEN
a) Yes Deny
b) If taxpayer refers to IRC § 7811 or Taxpayer Advocate Service (TAS) Follow procedures in IRM 21.8.2.1.8, Referrals to the Taxpayer Advocate Service (TAS)
c) No continue

Ordinary business care and prudence requires the taxpayer to determine their tax obligations when establishing a business in a foreign country.

5) Is the taxpayer claiming that the return was filed late because the transactions, laws or business structure was complicated?

IF THEN
a) Yes Deny
b) No continue

6) Is the taxpayer claiming that because the corporation was involved in multiple layers of ownership, it prevented them from filing timely?

IF THEN
a) Yes Deny
b) No continue

7) Is the taxpayer claiming that the return was filed late because of difficulty of obtaining foreign information?

IF THEN
a) Yes Deny
b) No continue

8) Is the taxpayer asserting that a Form 5472 is not required to be filed for the domestic corporation?

IF THEN
a) Yes Refer to Exam - attach penalty file
b) No continue
CATEGORIES
IRM Reference 20.1 Abatement Penalty Reason Code
REASON 1st position 4th position
ASSESSMENT ERROR   045
BANKRUPTCY 062 030
CASUALTY or DISASTER 062 025
EXTENSION 062 030
IGNORANCE OF THE LAW 062 030
IRS ERROR   045
MAIL PROBLEMS 062 022
RECORDS UNOBTAINABLE 062 025
RELIANCE 062 022
ASSESSMENT ERROR

1) What type of assessment error?

IF THEN
a) Wasn't given credit for an extension Go To EXTENSION
b) Claims the return was mailed timely Go To MAIL PROBLEM
c) Multiple $10,000 assessments Analysis of assessment document required **

2) Does research show any errors in the computation?

IF THEN
a) Yes Abate/Waive (Not RC)
b) No Deny (Explain computation)
BANKRUPTCY

1) When did the taxpayer file for bankruptcy?

a) Enter date

2) Is there a -V freeze (Bankruptcy) on the module?

IF THEN
a) Yes continue
b) No continue

3) Was the bankruptcy filed after the return due date, including extensions?

IF THEN
a) Yes Deny
b) No continue

4) Was the penalty assessed after the bankruptcy?

IF THEN
a) Yes continue
b) No continue

5) Identify type of bankruptcy ___________________________

6) What documentation is provided to confirm the bankruptcy?

IF THEN
a) Taxpayer is operating under protection of court Deny
b) Documentation available Deny
c) Lack of complete documentation Deny
CASUALTY or DISASTER (sudden or unexpected event)

1) What kind of casualty or disaster occurred?

IF THEN
a) A disaster recognized by FEMA continue
b) Officially declared local disaster, but not FEMA continue
c) Fire continue
d) Theft continue
e) Flood, wind or water damage continue
f) Vandalism continue
g) An accident continue
h) Some other casualty Deny

2) When did the casualty/disaster begin? _________________continue

3) When did the casualty/disaster end? __________________continue

4) What was destroyed or lost?

IF THEN
a) Necessary tax records were destroyed or stolen continue
b) The taxpayer's place of business was destroyed continue
c) Some other property was destroyed Deny
d) The casualty caused personal injury Deny
e) Other Deny

5) What documentation is provided to confirm the casualty?

IF THEN
a) Insurance claim or report continue
b) Police report continue
c) Newspaper clippings or credible documentation continue
d) Lack of complete documentation Deny

6) Did the casualty/disaster begin after the return due date, including extension(s)?

IF THEN
a) Yes Deny
b) No continue

7) Did the taxpayer file returns, or required forms, within a reasonable time after the disaster ended?

IF THEN
a) Yes Abate/Waive
b) No Deny
EXTENSION

1) What claim does the taxpayer make about the extension?

IF THEN
a) Requested first extension of time to file (FTF) continue
b) First extension lost in mail continue
c) Forgot to request an extension (FTF) Deny
d) Believed 3rd party filed (FTF) Deny
e) Other Deny

2) What documentation of the 1st extension request did the taxpayer provide?

IF THEN
a) Copy of a valid first extension request continue
b) Lack of complete documentation Deny

3) Was the Form 5472 filed by the extended due date?

IF THEN
a) Yes Abate/Waive
b) No Deny
IGNORANCE OF THE LAW

1) Why was the taxpayer ignorant of filing requirements?

IF THEN
a) U.S. resident investor Deny
b) Resided outside of U.S. with no U.S. tax representation Deny
c) Individual not aware of requirement to file U.S. tax returns Deny

2) Of what does the taxpayer claim ignorance?

IF THEN
a) Did not understand filing requirements continue
b) First year operating continue
c) CPA / Attorney ignorance Deny

3) Did the taxpayer receive tax help from a U.S., or International, experienced tax professional?

