International Enforcement: Whats Old, Whats New and What We Can - - PowerPoint PPT Presentation
International Enforcement: Whats Old, Whats New and What We Can Expect 35 th Annual UCLA Extension Tax Controversy Institute October 22, 2019 Beverly Hills Hotel 1 Speakers Moderator: Frank Agostino, Agostino & Associates,
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4 Criminal Investigation | IRS
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Mission
To serve the American public by investigating potential criminal violations of the Internal Revenue Code and related financial crimes in a manner that fosters confidence in the tax system and compliance with the law.
Organization / History
Formed in 1919, CI is the 6th largest Federal Law Enforcement Agency (Treasury’s largest) comprised of 2,767 employees worldwide, 2,030 of whom are special agents and 737 professional staff employees. CI’s investigative jurisdiction includes tax, money laundering and Bank Secrecy Act (BSA) laws. Some of the most notorious tax cheats in CI’s history include mobsters Al Capone and John Gotti, politicians Vice President Spiro Agnew and Representative James Traficant, international corporations including soccer's FIFA and banking giant UBS, real estate magnet Leona Helmsley, baseball great Pete Rose, and performers Chuck Berry and Willie Nelson.
Program Areas
Employment Tax / International Tax Fraud / Abusive Tax Schemes / General Tax Fraud / Cyber Crimes / Cryptocurrency & Virtual Currency / Refund Fraud (Stolen Identity Refund, Questionable Refund, and Return Preparer) / Organized Crime Drug Enforcement Task Force (OCDETF) / Terrorism / Public Corruption
Direct Investigative Time
CI spends over 75% of Direct Investigative Time investigating tax violations. 11% high level OCDETF/Narcotics, 14% other significant financial crimes (high level money laundering, terrorist financing, cyber crimes, BSA violations.)
Investigative Jurisdiction
While other federal agencies also have investigative jurisdiction for money laundering and some BSA violations, CI is the only federal agency authorized to investigate potential criminal violations of the Internal Revenue Code and the only federal agency solely devoted to investigating financial crimes. CI’s expertise in following the money is highly sought by DOJ in the most significant financial investigations.
Criminal Investigation | IRS
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3,363 special agents in FY 1995 (high water) 2,030 special agents currently (1456 are case working) Agent staffing comparable to early 1970s staffing levels 1,333 fewer agents than in 1995 (2,030 vs. 3,363) Over last 5 years – 19% decline in CI special agent staffing 188 special agent hires from FY 14 – FY 18 (38 per year) 778 special agent attrition FY 14 – FY 18 (143 per year) Approximately 60 posts of duty staffed with 2 or fewer special agents, which may be closed in the coming year, potentially resulting in a lack of coverage in entire judicial districts Current Training Capabilities 10 classes per year/24 students per class 99 agencies competing for training spots
Criminal Investigation | IRS
7 Criminal Investigation | IRS
8 Criminal Investigation | IRS
9 Criminal Investigation | IRS
FY 2017 FY 2018 FY 2019 Investigations Initiated 3,019 2,886 2,485 Prosecution Recommendations 2,251 2,130 1,893 Informations/Indictments 2,294 2,011 1,800 Conviction Rate 91.5% 91.7% 91.2% Total Sentenced 2,549 2,111 1,726 Percent to Prison 80.1% 82.0% 78.8% Average Months to Serve 42 45 43
10 Criminal Investigation | IRS
11 Australia Barbados Canada China Sydney Bridgetown Ottawa Hong Kong Attaché Attach Attaché Attaché Investigative Aid Deputy Attaché Deputy Attaché 31 Countries 27 Countries 9 Countries 25 Countries International Fusion Center
Human "Sources of Information" are the greatest resource in this AOR. Iceland is an emerging area for partnerships with IRS-CI. Great working relationships with other U.S. law enforcement partners within the AOR. Criminal Investigation | IRS
12 Colombia England Germany Mexico Bogota London Frankfurt Mexico City Attaché Attaché Attaché Attaché Deputy Attaché Investigative Aid Deputy Attaché Investigative Aid Investigative Aid 16 Countries 31 Countries 52 Countries 5 Countries 16 member vetted unit with 13 Colombian law enforcement officers supported by 3 assigned prosecutors (3 cities in Colombia). Excellent working relationship with Her Majesty's Revenue and Customs Agency. German Federal police have provided access to multiple databases that have been purchased by the German Government. Honduran National Police are developing cases on return preparers in the U.S. who have had a significant increase in wealth in Honduras as a result of the filing of fraudulent tax returns in the U.S. Criminal Investigation | IRS
13 Netherlands Panama United Arab Emirates The Hague Panama City Dubai Attaché Attaché Attaché 45 Countries 7 Countries 14 Countries European Crime Center (EC3) has highlighted the importance
and cooperation. Anti-Money Laundering Task Force has been proposed for money laundering/corruption investigations and prosecutions in Panama and the U.S. Newest International Post. Criminal Investigation | IRS
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FY2017 FY2018 FY2019 Initiations 283 233 214 Completions 261 315 299 Pipeline Investigations 322 351 336 Prosecution Recommendations 176 218 185 Convictions 159 172 153 Conviction Rate 87.4% 90.1% 84.1%
43.5 55.1 56.6
Criminal Investigation | IRS
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International Presence
Only IRS division with a physical international presence Attachés located in 11 countries (Germany, China, England, Australia, the Netherlands, Colombia, Barbados, Mexico, Canada, UAE and Panama) FY13-FY17: 982 international prosecution recommendations (6.1% of total prosecution recommendations) which includes charges brought against 21 International Financial Institutions
International Tax & Financial Crimes (ITFC) Group
Program Areas of Emphasis Ex-Patriates - The general focus of this area is the investigation of U.S. expatriates residing in foreign jurisdictions to include renunciations and purchase of economic citizenship through the EB-5 program Offshore Compliance Initiative - U.S. domesticated taxpayers using foreign abusive trusts, companies, accounts, transactions and structures to achieve a tax evasion purpose FATCA - Entities / individuals specifically engaging in schemes to evade the reporting requirements imposed by FATCA legislation
Joint Chiefs of Global Tax Enforcement (J5)
U.S. / Canada / the Netherlands / Australia / United Kingdom Share operational intelligence, best practices, and coordinated media campaigns Working groups: Cryptocurrency / Virtual Currency, Offshore Professional Enablers and Technology Platforms and Data Analytics
Notable Cases and Programs
Swiss Bank Program – 80 banks have entered into non-prosecution agreements and paid a total of $1.36B in fines. Offshore Voluntary Disclosure Program – led to criminal charges against 1,545 taxpayers. UBS – Foreign financial institution guilty of helping American taxpayers hide their wealth; ordered to pay a $780M fine. Credit Suisse – Foreign financial institution guilty of helping American taxpayers hide their wealth; ordered to pay $2.6B fine. Wegelin Bank – Foreign financial institution guilty of helping American taxpayers hide their wealth; ordered to pay a $22.05M fine. John Ivsan – Sentenced to 72 months in prison; ordered to pay $183M in restitution to the IRS for his role in an abusive tax scheme.
Criminal Investigation | IRS
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Criminal Investigation | IRS
What is the NCIU? Cutting edge, future of IRS-CI: Nationwide impact by using Data Forensics to identify core mission cases and identify new areas of non-compliance. Increased management and use of all available data. Building algorithms to identify potential cases. Primary goals – ensure nationwide coverage of all program
Current Focus– Employment Tax, Virtual Currency, International Tax (FATCA & USCs Living Abroad), Money
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Criminal Investigation | IRS
FY 2019 Results: 106 cases referred in FY 2019. All field offices received cases Initiative Areas: Employment Tax, FATCA, USCLA, Biofuels, Whistleblower and TEGE FY 2020 Goals: Expand referrals in Employment Tax (Successor Entities & Substantial Underpayment), International (USCLA, FATCA), Significant ML Cases from National Targeting Center. Refer 100+ cases. Referrals to all field offices – continue maximize geographic coverage. Implement formal stand up of Unit in CI field operations structure.
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Criminal Investigation | IRS
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Criminal Investigation | IRS
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Criminal Investigation | IRS
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(1) the average annual net income tax of an individual for the period of 5 taxable years ending before the date of the loss of United States citizenship is greater than $124,000 (adjusted for inflation under 877A(a)(3)(B) currently $168,000) ; (2) the net worth of the individual as of such date is $2,000,000 or more; OR (3) such individual fails to certify under penalty of perjury that he has met the requirements of U.S. tax law for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require.
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relinquished or intend to relinquish their U.S. citizenship and wish to come into compliance with their U.S. tax and reporting obligations. See IR-2019-151.
Expatriation Tax and any back taxes owed for prior years.
making their submission under the relief procedures;
preceding expatriation and in the year of expatriation; AND
returns, information returns) and to pay taxes and penalties for the years at issue due to non-willful conduct.
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taxpayers concerned that their conduct is willful or fraudulent, and that may rise to the level of tax and tax-related criminal acts, with a means to come into compliance with the law and potentially avoid criminal prosecution.”
prior to September 28, 2018.
procedures outlined in the new program regardless of when submitted.
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payment of taxes, plus 20% penalty, for up to 8 past years.
agency, media) alerting IRS to taxpayer’s noncompliance.
criminal prosecution.
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disclosure period.
tax liability (75% of tax due).
(up to 50% of account value).
instead of civil fraud penalty; and non-willful FBAR penalty instead of willful penalty.
apply.
be imposed.
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amended or delinquent income tax returns (taxpayers residing abroad) for past 3 years; plus, file FBARs for past 6 years.
must pay penalty of 5% of the highest account balance.
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Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:
establishing reasonable cause for the failure to file.
entity for which the information returns are being filed was not engaged in tax evasion.
return filed, penalties may be assessed in accordance with existing procedures.
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are treated as owned by the U.S. person for that taxable year (or $10,000, whichever is greater);
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attribution from non-U.S. persons and 50% threshold is reduced to 10%);
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(subject to deficiency procedures):
the related party in connection with any applicable transaction; and
related arty shall be determined by Secretary.
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fair market value of the transferred property.
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with his name;
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– United States v. Garrity, 2019 WL 1004584 (D. Conn. 2019) (appeal pending) – United States v. Horowitz, 2019 WL 265107 (D. Md. 2019) (appeal pending) – Kimble v. United States, 141 Fed.Cl. 373 (Ct. Cl. 2018) – United States v. Shinday, 2018 WL 6330424 (C.D. Ca. 2018) – United States v. Kahn, No. 1:17-cv-07258-KAM-VMS (E.D.N.Y. Sep. 23, 2019) – United States v. Rum, No. 17-cv-826, slip. op. at 14 (M.D. Fla. Aug. 2, 2019) – United States v. Cohen, case no. 2:17-cv-1652-MWF-JC (CD CAL, August 6, 2019) – United States v. Schoenfeld, No. 16-cv-1248, 2019 WL 2603341 (M.D. Fla. June 25, 2019) – United States v. Park, No. 16-CV-10787, 2019 WL 2248544 (N.D. Ill. May 24, 2019) – Norman v. United States, 138 Fed. Cl. 189 (2018) (appeal pending)
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unusual punishments inflicted.” U.S. Const. amend. VIII.
– Grossly disproportionate standard.
to a sovereign as punishment for some offense,’ and a payment is made ‘as punishment for some offense’ when its purpose is—even in part—retribution or
purpose.” In re Wyly, 552 B.R. 338, 611 (Bankr. N.D. Tex. 2016).
defendant’s argument of excessive fines under Bajakajian: “However, the assessment against her is not grossly disproportional to the harm she caused because Bussell defrauded the government and reduced public revenues.”
and 3520-A penalties were considered separately for excessive fines analysis.
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International Enforcement–What’s Old, What’s New and What We Can Expect 35th Annual Tax Controversy Institute1 UCLA Extension October 22, 2019 2:15-3:05pm
Moderator: Frank Agostino, Esq., Agostino & Associates, P.C., Hackensack, NJ Panelists: Caroline Ciraolo, Kostelanetz & Fink, LLP, Washington, D.C. Carolyn Schenck, IRS Office of Chief Counsel, St. Paul, MN Igor Drabkin, Holtz, Slavett & Drabkin, APLC, Beverly Hills, CA
Table of Contents
Expatriation Tax & Relief ........................................................................... 1 CDP Hearings, Litigation, and Hot Topics .................................................. 8 International Information Return…………………………………………..22 Appendix: Relief Procedures…..…………………………………………..59
1 Materials were prepared by the private practitioners. All information provided, opinions, recommendations,
and remarks are those of the private practitioners and do not reflect or represent the opinions or positions of the other panelists. Any information provided, opinions, recommendations, or remarks should not be taken as legal opinion, counseling, or guidance.
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EXPATRIATION TAX & RELIEF
I.
Renunciation of U.S. Citizenship or Green card A. Trend in renunciation: The number of American citizens and long-term residents who gave up their U.S. citizenship or green card increased rapidly since 2010: 742 in 2009, 1,534 in 2010, 1,781 in 2011, 933 in 2012, 2,999 in 2013, 3,415 in 2014, 4,279 in 2015, 5,411 in 2016, 5,133 in 2017, 3,983 in 2018.2 B. Renunciation of citizenship: 8 U.S.C. § 1481(a) governs the renunciation of citizenship, and provides: A person who is a national of the United States whether by birth or naturalization, shall lose his nationality by voluntarily … (5) making a formal renunciation of nationality before a diplomatic or consular officer of the United States in a foreign state, in such form as may be prescribed by the Secretary of State; or (6) making in the United States a formal written renunciation of nationality in such form as may be prescribed by, and before such
whenever the United States shall be in a state of war and the Attorney General shall approve such renunciation as not contrary to the interests of national defense… C. Future eligibility for tax avoiders: 8 U.S.C. § 1182(a)(10)(E) provides that former citizens who are determined by the U.S. Attorney General to have renounced their citizenship for the purpose of tax avoidance are ineligible for visas or admission into the U.S. Thus, the issue of Expatriation Tax must be handled with caution.
2 Helen Burggraf, U.S. Finally Publishes Final 2018 Renunciation Data, American Expat
Financial News Journal (Mar. 14, 2019), https://www.americanexpatfinance.com/news/item/131- u-s-finally-publishes-final-2018-renunciation-data; See also, Quarterly Publication of Individuals, Who Have Chosen To Expatriate, as Required by Section 6039G.
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Expatriation Tax A. Expatriation tax: In general, U.S. citizens or long-term residents who renounced their status and meet certain criteria are subject to taxation under IRC §§ 877 and 877A (“Expatriation Tax”). B. Covered Expatriate: Every expatriate who meets the criteria prescribed in IRC § 877(a)(2) (“Covered Expatriate”) is subject to the Expatriation
1. the average annual net income tax of an individual for the period
States citizenship is greater than $124,000 (currently $168,000 due to inflation adjustment under IRC § 877A(a)(3)(B)); 2. the net worth of the individual as of such date is $2,000,000 or more; OR 3. such individual fails to certify under penalty of perjury that he has met the requirements of U.S. tax law for the 5 preceding taxable years or fails to submit such evidence of such compliance as the Secretary may require. C. Taxing Covered Expatriates: Upon being classified as a Covered Expatriate, the Expatriation Tax applies to all net unrealized gains on the expatriate’s worldwide assets on a mark-to-market basis—that is, all property (subject to a few exceptions) of a Covered Expatriate is deemed sold for its fair market value on the day before the expatriation date, and any gains from such deemed sales are subject to income tax. IRC § 877A(a); see also IRS Notice 2009-85. Losses from deemed sales are taken into account for the taxable year of the deemed sale, except that the “wash sale” rules under IRC § 1091 do not apply. Any net gains can be reduced by the exclusion amount under IRC § 877A(a)(3), which is to be adjusted for inflation (currently $725,000 for 2019, see Rev. Proc. 2018-57). D. Expatriation Date:
treated as relinquishing his or her U.S. citizenship on the earliest of four possible dates:
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i. (1) the date the individual renounces his or her U.S. nationality before a diplomatic or consular officer of the U.S. . . ii. (2) the date the individual furnishes to the U.S. Department of State a signed statement of voluntary relinquishment of U.S. nationality. . . iii. (3) the date the U.S. Department of State issues to the individual a certificate of loss of nationality; or iv. (4) the date a U.S. court cancels a naturalized citizen’s certificate of naturalization.
term resident ceases to be a lawful permanent resident “if such individual commences to be treated as a resident of a foreign country under the provisions of a tax treaty between the United States and the foreign country, does not waive the benefits of the treaty applicable to residents of the foreign country, and notifies the Secretary of such treatment.” E. Deferring the Tax Payment: A Covered Expatriate may elect to defer payment of tax attributable to property deemed sold. IRC § 877A(b) provides: a covered expatriate may make an irrevocable election (“deferral election”) with respect to any property deemed sold by reason of section 877A(a) to defer the payment of the additional tax attributable to any such property (“deferral assets”). The deferral election is made on an asset-by-asset
any asset, the covered expatriate must provide adequate security (defined below) and must irrevocably waive any right under any U.S. treaty that would preclude assessment or collection of any tax imposed by reason of section 877A.
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1. The mark-to-market tax does not apply to deferred compensation items, certain tax-deferred accounts, and interest in non-grantor trusts of which the covered expatriate was a beneficiary on the day before the expatriation date. IRC § 877A(c). F. Steps for renouncing citizenship and paying expatriation tax:
foreign country to renounce U.S. citizenship or residency by signing an oath of renunciation.3
Certificate of Loss of Nationality (“COLN”) is issued.4
the income tax return for the tax year of expatriation.5
3 Renunciation of U.S. Nationality Abroad, U.S. Department of State, available at
https://travel.state.gov/content/travel/en/legal/travel-legal-considerations/us- citizenship/Renunciation-US-Nationality-Abroad.html; see e.g., Renunciation of U.S. Citizenship, available at https://nl.usembassy.gov/u-s-citizen-services/citizenship- services/renunciation-u-s-citizenship/.
4 Id. 5 2019 Instruction for Form 8854, available at https://www.irs.gov/pub/irs-dft/i8854--dft.pdf.
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IRS’s New Relief Procedure for Certain Former Citizens A. New Procedure: On September 6, 2019, the IRS announced a procedure for certain persons who have relinquished or intend to relinquish their U.S. citizenship and wish to come into compliance with their U.S. tax and reporting obligations and avoid being taxed as a Covered Expatriate under IRC § 877A. See IR-2019-151.6 1. In general, Covered Expatriates are subject to the Expatriation Tax if they renunciate. They are also responsible for any unpaid taxes, including penalties and interest, accrued while they were U.S. citizens. 2. This relief procedure enables certain citizens or former citizens to be exempt from the Expatriation Tax and any back taxes owed for prior years. B. Eligibility for Relief: The Relief Procedure applies to those: 1. who have relinquished their U.S. citizenship after March 18, 2010; 2. who have no filing history as a U.S. citizen or resident (if an expatriate filed Form 1040NR nonresident alien income tax return under good faith belief that he/she was not a U.S. citizen, the procedure may still be allowed); 3. who have a net worth less than $2,000,000 at the time of expatriation and at the time of making their submission under the relief procedures; 4. who have an aggregate total tax liability of $25,000 or less for the five tax years preceding expatriation and in the year of expatriation (after application of all applicable deductions, exclusions, exemptions and credits, including foreign tax credits, but excluding the application of IRC § 877A and excluding any penalties and interest); AND 5. whose failure to file required tax returns (including income tax returns, applicable gift tax returns, information returns (including Form 8938, Statement of Foreign Financial Assets), and Report
6 Available at https://www.irs.gov/newsroom/irs-announces-new-procedures-to-enable-certain-expatriated-
individuals-a-way-to-come-into-compliance-with-their-us-tax-and-filing-obligations.
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formerly Form TD F 90-22.1)) and to pay taxes and penalties for the years at issue due to non-willful conduct. C. Relief Provided: If an expatriate is determined eligible to use this procedure, he/she becomes exempt from any back taxes, interest, and penalties that he/she failed to pay and the Expatriation Tax. D. Participation in Relief Procedure: 1. Renounce U.S. citizenship following the Department of State procedure. 2. File with the IRS the following documents, writing in red “Relief for Certain Former Citizens” across the top of each return: i. Certificate of Loss of Nationality (CLN) of the U.S., Form DS-4083, or copy of court order canceling a naturalized citizen’s certificate of naturalization (described in IRC § 877A(g)(4)(D)); ii. Copy of (a) valid passport OR (b) birth certificate and government issued identification; iii. Copies of “Dual-status” return including Form 1040NR with all required information returns: Form 8854; Form 1040 attached as an information return reporting worldwide income up to date of expatriation; and all other required information returns, including but not limited to Form 8938; and iv. Forms 1040 with all required information returns for five tax years preceding the expatriation date. 3. This relief procedure does not apply to long-term residents (green card holders). 4. Unlike other streamlined procedures, this procedure does not require an applicant to have a Social Security Number. An applicant simply can leave the boxes blank where an SSN is requested. 5. Unlike other procedures, the IRS will acknowledge the receipt of the submission after reviewing the submission package.
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6. Returns submitted under this procedure will not be automatically subject to IRS audit, although they may be selected for audit under the regular audit selection process. 7. If an applicant who is not eligible for this procedure make a submission, the IRS will process such submission using normal processing procedure, and the applicant will be liable for all taxes, penalties, and interest.