IF THEN
a) Yes Go To RELIANCE
b) No Deny
IRS - ERROR

1) What was the nature of the IRS error?

IF THEN
a) Error in an IRS publication continue
b) IRS employee gave incorrect technical advice continue
c) IRS advised taxpayer not to file during compliance activity continue
d) IRS incorrectly processed TP's return continue

2) When was the advice requested?

IF THEN
a) Enter Date:
b) Unknown -- not provided by taxpayer continue

3) What documentation of oral advice is provided?

IF THEN
a) Proof TP provided relevant information to IRS continue
b) Proof IRS addressed question, but was wrong continue
c) Name or ID of employee who gave the advice continue

4) What documentation of written advice is provided?

IF THEN
a) Documentation does not support the claim Deny
b) Taxpayer’s request & IRS response support claim continue
c) Copy only of taxpayer’s request Deny
d) Copy only of IRS response Deny
e) Lack of complete documentation Deny

5) What publication did the taxpayer rely on?

a) Publication number:
b) Publication date:

6) Was the IRS publication* in error?

IF THEN
a) Yes, pub indicated no return or form required Abate/Waive
b) No, in fact, the pub is factually correct Deny
MAIL - PROBLEM

1) What was the nature of the mail problem?

IF THEN
a) Form sent to other tax agency continue
b) Properly addressed, but insufficient postage continue
c) Form lost in mail continue
d) Form delayed in mail continue
e) TP claims error by the postal service continue
f) First extension request lost in the mail continue
g) Second extension request lost in the mail Go To EXTENSION

2) What documentation did the taxpayer provide?

IF THEN
a) Proof of timely mailed certified letter continue**
b) Proof of timely mailing and of U.S. postal error continue
c) Lack of complete documentation Deny
IF THEN
a) Postmark shows return was mailed timely (U.S.) Abate/Waive
b) Taxpayer's claim not supported Deny
RECORDS UNOBTAINABLE

1) Did the taxpayer file and receive an approved extension(s)?

IF THEN
a) Yes continue
b) No Deny

2) From whom was the taxpayer unable to obtain the records?

IF THEN
a) CPA or Accountant continue
b) Financial Advisor continue
c) Attorney continue
d) Tax Preparer continue
e) Responsible Officer / Partner continue
f) Court continue
g) Someone else Deny

3) Why was the taxpayer unable to obtain the records from person in #2?

IF THEN
a) The person went out of business continue
b) The person refused to provide the records Deny **
c) A disagreement about payment for services Deny

4) Did the taxpayer's representative go out of business after the return due date?

IF THEN
a) Yes Deny
b) No continue

5) What documentation did the taxpayer provide?

IF THEN
a) Proof of death, illness, or business closing continue
b) Credible level of detail continue
c) Lack of credible documentation Deny

6) What steps did the taxpayer take to secure the records?

 

7) What date did the records become available?

a) Enter Date:

8) Did the taxpayer file returns, or required forms, within 90 days of Records Unobtainable #7 (Date records became available)?

IF THEN
a) Yes Abate/Waive
b) No Deny

** 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. Also, 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. Failure to File, Cumulative Bulletin Notice 97-34, 1997-1 CB 422, (June 02, 1997)

RELIANCE (on others)

1) Who did the taxpayer rely on?

IF THEN
a) Responsible Officer / Partner continue
b) CPA or Accountant continue
c) Attorney continue
d) IRS Employee Go To IRS-ERROR
e) Bookkeeper Deny
f) Person assisting in establishment of Foreign Corporation Deny
g) Information in a tax plan or promotion Deny
h) Financial advisor Deny
i) Business associate Deny
j) Someone Else Deny

2) When did the taxpayer notify the advisor of the foreign corporation?

a) Enter Date:

3) Is the date in Reliance #2 prior to the return due date, including extension(s)?

IF THEN
a) Yes continue
b) No Deny

4) When was the taxpayer given the incorrect information?

a) Enter Date:

5) What was the nature of the reliance?

IF THEN
a) Person said taxpayer did not need to file continue
b) Person handled everything continue
c) Person was too busy to take timely action Deny
d) Person lost or wouldn’t return records Go To RECORDS-UNOBTAINABLE
e) Other Deny

6) What documentation is available?

IF THEN
a) Shows representative advised that taxpayer not liable continue
b) Shows representative professionally qualified to handle taxes continue
c) Copies of promotional material continue
d) Shows TP provided representative with records prior to RDD continue
e) Lack of complete documentation Deny

7) Was the taxpayer’s reliance unreasonable?

IF THEN
a) The reliance involved avoidance of substantial income Deny
b) The reliance was based on frivolous positions Deny
c) The taxpayer substantially changed filing patterns Deny
d) The taxpayer did not take reasonable steps to investigate Deny
e) The taxpayer did not request a 2nd opinion Deny

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