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CDP HEARINGS, LITIGATION, & HOT TOPICS
I. COLLECTION DUE PROCESS HEARINGS AND LITIGATION A. Collection Due Process Hearing: 1. Notices to taxpayer: after assessment is made, the Service will send one or both of the following notices in order to collect. i. Letter 3172 Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320: this is the letter that is sent to you in accordance with I.R.C. § 6320 informing you of your right to an appeal. Will accompany the actual Form 668(Y), Notice of Federal Tax Lien. a. Form 668(Y) Notice of Federal Tax Lien: provides the taxpayer’s information, the lien amount, the tax periods involved, the tax type involved the filing date, and the place of filing. b. I.R.C. § 6320: requires the Secretary to notify the taxpayer in writing of the filing of a notice of under I.R.C. § 6123. (1) Time for notice: the notice is to be given in person; left at the dwelling or usual place of business; or sent by certified or registered mail to such person’s last known address, not more than 5 business days after the day of the lien filing. (2) Information required: Service must provide taxpayer, in simple and nontechnical terms: the amount of unpaid tax; the right of the person to request a hearing; the administrative appeals available to taxpayer with respect to the lien and the procedures relating to such an appeal; provisions and procedures relating to lien release; and provisions relating to seriously delinquent tax debt and passport revocation under I.R.C. § 7345. (3) Right to fair hearing: hearing shall be held by
be conducted by an employee with no prior
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involvement; and the hearing should be held in conjunction with a hearing under I.R.C. § 6330, if practicable. ii. Letter 1058 Final Notice of Intent to Levy and Notice of Your Rights to a Hearing: this letter informs the taxpayer that their property is subject to levy and informs them of their right to a hearing. Also, instructs taxpayer to file Form 12153, Request for a Collection Due Process or Equivalent Hearing. a. I.R.C. § 6330: requires notice to taxpayer prior to levy. (1) Time for notice: the notice is to be given in person; left at the dwelling or usual place of business; or sent by certified or registered mail to such person’s last known address, not less than 30 days before the levy. (2) Timing exceptions: the following items are not subject to the 30-day notice and the taxpayer must be notified within a reasonable time: if the Secretary has made a finding that collection may be in jeopardy; Secretary has levied State tax refund; Secretary has served a disqualified employment tax levy; or the Secretary has served a Federal contractor levy. (3) Information required: Service must provide taxpayer, in simple and nontechnical terms: the amount of unpaid tax; the right of the person to request a hearing; the taxpayer’s rights, including: provisions relating to levy and sale of property, applicable procedures, administrative appeals available and procedures for appeal, alternative available to the taxpayer which can prevent levy, and provisions relating to redemption of property and release of liens on property. (4) Right to fair hearing: hearing shall be held by
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shall be conducted by an employee with no prior involvement. (5) Verification: Appeal’s officer shall obtain verification that the requirements of any applicable law or administrative procedure have been met. (6) Issues at hearing: any relevant issue relating to the unpaid tax or proposed levy may be raised, including: spousal defenses, challenge to the appropriateness of the collection action, and collection alternatives; the underlying tax liability may be challenged if there was no notice of deficiency sent and no prior opportunity to dispute such tax liability. 2. Challenges: A taxpayer can challenge the assessed penalty during a collection due process (“CDP”) hearing provided that he did not receive a statutory notice of deficiency for the liability
I.R.C. § 6330(c)(2)(B). i. A continuation penalty is assessed with Form 8278 rather than with a statutory notice of deficiency. Therefore, the relevant inquiry is whether the taxpayer had a prior
ii. The following constitute a prior opportunity for a hearing: a. The taxpayer participated in another Appeals hearing for the same tax and periods in CDP; b. The taxpayer received a prior CDP lien or levy notice for the same tax and periods; c. Audit reconsideration conducted by Exam if the taxpayer was offered the opportunity for a conference with Appeals to dispute the results of the reconsideration request; d. The IRS filed a proof of claim in a bankruptcy proceeding involving the liability on the CDP notice; e. Suits to reduce judgment or foreclose a tax lien involving the tax liability on the CDP notice; and f. The taxpayer received a notice offering a hearing with Appeals.
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iii. The following do not constitute a prior opportunity for a hearing: a. Receipt of a 30-day letter in a deficiency case; b. Audit reconsideration conducted by Exam if the taxpayer was not offered the opportunity for a conference with Appeals to dispute the results of the reconsideration request; c. A separate Appeals conference held concurrently with the CDP hearing; d. Accrued interest and penalties that were not at issue in a notice of deficiency or in a prior hearing; e. The opportunity to file an amended return; f. Receipt of a math error or clerical error notice under I.R.C. § 6213(b)(1); and g. The taxpayer had the opportunity to pay the tax and file a claim for refund but did not do so. iv. One hearing per period: taxpayer is entitled to only one hearing per period pursuant to I.R.C. §§ 6320(b)(2) and 6330(b)(2). The Treasury regulations, however, allow for more than one hearing per period for hearings conducted under I.R.C. §§ 6320 or 6330. Treas. Reg. 301.6320- 1(d)(2) Q&A D-1 provides: Q-D1. Under what circumstances can a taxpayer receive more than one CDP hearing under section 6320 with respect to a tax period? A-D1. The taxpayer may receive more than
respect to a tax period where the tax involved is a different type of tax (for example, an employment tax liability, where the original CDP hearing for the tax period involved an income tax liability), or where the same type of tax for the same period is involved, but where the amount of the unpaid tax has changed as a result of an additional assessment
including interest or penalties) for that period
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delinquency penalty has been assessed. The taxpayer is not entitled to another CDP hearing under section 6320 if the additional assessment represents accruals of interest, accruals of penalties, or both. v. Hearings: held by office of Appeals and are traditionally
Taxpayer cannot subpoena documents or witnesses at the Appeals hearing. vi. Verification: Appeals office is to verify that all requirements of any applicable law or administrative procedure have been met. This includes compliance with I.R.C. § 6751(b), requiring managerial approval. vii. Procedure for requesting CDP: a. In order to request a CDP hearing, the taxpayer must file IRS Form 12153, Request for a Collection Due Process or Equivalent Hearing, in response to either a Final Notice of Intent to Levy or a Notice
within 30 days from the date of the IRS notice that is in dispute. b. To ensure proper consideration is given to the taxpayer’s dispute, the taxpayer should identify all issues related to the assessment of the continuation penalty and/or the collection of that penalty. If the taxpayer has not previously challenged the underlying tax liability, then this is their opportunity to do so. c. After the CDP hearing, the IRS will issue a Notice
the date of that notice to file a petition with the U.S. Tax Court to dispute the Appeals Officer’s findings. viii. Timeliness of CDP request: determined under I.R.C. §§ 7502 (timely mailing treated as timely filing) and 7503 (extending deadline to first day that is not a Saturday, Sunday, or legal holiday where deadline otherwise falls on such a day). B. Collection Appeals Conference v. CDP:
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1. Perkins v. Commissioner: “An opportunity to dispute the underlying liability that precludes a taxpayer from challenging it in a section 6330 hearing includes a prior opportunity for a conference with the Commissioner's Office of Appeals when the taxpayer availed himself of that opportunity. Lewis v. Commissioner,128 T.C. 48, 61, 2007 WL 927211 (2007); see also sec. 301.6330–1(e)(3), Q & A–E2, Proced. & Admin. Regs.” Perkins v. Commissioner, 129 T.C. 58, 62–63. 2. Romano-Murphy v. Commissioner: “in order for a challenge to the existence or amount of the underlying tax liability to be considered by the Office of Appeals in a collection-review hearing, section 6330(c)(2)(B) requires the person not to have had a prior opportunity to challenge the liability for the
underlying tax liability includes ‘a prior opportunity for a conference with Appeals that was offered either before or after the assessment of the liability.’ Sec. 301.6330-1(e)(3), Q&A-E2,
152 T.C. No. 16 (slip. op. at *12) (May 21, 2019). C. Post-CDP Litigation: 1. United States Tax Court: USTC has exclusive jurisdiction to review determinations made pursuant to a CDP hearing. Taxpayer must petition USTC within 30 days of the determination date. I.R.C. § 6330(d) i. Standard of review: the standard of review is de novo when the taxpayer is challenging (able to challenge) the underlying tax liability. See Goza v. Commissioner, 114 T.C. 176 (2000). When the underlying tax liability is not at issue, the standard is abuse of discretion. This standard focuses on whether the Appeals officer properly verified the Secretary’s compliance that all applicable law and administrative procedures have been met. a. Verification includes whether the Service complied with I.R.C. § 6751(b). Section 6751(b) requires managerial approval prior to the initial determination of the penalty. With regard to deficiency cases, the initial determination has been deemed to be the Revenue Agent Report (RAR) and the 30-day letter. Clay v. Commissioner, 152 T.C.
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ii. If taxpayer seeks review of spousal defense only, then taxpayer has 90 days to petition the court. See I.R.C. § 6015(e)(1)(A)(ii). iii. Issues deemed frivolous during Appeals hearing will be included in a “disregard letter,” which treats this issue(s) as if it were never submitted. The USTC has the ability to review whether an issue is frivolous but cannot review frivolous issues. I.R.C. § 6330(g); Buczek v. Commissioner, 143 T.C. 301 (2014). 2. United States District Court and Court of Federal Claims: taxpayers can also pay the outstanding tax liability and seek a refund in either the United States district court, pursuant to 28 U.S.C. § 1346(a), or the Court of Federal Claims, pursuant to 28 U.S.C. § 1491. Taxpayer must first file a Form 843, Claim for Refund and Request for Abatement, with the IRS. 3. Appellate Jurisdiction: appeals from the USTC for CDP are entertained in the circuit that has the legal residence of the taxpayer, if an individual, or the principal place of business or principal office or agency if the petitioner is not an individual. I.R.C. § 7482(b)(1)(g). D. Reasonable Cause: 1. Application: reasonable cause is a defense for the failure to file information return penalties. Reasonable cause is often found in the applicable statute but is rarely defined. Typically, reasonable cause focuses on the exercise of ordinary business care and prudence and whether the failure was willful. See Flume v. Commissioner, T.C. Memo 2017-21, at *5; see also In re Wyly,
i. I.R.C. § 6038 (which triggers a Form 5471 filing requirement) requires that reasonable cause be submitted in a written statement under the penalties of perjury to support their reasonable cause claim. See Treas. Reg. § 1.6038-2(k)(e)(ii). 2. Availability: the Service will not entertain penalty abatement requests until it confirms that the taxpayer is in compliance with their filing requirements. Further, reasonable cause can only be argued in a CDP hearing if the taxpayer has not had a prior
available after a taxpayer receives notice that they have 90 days
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to file the missing information. See Treas. Reg. § 1.6038- 2(k)(3)(i). 3. Reasonable cause should not be granted when: i. A foreign country’s imposition of penalties on the taxpayer for disclosing the information; ii. A foreign trustee refuses to provide the information for any reason, including difficulty in producing the required information; or iii. The taxpayer relied on another person to file the returns. I.R.M., pt. 20.1.9.1.1 (Oct. 24, 2013). 4. Substantial compliance: I.R.C. §§ 6038 and 6038A allow penalty alleviation for filing substantially complete returns. See Treas.
E. Res Judicata: 1. Administrative res judicata and CDP hearings: administrative res judicata originates from the Supreme Court’s decision in United States v. Utah Construction & Mining Co., 384 U.S. 394 (1966). See Delamater v. Schwieker, 721 F.2d 50, 53–54 (2d Cir. 1983). “When an administrative agency is acting in a judicial capacity and resolves disputed issues of fact properly before it which the parties have had an opportunity to litigate, the courts have not hesitated to apply res judicata to enforce repose.” Astoria Fed.
hearings are administrative hearings. See Thompson v. Commissioner, T.C. Memo. 2013-260, at *2; see also Estate of Sanfilippo v. Commissioner, T.C. Memo. 2015-15, at *8. Does
2. Common law res judicata: Commissioner v. Sunnen provides that “Each year is the origin of a new liability and of a separate cause
Sections 6320(b)(2) and 6330(b)(2) provide: “[a] person shall be entitled to only one hearing under this section with respect to the taxable period to which the unpaid tax specified in subsection (a)(3)(A) relates.” Do these two provisions preclude CDP and deficiency proceedings for the same tax year if brought separately? F. Statute of Limitations: 1. Statute suspended when CDP requested: when a CDP hearing is requested the statute of limitations for the following will be suspended: collection after assessment date pursuant to I.R.C. §
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6502 (CSED); criminal prosecutions pursuant to I.R.C. § 6503; taxpayer refund, wrongful levy, and government suits to recover erroneous refunds pursuant to I.R.C. § 6532. 2. What is the applicable statute of limitations for international penalties: a debate has arisen regarding what the appropriate statute of limitations is for assessing international penalties: i. Section 6501(c)(8) provides: In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date
which the Secretary is furnished the information required to be reported under such section. I.R.C. § 6501(c)(8) does not, however, specifically mention the ability to assess penalties for the failure to provide the information required under the international information reporting sections. This provision does allow for the extension of time for assessment of any tax. International information reporting penalties may, and probably are, not considered a tax. See Nat’l Fed’n of
ii. Section 6501 and return-based penalty: if the SOL for assessing penalties for the failure to provide international information is not controlled by I.R.C. § 6501(c)(8) then it may be governed by the SOL for filing the income tax
period of limitations upon filing of the income tax return. If international information must be reported with the income tax return (such as I.R.C. §§ 6038, 6038B, and 6038D) then the failure to provide such information may be triggered by the filing of the return. Thus, the failure to
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file the information with the return may only allow for a three-year assessment period from the filing of the return. iii. Section 2462 and conduct-based penalty: if the filing of the income tax return does not trigger the statute of limitations for the failure to provide international information and I.R.C. § 6501(c)(8) does not apply, then the catchall statute of limitations found in 28 U.S.C. § 2462, providing for a five year SOL from “the date when the claim first accrued” to bring an “action, suit or proceeding for the enforcement of any . . . penalty[.]” In this situation, the conduct of not filing the return on the due date may trigger the SOL because that is the date when the claim first accrued. For instance, if a taxpayer has an I.R.C. § 6038 filing requirement for 2010 (to be filed in April 2011) then the applicable SOL would be April 2016 (five years after the information was due) despite whether the income tax return was filed or not. 3. Indefinite SOL: I.R.C. § 6501(c)(8) will keep the statute of limitations open for the entire tax year until three years after the information required was provided. In other words, if a Form 1040 is filed in 2015 but the Form 5471 was filed in 2019, the statute of limitations for assessment on the income tax return is
not provided then the statute of limitations for that tax year may be open indefinitely. 4. Reasonable cause limitations: one exception to the indefinite SOL mentioned above occurs when the failure to provide the international information is due to reasonable cause. I.R.C. § 6501(c)(8)(B) limits the statute of limitations extension to items related to the international information provided if the failure to file was due to reasonable cause and not willful neglect. In other words, if the taxpayer filed Form 1040 in 2015 and did not file a Form 5471 until 2019 but the failure to file was due to reasonable cause then the time for assessment will be extended to 2022 but
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II. Hot Topics in International Penalty Litigation A. CDP vs. Deficiency: although most international penalties will be subject to the collection due process proceedings, there are several consequences stemming from the failure to file that can be brought as part of the deficiency proceedings: 1. Form 5471: deficiency proceedings will be brought for reduction
2. Form 5472: deductions disallowed for any amount paid or incurred by reporting corporation and cost to reporting corporation of any property acquired, pursuant to I.R.C. § 6038A(e)(3). 3. Form 926: recognized gain from contributions under I.R.C. § 6038B(c)(1). 4. Form 3520: redetermination of foreign gifts as income under I.R.C. § 6039F(c)(1)(A). 5. See I.R.M., Exhibit 20.1.9-4. B. Income Recharacterization: 1. Form 3520: aside from penalties being assessed, another issue that can arise is the recharacterization of foreign gifts as income. If foreign gifts are not reported or substantiated, then the IRS during examination can deem the alleged foreign gift to be unreported foreign income. By doing so they put the burden on the taxpayer to prove that the amount received constitutes a non- taxable gift as opposed to income. If the taxpayer cannot prove that property received was a gift rather than income then not only will he be liable for additional income tax liability but he will also be subject to an accuracy-related penalty under I.R.C. § 6662(a); this is besides the penalty for failing to file Form 3520. I.R.C. § 6039F(c)(1)(A) allows the IRS to determine the tax consequence of receiving such gift (or bequest) if the information is not filed timely. Unlike the late filing penalty, IRM 20.1.9.10.3 (04-22-2011) provides that the I.R.C. § 6039F(c)(1)(A) penalty is subject to deficiency procedures. 2. Form 3520-A: another issue that arises is the IRS’s ability to deem any distribution from a foreign trust to be treated as an accumulated distribution, which is includable in gross income, if the taxpayer does not provide adequate records (which, once again, may not be in the possession of or accessible to the taxpayer).
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3. Form 926: recognize gain from contributed property as if it had been sold for such value at the time on contribution. 4. Form 5472: aside from the penalties, I.R.C. § 6038A(e)(3) disallows the taxpayer’s deductions for a failure to provide adequate books and records. Taxpayers who do not properly or timely file their Form 5472 can be subjected to not only concurrent $25,000 per-month-penalties but will also have their deductions disallowed. 5. These “penalties” will be subject to deficiency proceedings. C. Summarily Assessable Penalties: there are a few international penalties which are being summarily assessed, similar to assessable penalties, even though they may not be summarily assessable penalties. Penalties under I.R.C. §§ 6038, 6038B, and 603D (Forms 5471, 926, and 8938) are being summarily assessed against taxpayers even though they are not summarily assessable. 1. Section 6038, 6038B, and 6038D are in Chapter 61 of Internal Revenue Code. Chapter 68 of the Code provides for assessable penalties. i. Section 6671(a) provides: “The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title to ‘tax’ imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.” (Emphasis added). ii. Section 6671 only applies to penalties located within Chapter 68. There is no comparable provision found in Chapter 61 of the Code. 2. Cross-reference or specific language: penalties without Chapter 68 can also be assessed in the same manner as taxes but those penalties have either: a) cross-reference into Chapter 68; or b) have specific language authorizing assessment and collection in the same manner as tax.
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Code Section & Chapter of Code Code Authority for Assessment. 6011 (Chapter 61) Section 6707A(a): “Any person who fails to include on any return
reportable transaction which is required under section 6011 to be included with such return or statement shall pay a penalty in the amount determined under subsection (b).” 527 (Chapter 1) Section 527(j)(1)(B): “For purposes of subtitle F, the amount imposed by this paragraph shall be assessed and collected in the same manner as penalties imposed by section 6652(c).” 9707 (Chapter 99) Section 9707(f): “For purposes of this title, the penalty imposed by this section shall be treated in the same manner as the tax imposed by section 4980B.” 7519 (Chapter 77) Section 7519(f)(1): “Except as otherwise provided in this subsection
any payment required by this section shall be assessed and collected in the same manner as if it were a tax imposed by subtitle C.” 6039F (Chapter 61) Section 6039F(c)(1)(B): “such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not
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Code Section & Chapter of Code Code Authority for Assessment. to exceed 25 percent of such amount in the aggregate).” 6043 (Chapter 61) Section 6043(d) “For provisions relating to penalties for failure to file– (1) a return under subsection (b), see section 6652(c), or (2) a return under subsection (c), see section 6652(1).” 6046 (Chapter 61) Section 6046(f): “For provisions relating to penalties for violations of this section, sections 6679 and 7203.” 6046A (Chapter 61) Section 6046A(e): “For provisions relating to penalties for violations of this section, see sections 6679 and 7203.” 5000A (Chapter 48) Section 5000A(g)(1): “The penalty provided by this section shall be paid upon notice and demand by the Secretary, and except as provided in paragraph (2), shall be assessed and collected in the same manner as an assessable penalty under subchapter B of chapter 68.” D. Form 5471 Attribution: I.R.C. § 6038(e)(2) applies the I.R.C. § 318(a) (except for attribution from non-U.S. persons and 50% threshold is reduced to 10%) attribution rules and attributes filing obligations to: spouses, children, grandchildren, and parents.
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INTERNATIONAL INFORMATION RETURNS
I. Form 3520,7 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts A. Preparation of Return: 1. Who Must File: grantors of an inter vivos trust, transferors involved in reportable events (as defined), beneficiaries of a foreign trust (who have received distributions during a taxable year), and U.S. persons who have received a foreign gift amount
i. Form 3520 is unique because traditional U.S. Gift Tax Returns (Form 709) require the donor to file a return. Form 3520, however, requires the recipient of the gift to file a return, despite the reality of whether they are in possession
to be in possession). 2. Reportable Event: for purposes of I.R.C. § 6048, a reportable event includes: i. Formation of a foreign trust; ii. transfer of cash or other assets into a foreign trust; iii. receipt of any distributions by U.S. beneficiaries; iv. the death of a U.S. citizen or resident if: a. decedent was treated as an owner of any portion of a foreign trust; or b. any portion of a foreign trust was included in the gross estate of decedent. 3. Substantial Owner (Grantor Trust Rules): a filing requirement arises where the grantor of the foreign trust is considered a substantial owner of the trust. If a grantor retains any of the following rights or interests then he may be deemed a substantial
7 Tax professionals representing clients with international information return filing
requirements should make sure to put the specific form (i.e. 3520, 5472) on the Form 2848, Power of Attorney and Declaration of Representative, even if the form attaches to the income tax return. A representative will not be notified regarding forms that accompany an income tax return unless such form is specifically included on their Form 2848, including penalties associated with such return. I.R.S. Chief Couns. Memo. 36021 (Sep. 8, 2017).
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i. Reversionary Interest (I.R.C. § 673): grantor retains a reversionary interest (of 5% or more) in the corpus or income of trust; ii. Power to Control Beneficial Enjoyment (I.R.C. § 674): grantor retains power to dispose of beneficial enjoyment
an adverse party; iii. Administrative Powers (I.R.C. § 675): grantor retains sufficient administrative control where he can manipulate the benefits so they are used for grantor and not beneficiaries; iv. Power to Revoke (I.R.C. § 676): grantor can revoke property from the trust and revest himself of the property; v. Income for Benefit of Grantor (I.R.C. § 677): grantor receives distributions; vi. Person Other Than Grantor Treated as Substantial Owner (I.R.C. § 678): non-grantors can also be deemed substantial owners if he retains sole power to distribute the corpus or income to himself or if he retains control that would consider a grantor as a substantial owner; and vii. Foreign Trusts Having One or More United States Beneficiaries (I.R.C. § 679): grantors of foreign trusts with U.S. beneficiaries will automatically be deemed a substantial owner. 4. Foreign Gifts: U.S. persons receiving foreign gifts may also have a reporting requirement: i. Foreign Person: if a foreign person gives a gift to a U.S. person then it will generally be a non-taxable event but if it is over $100,000 (which is considered in the aggregate) then it will require filing a Form 3520. ii. Foreign Corporation or Partnership: if a U.S. person receives a gift from a foreign corporation or partnership that is above $16,388 (adjusted for inflation, per Rev.
are also required to pay tax on this gift (See Treas. Reg. § 1.672(f)-4). iii. Non-cash foreign gifts must be valuated consistent with I.R.C. § 2512. 5. When to File: The form is due when the income tax return of the U.S. entity (individual, partnership, corporation, etc.) is due,
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including any extensions of time to file. The form is not filed with the tax return. 6. Exceptions to Filing: Most exceptions to filing involve foreign trusts that deal with employee compensation and/or payment plans (under I.R.C. §§ 402, 402(a), and 404A). 7. Corrective Measures: if the taxpayer has not properly filed his Form 3520, he may do so without penalty. Under the Delinquent International Information Return Submission Procedures (“DIIRSP”) the taxpayer can avoid a penalty for their failure to file if these requirements are satisfied: i. the taxpayer did not file one or more required information returns; ii. the taxpayer has a reasonable cause for not timely filing the information return; iii. the taxpayer is not under a civil examination or criminal investigation by the IRS; and iv. the IRS has not already contacted the taxpayer regarding the delinquent return. B. Examination: the IRS may send Information Document Requests (“IDR”) or a Formal Document Request (“FDR”). Taxpayers that are unable or unwilling to provide information in response to a FDR will be precluded from introducing such information in a future judicial proceeding, under I.R.C. § 982. Documents can be precluded even if they are not in the taxpayer’s possession, taxpayer cannot obtain such documents, and the foreign country that houses the foreign donor or trust makes the dissemination of such information illegal. 1. Statute of Limitations: the statute of limitations to audit a Form 3520 is three years from filing. The statute does not begin until the Form 3520 is filed. This includes incomplete filings. Form 3520, unlike Forms 5471 and 5472, does not recognize substantial compliance. i. Substantial Compliance may begin the running of the statute of limitations if there is a proper Beard filing. Beard v. Commissioner, 82 T.C. 766 (1984) (which the IRS does not agree with) held that a return was valid for statute of limitations purposes if the following is provided: a. possess sufficient information for the IRS to calculate the tax liability; b. be filed as a purported return;
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c. be an honest and reasonable attempt to comply with the tax laws; and d. be signed under the penalties of perjury. C. Penalties: failure to file or provide complete and correct information can subject the taxpayer to these penalties: 1. I.R.C. § 6677: failure to file will lead to a penalty of $10,000 or 35% (whichever is greater) of the gross value of the property involved in the event. i. A continuation penalty also applies if the failure to file is not corrected within 90 days of being notified by the IRS. This penalty shall be $10,000 for each 30-day period in which the failure remains uncorrected. 2. I.R.C. § 6039F: failure to furnish gift information can lead to a penalty of 5% per month up to 25% of the total gift. 3. I.R.C. § 6662(j): this applies to foreign financial assets in which information must be provided under I.R.C. § 6048 that is not
related penalty from 20% to 40%. I.R.C. § 6039F is not specifically referenced in I.R.C. § 6662(j). 4. Defenses: reasonable cause is the primary defense to a failure to
has filed the Form 3520. Reasonable cause is a facts and circumstances test and focuses upon the taxpayer’s reason for failing to file, efforts made to comply with the filing requirement, and his or her ignorance of the law. Disclosure of the information being a crime in another country is not considered reasonable cause. 5. Recharacterization: aside from penalties being assessed, another issue that can arise is the recharacterization of foreign gifts as
IRS during examination can deem the alleged foreign gift is actually unreported foreign income. By doing so they put the burden on the taxpayer to prove that the amount received constitutes a non-taxable gift as opposed to income. If the taxpayer cannot prove that property received was a gift rather than income then not only will he be liable for additional income tax liability but he will also be subject to an accuracy-related penalty under I.R.C. § 6662(a); this is besides the penalty for failing to file Form 3520. I.R.C. § 6039F(c)(1)(A) allows the IRS
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to determine the tax consequence of receiving such gift (or bequest) if the information is not filed timely. Unlike the late filing penalty, IRM 20.1.9.10.3 (04-22-2011) provides that the I.R.C. § 6039F(c)(1)(A) penalty is subject to deficiency procedures. D. Appeals: Appeals hearings are the primary mediums for challenging determinations made regarding Form 3520. 1. IRM 8.11.5.6 (12-18-2015) - IRC § 6039F Notice of Large Gifts from Foreign Persons (Form 3520) – provides this penalty is an “International penalty and has post-assessed, pre-payment, penalty appeal rights.” 2. IRM 20.1.9.10.3 (04-22-2011) explains that I.R.C. § 6039F penalties are asserted on a Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties. 3. Once the penalty is assessed, a CP notice will be generated and sent to the taxpayer. The IRS will send either CP 15 or CP 215 to the taxpayer. The CP 15 notice notifies the taxpayer that a penalty has been assessed and explains that, if the taxpayer wishes to appeal the assessment, he or she should submit a written request within 30 days from the date of the notice. The CP 215 notice notifies the taxpayer that, if the taxpayer wishes to appeal the penalty, he or she should send the IRS a written request to appeal within 30 days from the date of the notice. 4. If the taxpayer does not take action on the CP 15 or CP 215 notice, the IRS will send the taxpayer Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, or LT11 Final Notice of Intent to Levy and Notice of Your Right to a Hearing, or Letter 3172, Notice of Federal Tax Lien and Your Rights to a Hearing under IRC 6320. 5. If none of the prior notices offered the taxpayer an administrative appeal then, upon the taxpayer’s timely request, the Appeals Office will conduct a de novo review of the taxpayer’s liability, including his or her reasonable cause defense. A taxpayer cannot challenge the underlying liability if he or she has had a prior
6. I.R.C. § 6751(b) Challenge: upon asking Appeals to verify the steps taken by Collection, one challenge that can be raised (but which should only be raised post-assessment) is the 6751(b)
I.R.C.] shall be assessed unless the initial determination of such
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assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.” 7. Qualified Offer: tax professionals may want to submit a qualified
7430(g). Qualified offers allow taxpayers to recoup legal and administrative fees for reasonable settlement offers refused by the Service; the Service must receive judgment in excess of the settlement offer to not be liable for costs and fees. Qualified
is timely and the taxpayer is not precluded from contesting the liability under I.R.C. §§ 6330(c)(2), 6330(c)(4), or 6320(c). The Service must accept the offer within 90 days or it is deemed
guidance on how the Service sees certain issues. E. Litigation: 1. Pre-payment Forum: To initiate a Tax Court case, the taxpayer (now known as petitioner) will file a petition, designation for place of trial, and a statement with the taxpayer’s identification number, which will accompany a filing fee of $60 (made payable to Clerk, United States Tax Court). i. Petitions must include, among other items, facts and legal theories on why the petitioner should prevail. Any issue not contested in the petition is deemed conceded by
attached and any taxpayer identification numbers (such as social security number) must be redacted. 2. Refund Forum: Refund claims can be brought in the United States Court of Federal Claims and the United States District
must first pay the tax and file a claim for refund from the IRS. Claims for refund must include the grounds on which a refund is claimed and facts to support those grounds, all of which must be sworn to under penalties of perjury. Refund claims are filed using Form 843, Claim for Refund and Request for Abatement. In most Form 3520 cases, the claim must be filed within 2 years from when the tax was paid.
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II. Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner A. Preparation of Return: 1. Who Must File: foreign trusts with U.S. owners must file a Form 3520-A (I.R.C. § 6048). Owners of the foreign trust can be established according to the Grantor Trust rules (I.R.C. §§ 671– 679). These U.S. owners must be U.S. persons for the trust to have a filing requirement under I.R.C. § 7701(a)(30)). Questions that must be answered: i. Is the foreign entity a trust for U.S. tax purposes? ii. If it is a trust, is it a foreign trust? iii. If it is a foreign trust, is it owned by a U.S. person? 2. When to File: the Form 3520-A must be filed by the 15th day of the third month after the end of the trust’s tax year. Extensions do not run with a specific tax return and a Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, must be filed. 3. Grantor Trust Rules: a filing requirement arises where the grantor of the foreign trust is considered a substantial owner of the trust. If a grantor retains any of the following rights or interests then he may be deemed a substantial owner of the foreign trust and must file a Form 3520: i. Reversionary Interest (I.R.C. § 673): grantor retains a reversionary interest (of 5% or more) in the corpus or income of trust; ii. Power to Control Beneficial Enjoyment (I.R.C. § 674): grantor retains power to dispose of beneficial enjoyment
an adverse party; iii. Administrative Powers (I.R.C. § 675): grantor retains sufficient administrative control where he can manipulate the benefits so they are used for grantor and not beneficiaries; iv. Power to Revoke (I.R.C. § 676): grantor can revoke property from the trust and revest himself the property; v. Income for Benefit of Grantor (I.R.C. § 677): grantor receives distributions from the trust;
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vi. Person Other Than Grantor Treated as Substantial Owner (I.R.C. § 678): non-grantors can also be deemed substantial owners if he retains sole power to distribute the corpus or income to himself or if he retains control that would consider a grantor as a substantial owner; and vii. Foreign Trusts Having One or More United States Beneficiaries (I.R.C. § 679): grantors of foreign trusts with U.S. beneficiaries will automatically be deemed a substantial owner. viii. Attribution rules also apply that imputes ownership by a spouse to the settler/grantor. 4. Failure to File: what makes Form 3520-A unique is that it penalizes the U.S. owners of the foreign trust for the trust’s failure to file (I.R.C. § 6677(b)). i. U.S. owners can insulate themselves from liability if they appoint a U.S. agent to discharge their obligations regarding the Form 3520-A. The agreement appointing the agent must be in a form substantially similar to the one approved by the IRS in Notice 97-34. Once a U.S. agent is properly appointed and authorized to act, the IRS can deal with that person to ensure that the trust complies with all
5. Recharacterization: another issue that arises is the IRS’s ability to deem any distribution from a foreign trust to be treated as an accumulated distribution, which is includable in gross income, if the taxpayer does not provide adequate records (which, once again, may not be in the possession of or accessible to the taxpayer). B. Examination: 1. Foreign Document Requests (“FDR”): a foreign document request is similar to an information document request (“IDR”) because it requests documents from the recipient. The major difference between the two is that failing to provide documents in response to an FDR can preclude you from offering these documents in future litigation. I.R.C. § 982(a) prohibits any court with jurisdiction over a civil matter from allowing the taxpayer to introduce any foreign document previously requested and not
have the required documents and may not be able to obtain such documents.
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2. Penalty Letters, Notice Letters, and Notices (IRM 20.1.9.14.2 (04-22-2011)): the delinquent filer (or owner of the foreign company that is delinquent) can expect the following letters/notices from the IRS regarding their failure to file Form 3520-A: i. Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under I.R.C. § 6677(a). ii. Letter 3943—This is the closing acceptance letter to be utilized after a taxpayer responds and the examiner determines that no penalties will be asserted. iii. Letter 3944—This is the closing no response letter to be utilized when a taxpayer either fails to respond to Letter 3804 or when a taxpayer does not provide a statement of reasonable cause for failing to file such returns. iv. Letter 3946—This is the closing reasonable cause rejected letter to be utilized after a taxpayer responds and the examiner determines that penalties will be asserted. v. CP Notices—Once a penalty is identified by the campus
is processed, a CP notice is generated and sent to the taxpayer: a. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with PRN 660 is generated and sent to the taxpayer. b. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 660 is generated and sent to the taxpayer. 3. Penalty Assertion: penalties are initially determined on a Form 8278. 4. Statute of Limitations: the statute of limitations to audit a Form 3520-A is three years from the date of filing. The statute does not begin until the Form 3520-A is filed. This includes incomplete
recognize substantial compliance. i. Substantial Compliance may begin the running of the statute of limitations if there is a proper Beard filing. Beard v. Commissioner, 82 T.C. 766 (1984) (which the IRS rejects) held that a return was valid for statute of limitations purposes if the following is provided:
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a. possess sufficient information for the IRS to calculate the tax liability; b. be filed as a purported return; c. be an honest and reasonable attempt to comply with the tax laws; and d. be signed under the penalties of perjury. C. Penalties: the U.S. owner is subject to a penalty equal to 5% of the gross value of the portion of the trust’s assets treated as owned by the U.S. person at the close of that year (or $10,000 if higher). 1. Continuation penalty will also apply if the failure to file is not corrected within 90 days of the IRS sending the U.S. owner
after the IRS notifies the taxpayer and taxpayer has not corrected failing to file within the 90-day period. 2. Criminal penalties can also apply (See I.R.C. §§ 7203, 7206, and 7207). 3. I.R.C § 6662(j) penalties can also apply if there was an understatement of tax arising from an undisclosed foreign financial asset. Such penalty shall be 40% instead of 20%. 4. Defenses: If failing to file Form 3520-A was due to reasonable cause and not willful neglect, no penalty may be imposed. That a foreign jurisdiction would impose a civil or criminal penalty either on the taxpayer or any other person for disclosing the required information is specifically defined by the statute as not constituting reasonable cause. Refusal of a foreign trustee to provide information for any other reason, including (1) the difficulty in producing the required information or (2) provisions in the trust instrument that prevent disclosure of required information, are not considered reasonable causes by the IRS. D. Appeals: 1. Like Form 3520, Form 3520-A penalties have post-assessment pre-payment penalty appeal rights (IRM 8.11.5.9(3) (12-18- 2015)). 2. Once the penalty is assessed, a CP notice will be generated and sent to the taxpayer. The IRS will send either CP 15 or CP 215 to the taxpayer. The CP 15 notice notifies the taxpayer that a penalty has been assessed and explains that, if the taxpayer wishes to appeal the assessment, he or she should submit a written request within 30 days from the date of the notice. The CP 215 notice notifies the taxpayer that, if the taxpayer wishes
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to appeal the penalty, he or she should send the IRS a written request to appeal within 30 days from the date of the notice. 3. If the taxpayer does not take action on the CP15 or CP 215 notice, the IRS will send the taxpayer Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, or LT11, Final Notice of Intent to Levy and Notice of Your Right to a Hearing,
Hearing under IRC 6320. 4. Qualified Offer: tax professionals may want to consider submitting a qualified offer contemporaneous with their request for an Appeals conference. A qualified offer is an offer made under IRC § 7430(g). Qualified offers allow taxpayers to recoup legal and administrative fees for reasonable settlement offers refused by the Service; the Service must receive judgment in excess of the settlement offer to not be liable for costs and fees. Qualified offers can be submitted during CDP hearings if the CDP request is timely and the taxpayer is not precluded from contesting the liability under IRC §§ 6330(c)(2), 6330(c)(4), or 6320(c). The Service must accept the offer within 90 days or it is deemed rejected. A qualified offer will also ensure that the IRS national office reviews the issues, which can give tax practitioners some guidance on how the Service sees certain issues. E. Litigation: 1. Pre-payment Forum: To initiate a Tax Court case, the taxpayer (now known as petitioner) will file a petition, designation for place of trial, and a statement with the taxpayer’s identification number, which will accompany a filing fee of $60 (made payable to Clerk, United States Tax Court). i. Petitions must include, among other items, facts and legal theories on why the petitioner should prevail. Any issue not contested in the petition is deemed conceded by
attached and any taxpayer identification numbers (such as social security number) must be redacted. 2. Refund Forum: Refund claims can be brought in the United States Court of Federal Claims and the United States District
must first pay the tax and file a claim for refund from the IRS. Claims for refund must include the grounds on which a refund is
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claimed and facts to support those grounds, all of which must be sworn to under penalties of perjury. Refund claims are filed using Form 843, Claim for Refund and Request for Abatement.
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III. Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations A. Preparation of Return: 1. Who Must File (I.R.C. § 6046): there are five categories of filers but only four are still required to file (Categories 2–5). i. Category 1 Filer: inapplicable because repealed by American Jobs Creation Act of 2004. ii. Category 2 Filer: a. U.S. citizen or resident who is an officer or director
acquired stock that represents 10% or more of the total value or voting power of the foreign corporation; or b. U.S. Citizen or resident who is an officer or director
acquired an additional 10% or more of the
(1) A U.S. person has acquired stock in a foreign corporation when that person has an unqualified right to receive the stock, even though the stock is not actually issued. See
(2) The Category 2 Filer need not own any shares herself for a filing obligation to arise. iii. Category 3 Filer: a. U.S. person who acquires stock in a foreign corporation during the tax year and after the acquisition owns 10% or more of the total value or voting power of the foreign corporation; b. A U.S. person who acquires stock which, without regard to stock already owned on the date of the acquisition, meets the 10% stock ownership requirement regarding the foreign corporation; c. A person treated as a U.S. shareholder under I.R.C. § 953(c) with regard to the foreign corporation; d. A person who becomes a U.S. person while meeting the 10% stock ownership requirement with respect to the foreign corporation; or
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e. A U.S. person who disposes of sufficient stock in the foreign corporation to reduce his interest to less than the stock ownership requirement (10%). f. For Category 2 or 3, a U.S. person includes (1) A citizen or resident of the United States; (2) A domestic partnership; (3) A domestic corporation; and (4) Most estates and trust (specifically those which aren’t considered foreign estates or trusts under I.R.C. § 7701(a)(31)). g. Exceptions to U.S. person definition (Treas. Reg. § 1.6046-1(f)(3)): (1) Regarding an individual who is a bona fide resident of Puerto Rico, the term United States person has the meaning assigned to it by Treas. Reg. § 1.957-3 except that the rules
(2) Regarding an individual who is a bona fide resident of any IRC § 931 possession, as defined in Treas. Reg. § 1.931-1(c)(1), the term United States person has the meaning assigned to it by Treas. Reg. § 1.957-3. (3) An individual for whom an election under IRC § 6013(g) or (h) is in effect will, subject to the exceptions in paragraph (f)(3)(ii), be considered a United States person for purposes of IRC § 6046 and Treas. Reg. § 1.6046-1(f)(3). iv. Category 4 Filer: U.S. persons who control a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation. a. U.S. Person: (1) A citizen or resident of the United States; (2) A non-resident alien for whom an election is in effect under IRC § 6013(g) to be treated as a resident of the United States; (3) An individual for whom an election is in effect under IRC § 6013(h), relating to non- resident aliens who become residents of the
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United States during the tax year and are married at the close of the tax year to a citizen
(4) A domestic partnership; (5) A domestic corporation; and (6) An estate or trust that is not a foreign estate
b. Exceptions to U.S. Person (Treas. Reg. § 1.6038- 2(d)): (1) Regarding an individual who is a bona fide resident of Puerto Rico, the term United States person has the meaning assigned to it by Treas. Reg. § 1.957-3 except that the rules
(2) Regarding an individual who is a bona fide resident of any IRC § 931 possession, as defined in Treas. Reg. § 1.931-1(c)(1), the term United States person has the meaning assigned to it by Treas. Reg. § 1.957-3 (essentially, American Samoa). (3) An individual for whom an election under IRC § 6013(g) or (h) is in effect will, subject to the exceptions in paragraph (d)(2) of Treas.
States person for purposes of I.R.C. § 6038. c. Control: A person shall be deemed in control of a foreign corporation if at any time during that person's taxable year she
stock possessing over 50% of the total combined voting power of all classes of stock entitled to vote, or over 50% of the total value of shares of the foreign corporation. (1) If a person owns over 50% of a foreign corporation that owns over 50% of the combined voting power or value of another corporation, then that person shall also be deemed as being in control of such other corporation. (2) Attribution rules under I.R.C. § 318(a) shall apply for determining control.
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v. Category 5 Filer: U.S. shareholders who own 10% or more
for an uninterrupted period of at least 30 days in any tax year of the foreign corporation. a. U.S. Shareholder (I.R.C. § 951(b)): any U.S. person who owns or is considered as owning 10% or more
stock or of the total value of shares of all classes of stock in a foreign corporation. b. U.S. Person (I.R.C. § 957(c)): U.S. person means the same as it does under I.R.C. § 7701(a)(30) except that: (1) Regarding a corporation organized under the laws of the Commonwealth of Puerto Rico, the term United States person does not include an individual who is a bona fide resident of Puerto Rico, if a dividend received by such individual during the taxable year from such corporation would, for purposes of I.R.C. § 933(a), be treated as income derived from sources within Puerto Rico, and (2) Regarding a corporation organized under the laws of Guam, American Samoa, or the Northern Mariana Islands: (i) 80% or more of the gross income of which for the 3 year period ending at the close of the taxable year (or for such part of such period as such corporation or any predecessor has existed was derived from sources within such a possession or was effectively connected with the conduct of a trade or business in such a possession, and (ii) 50% or more of the gross income of which for such period (or part) was derived from the active conduct of a trade or business within such a possession.
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c. Controlled Foreign Corporation (I.R.C. § 957(a)): a CFC is any foreign corporation if over 50% of the total combined voting power of all classes of stock
shareholders on any day during the taxable year of such foreign corporation. vi. Dormant or Inactive Corporations: Revenue Procedure 92- 70 allows dormant inactive corporations to file an abridged version of the Form 5471. Corporations that qualify as dormant inactive foreign corporations in a tax year can utilize a summary filing procedure for that tax
to file only page one of the Form 5471, with the necessary identification information. Filing a summary return must include a label in the top margin stating: “Filed Pursuant to Rev. Proc. 92-70 for Dormant Foreign Corporations.” A CFC will be a dormant foreign corporation if, during the annual accounting period: a. The foreign corporation conducted no business and
another dormant foreign corporation; b. No shares of the foreign corporation (other than directors’ qualifying shares) were sold, exchanged, redeemed, or otherwise transferred, nor was the foreign corporation a party to a reorganization; c. No assets of the foreign corporation were sold, exchanged, or otherwise transferred, except for de minimis transfers described in (4) and (5) below; d. The foreign corporation received or accrued no more than $5,000 of gross income or gross receipts; e. The foreign corporation paid or accrued no more than $5,000 of expenses; f. The value of the foreign corporation’s assets as determined under U.S. generally accepted accounting principles (but not reduced by any mortgages or other liabilities) did not exceed $100,000;
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g. No distributions were made by the foreign corporation; and h. The foreign corporation either had no current or accumulated earnings and profits or had only de minimis changes in its beginning and ending accumulated earnings and profits balances from income or expenses. 2. Information to be furnished (I.R.C. § 6038): I.R.C. § 6038 requires the filing information to be provided: i. name of business; ii. principal place of business; iii. nature of business of such entity; iv. country under whose laws the entity is incorporated; v. post-1986 undistributed earnings (as defined by I.R.C. § 902(c)) for foreign corporations; vi. balance sheet of the foreign entity, including assets, liabilities, and capital; vii. transactions between the entity and: a. such U.S. person; b. any corporation or partnership which such U.S. person controls; and c. any U.S. person owning either 10% or more of the value of any class of outstanding stock of such foreign corporation, and any U.S. person owning at least a 10% interest in such foreign partnership; and
showing the name and address of, and number of shares held by, each U.S. person who is a shareholder of record
time during the annual accounting period (this is for foreign corporations, foreign partnerships should furnish comparable information). 3. When to File: Form 5471 must be attached to the taxpayer’s income tax return and must be filed on the due date (including extensions) for that return. 4. Exceptions from Filing: i. Multiple Filers: one person may file a Form 5471 and the applicable schedules for other persons with the same filing requirement.
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a. Category 4 and 5 Filers can file joint returns but Category 3 Filers can only have their information filed by someone with equal or greater interest (measured in value or voting power of the stock of the foreign corporation). b. The person who files must fill out Item E on page 1 and all persons identified in this section must attach a statement to their income tax return that includes the information described in the instructions for Item E. ii. Consolidated Groups: Category 4 Filers do not need to file for a corporation defined in I.R.C. § 1504(d) that files a consolidated return for the tax year. iii. Constructive Ownership: a. A person from either Category 3, 4, or 5 need not file if: (1) The U.S. person does not own a direct interest in the foreign corporation; (2) The U.S. person must furnish the information requested solely because of constructive
section 1.958-2, 1.6038-2(c), or 1.6046-1(i)) from another U.S. person; and (3) The U.S. person through whom the indirect shareholder constructively owns an interest in the foreign corporation files Form 5471 to report the required information. b. A Category 2 Filer need not file if: (1) Immediately after a reportable stock acquisition, three or fewer U.S. persons own 95% or more in value of the outstanding stock
making the acquisition files a return for the acquisition as a Category 3 filer; or (2) The U.S. person(s) for whom the Category 2 filer must file Form 5471 does not directly
must furnish the information solely because
person and the person from whom the stock
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information. c. A Category 4 or 5 Filer need not file if the shareholder: (1) Does not own a direct or indirect interest in the foreign corporation; and (2) Must file Form 5471 solely because of constructive ownership from a nonresident alien. iv. Domestic Corporations: foreign insurance companies that elect to be treated as a domestic corporation (under I.R.C. § 953(d)) and have filed an income tax return need not file Form 5471. B. Examination: 1. Foreign Document Requests (“FDR”): a foreign document request is similar to an information document request (“IDR”) because it requests documents from the recipient. The major difference between the two is that failing to provide documents in response to an FDR can preclude you from offering these documents in future litigation. I.R.C. § 982(a) prohibits any court with jurisdiction over a civil matter from allowing the taxpayer to introduce any foreign document previously requested and not
have the required documents and may not have the ability to
2. Penalty Letters, Notice Letters, and Notices (IRM 20.1.9.3.2 (11- 30-2015)): the delinquent filer (or owner of the foreign company that is delinquent) can expect the following letters/notices from the IRS regarding their failure to file Form 5471: i. CP Notices—Once a penalty is identified by the campus
is processed, a CP notice is generated and sent to the taxpayer: a. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with PRN 623 is generated and sent to the taxpayer. b. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 623 is generated and sent to the taxpayer.
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3. Penalty Assertion: penalties are initially determined on Form 8278. 4. Statute of Limitations: the statute of limitations to audit a Form 5471 is three years from the date of filing. The statute does not begin until the Form 5471 is filed. i. Substantial Compliance may begin the running of the statute of limitations if there is a proper Beard filing. Beard v. Commissioner, 82 T.C. 766 (1984) (which the IRS rejects) held that a return was be valid for statute of limitations purposes if the following is provided: a. possess sufficient information for the IRS to calculate the tax liability; b. be filed as a purported return; c. be an honest and reasonable attempt to comply with the tax laws; and d. be signed under the penalties of perjury. C. Penalties: 1. Failure to File: failure to file any information required under I.R.C. § 6038(a) will lead to a $10,000 penalty for each annual accounting period regarding which such failure exists. 2. Continuation Penalty: if any failure to furnish information continues for more than 90 days after the IRS has sent notice to the taxpayer there will be a continuation penalty of $10,000 per 30-day period during which such failure continues, not to exceed $50,000. 3. Foreign Tax Credit Reduction: taxpayers that do not provide the information will also be subject to a reduction of available foreign tax credit, which will be diminished by 10%. i. This diminution also has a continuation component; if notice is sent to the taxpayer and the failure continues 90 days or more after such notice, then an additional 5% will be reduced for every 3-month period in which a taxpayer’s failure continues. The limitation for this penalty shall be the greater of $10,000 or the income of the foreign business entity for its annual accounting period to which the failure occurs. 4. Undisclosed Foreign Financial Assets (I.R.C. § 6662(j)): for any underpayment attributable to any undisclosed foreign financial asset understatement, the taxpayer shall be subject to a heightened accuracy-related penalty of 40%.
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i. Undisclosed foreign financial asset is defined as any asset regarding which information had to be provided under I.R.C. §§ 6038, 6038B, 6038D, 6046A, or 6048 but was not so provided. ii. I.R.C. § 6662(j) penalties, unlike I.R.C. § 6038 penalties, give rise to a notice of deficiency and the traditional pre- assessment Appeals forum. International penalties do not give rise to a notice of deficiency and traditionally only involve post-assessment pre-payment Appeals conferences. 5. Defenses: Reasonable cause is a defense for failure to file. This is a facts and circumstances analysis that will focus upon the taxpayer’s ordinary business care and prudence when attempting to file the return (See IRM 20.1.1.3.2(1)(11-21-2017); Flume v. Comm’r, T.C. Memo 2017-21). D. Appeals: 1. Form 5471 penalties have post-assessment pre-payment penalty appeal rights. 2. Form 5471 penalties are also eligible for Accelerated Appeals Consideration (IRM 8.11.5.14.1(12-18-2015)). 3. Once the penalty is assessed, a CP notice will be generated and sent to the taxpayer. The IRS will send either CP 15 or CP 215 to the taxpayer. The CP 15 notice notifies the taxpayer that a penalty has been assessed and explains that, if the taxpayer wishes to appeal the assessment, he or she should submit a written request within 30 days from the date of the notice. The CP 215 notice notifies the taxpayer that, if the taxpayer wishes to appeal the penalty, he or she should send the IRS a written request to appeal within 30 days from the date of the notice. 4. If the taxpayer does not take action on the CP 15 or CP 215 notice, the IRS will send the taxpayer Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, or LT11, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, or Letter 3172, Notice of Federal Tax Lien and Your Rights to a Hearing under IRC 6320. 5. Qualified Offer: tax professionals may want to submit a qualified
7430(g). Qualified offers allow taxpayers to recoup legal and administrative fees for reasonable settlement offers refused by
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the Service; the Service must receive judgment in excess of the settlement offer to not be liable for costs and fees. Qualified
is timely and the taxpayer is not precluded from contesting the liability under IRC §§ 6330(c)(2), 6330(c)(4), or 6320(c). The Service must accept the offer within 90 days or it is deemed
guidance on how the Service sees certain issues. E. Litigation: 1. Pre-payment Forum: To initiate a Tax Court case, the taxpayer (now known as petitioner) will file a petition, designation for place of trial, and a statement with the taxpayer’s identification number, which will accompany a filing fee of $60 (made payable to Clerk, United States Tax Court).
legal theories on why the petitioner should prevail. Any issue not contested in the petition is deemed conceded by
attached and any taxpayer identification numbers (such as social security number) must be redacted. 2. Refund Forum: Refund claims can be brought in the United States Court of Federal Claims and the United States District
must first pay the tax and file a claim for refund from the IRS. Claims for refund must include the grounds on which a refund is claimed and facts to support those grounds, all of which must be sworn to under penalties of perjury. Refund claims are filed using Form 843, Claim for Refund and Request for Abatement.
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IV. Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business A. Preparation of Return: 1. I.R.C. §§ 6038A & 6038C: I.R.C. § 6038A requires domestic corporations with 25% foreign ownership to file information returns and to maintain adequate books and records (the books and records must be sufficient to determine the correct treatment
foreign corporations engaged in trade or business in the U.S. to file information returns and maintain adequate books and records. 2. Who Must File: reporting corporations must file if they engaged in a reportable transaction with a foreign or domestic related
a reportable transaction with the reporting corporation must also file. i. Disregarded Entities: as of 2018, domestic disregarded entities which are wholly-owned by a foreign person must also file Form 5472. The Form 5472s should be submitted with a pro forma Form 1120. Disregarded entities cannot file Form 5472 electronically. ii. Each foreign shareholder is responsible for filing unless they file a consolidated return (discussed below). 3. When and How to File: Form 5472 should be filed on the due date of the corporation’s return and should be attached to the return. 4. Reportable Transactions: reportable transactions are related- party transactions (Treas. Reg. § 1.6038A); transactions will not be a reportable transaction if neither party to the transaction is a U.S. person and the transaction does not generate gross income from or is effectively connected to the U.S. 5. Related Parties: reportable transactions focus upon related parties; parties are related if: i. they are a 25% foreign shareholder of the reporting corporation; ii. they are related to the reporting corporation or a shareholder under I.R.C. §§ 267(b) or 707(b)(1); or
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a. I.R.C. § 267(b): defines the different relationships, ranging from family members to fiduciaries to S- Corporations owned by the same person. b. I.R.C. § 707(b)(1): relationship between a partnership and another partnership, with similar
the partnership. iii. they are related to the reporting corporation under I.R.C. § 482 (which involves two or more organizations, trades, or businesses owned or controlled by the same interests). 6. Record Maintenance Requirement: unlike other foreign information returns, Form 5472 filers are also required to keep adequate books of account or records as required under I.R.C. § 6001, which must be sufficient to establish the correctness of the reporting corporation’s federal income tax liability. 7. Exceptions to Filing: there are several filing exceptions, including: i. There were no reportable transactions of the types listed in Section IV and VI of the form; ii. A U.S. person in control of the foreign related corporation filed Form 5471 for the same tax year. The U.S. person must fill out Schedule M of Form 5471 (this exception does not apply to disregarded entities); iii. The related corporation qualifies as a foreign sales corporation and files a Form 1120FSC (also does not apply to foreign owned disregarded entities); iv. Foreign corporation without a permanent establishment in the U.S. under an applicable income tax treaty and it files a Form 8833; v. Foreign corporation whose gross income is exempt under I.R.C. § 883 and it satisfies the filing requirements found in I.R.C. §§ 883 and 887; vi. Both the corporation and related party are not U.S. persons, under I.R.C. § 7701(a)(30), and: a. Will not generate gross income from sources within the U.S. or income effectively connected with the conduct of trade or business within the U.S.; or, b. Will not generate any expenses, losses, or other deductions that is allocable or apportionable to such income;
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vii. If a reporting corporation is a member of an affiliated group and they file a consolidated income tax return. If so, the parent company must attach a schedule stating the members filing the consolidated return to the Form 5472. B. Examination: 1. Foreign Document Requests (“FDR”): a foreign document request is similar to an information document request (“IDR”) because it requests documents from the recipient. The major difference between the two is that failing to provide documents in response to an FDR can preclude you from offering these documents in future litigation. I.R.C. § 982(a) prohibits any court with jurisdiction over a civil matter from allowing the taxpayer to introduce any foreign document previously requested and not
have the required documents and may not be able to obtain such documents. 2. Penalty Letters, Notice Letters, and Notices (IRM 20.1.9.5.2 (11- 30-2015)): the delinquent filer (or owner of the foreign company that is delinquent) can expect the following letters/notices from the IRS regarding their failure to file Form 5472: i. CP Notices—Once a penalty is identified by the campus
is processed, a CP notice is generated and sent to the foreign corporation as follows: a. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 625 is generated and sent to the taxpayer. 3. Penalty Assertion: penalties are initially determined on Form 8278. 4. Statute of Limitations: the statute of limitations to audit a Form 5472 is three years from the date of filing. The statute does not begin until the Form 5472 is filed. i. Substantial Compliance may begin the running of the statute of limitations if there is a proper Beard filing. Beard v. Commissioner, 82 T.C. 766 (1984) (which the IRS rejects) held that a return was be valid for statute of limitations purposes if the following is provided: a. possess sufficient information for the IRS to calculate the tax liability; b. be filed as a purported return;
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c. be an honest and reasonable attempt to comply with the tax laws; and d. be signed under the penalties of perjury. ii. Substantial Compliance Factors: the IRS has provided guidance on what constitutes “substantially complete” and “substantial compliance.” Whether the under or over- reporting of an item will make that return substantially incomplete depends upon an analysis of these factors: a. the magnitude
the under/over-reporting compared to the actual total amount of the transaction; b. whether there are other correctly reported reportable transactions, other than the erroneously reported transaction, with the same related party; c. the magnitude of the erroneous reported transaction in relation to the other reportable transactions as correctly reported; d. the magnitude of the erroneous reported transaction in relation to the reporting corporation’s volume of business and overall financial situation; e. the significance of the erroneously reported transaction regarding the reporting corporation’s business; f. whether the erroneously reported transaction occurs in a significant ongoing transactional relationship with the related party; and g. whether the erroneously reported transaction is reflected in the determination and computation of the reporting corporation’s taxable income. 5. Recharacterization: aside from the penalties, I.R.C. § 6038A(e)(3) disallows the taxpayer’s deductions for a failure to provide adequate books and records. Taxpayers who do not properly or timely file their Form 5472 can be subjected to not
their deductions disallowed. 6. Attribution: Forms 5471 and 5472, unlike Forms 3520 and 3520- A, also apply the attribution rules found in I.R.C. § 318. C. Penalties: Failure to file Form 5472 will result in a penalty of $25,000.00 per year (was $10,000.00 prior to 2018). There is also a continuation penalty, in which an additional $25,000.00 penalty will be
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assessed for each 30-day period if the taxpayer fails to rectify the failure to file within 90 days of being notified by the Service. Unlike other continuation penalties there is no limit to the continuation penalty for a failure to file Form 5472. 1. Failure to maintain adequate records: a failure to maintain adequate records can also subject the taxpayer to a $25,000 penalty and a continuation penalty. These penalties can run concurrently and do not have a maximum. 2. All penalties determined must be approved by a manager prior to being assessed (I.R.C. § 6751(b)). Every taxpayer should ask for the 6751(b) memo and should do a Freedom of Information Act (FOIA) request to determine if the memo exists. 3. Defenses: like the other failure to file penalties for international information returns, reasonable cause will eliminate the penalty. Reasonable cause will only apply to the period for which there was proper reasonable cause (so if there is only cause for one month out of a three-month delinquency then the taxpayer still must pay a penalty on the other two months). Taxpayer must submit the reasonable cause statement under the penalty of perjury and must make an affirmative showing of every fact alleged to establish reasonable cause. i. Small Corporation Exception: small corporations, being those with $20,000,000 or less in gross receipts, must still file a Form 5472 but there shall be no penalty for a failure to maintain adequate books and records and reasonable cause should be applied liberally to small corporations (Treas. Reg. §§ 1.6038A-1(h) & 1.6038A-4(b)(2)(ii)). To satisfy the small corporation exception, the taxpayer must show: a. It is a small corporation (gross receipts less than $20 million); b. It did not know of the duty to file Form 5472 or to maintain adequate books and records; c. Has limited presence and contact with the U.S.; and d. Promptly and fully complies with all IRS requests to file Form 5472 or to furnish books and records. ii. A reasonable cause decision tree can be found as Exhibit 21.8.2-2 of the I.R.M.
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iii. Although a facts and circumstances analysis, the IRS has provided certain situations that may indicate reasonable cause (Treas. Reg. § 1.6038A-4(b)(2)(iii): a. an honest misunderstanding of fact or law that is reasonable in light of the experience and knowledge
b. Isolated computational or transcriptional errors; c. Reliance on an information return, professional advice
however, constitutes reasonable cause and good faith if, under all the circumstances, the reliance was reasonable; d. if the taxpayer has a reasonable belief that it is not
e. for not treating a foreign corporation as a related party where the foreign corporation is a related party solely by reason of § 1.6038A-1(d)(3) (under the principles of section 482), and the taxpayer had a reasonable belief that its relationship with the foreign corporation did not meet the standards for related parties under section 482. iv. Other Defenses: there are other exceptions and defenses which can be utilized, including: a. Reasonable Estimate: if an amount reported on the Form 5472 is within 25% then it is considered a reasonable estimate (75% to 125% of actual amount). b. Small Amounts: if the amount to be reported does not exceed $50,000 then the reporting corporation should state so on the Form 5472 itself. c. First Time Penalty Abatement I.R.M. 20.1.9.3.5(3)(07-08-2015): taxpayer may be eligible for a first time penalty abatement, which is administrative relief, if a related abatement on a Form 1120 was filed with the Form 5472 if the taxpayer had no similar penalties for the three years prior. D. Appeals: 1. Form 5472 penalties have post-assessment pre-payment penalty appeal rights.
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2. Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a BMF CP 215, Notice of Penalty Charge, is generated and sent to the taxpayer. 3. If the taxpayer does not take action on the CP 215 notice, the IRS will send the taxpayer Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, or LT11, Final Notice of Intent to Levy and Notice of Your Right to a Hearing, or Letter 3172, Notice of Federal Tax Lien and Your Rights to a Hearing under IRC 6320. 4. Qualified Offer: tax professionals may want to submit a qualified
7430(g). Qualified offers allow taxpayers to recoup legal and administrative fees for reasonable settlement offers refused by the Service; the Service must receive judgment in excess of the settlement offer to not be liable for costs and fees. Qualified
is timely and the taxpayer is not precluded from contesting the liability under IRC §§ 6330(c)(2), 6330(c)(4), or 6320(c). The Service must accept the offer within 90 days or it is deemed
guidance on how the Service sees certain issues. E. Litigation: 1. Pre-payment Forum: To initiate a Tax Court case, the taxpayer (now known as petitioner) will file a petition, designation for place of trial, and a statement with the taxpayer’s identification number, which will accompany a filing fee of $60 (made payable to Clerk, United States Tax Court). i. Petitions must include, among other items, facts and legal theories on why the petitioner should prevail. Any issue not contested in the petition is deemed conceded by
attached and any taxpayer identification numbers (such as social security number) must be redacted. 2. Refund Forum: Refund claims can be brought in the United States Court of Federal Claims and the United States District
must first pay the tax and file a claim for refund from the IRS.
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Claims for refund must include the grounds on which a refund is claimed and facts to support those grounds, all of which must be sworn to under penalties of perjury. Refund claims are filed using Form 843, Claim for Refund and Request for Abatement.
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FBAR ISSUES AND UPDATES
I. Latest developments relating to foreign asset reporting penalties A. FBAR (Foreign Bank and Financial Accounts) 1. 31 U.S.C. § 5314 authorizes the Secretary to require U.S. residents, citizens, and persons doing business in the U.S. to keep records and/or file reports if they transact or maintain a relation with a foreign financial agency. 2. Who Must Report? i. Individuals must file a Report of Foreign Bank and Financial Accounts if they have: a. Financial interest in, signature authority or other authority over one or more accounts, such as bank accounts, brokerage accounts and mutual funds, in a foreign country, and; b. The aggregate value of all foreign financial accounts exceeds $10,000.00 at any time during the calendar year. c. A U.S. person is a citizen or resident of the United States or any domestic legal entity such as a partnership, corporation, limited liability company, estate, or trust. 3. How to Report i. Those required to report their foreign accounts should file the FBAR electronically using the BSA E-Filing System. The FBAR is due April 15th. Taxpayers should not file the FBAR with their federal, individual, business, trust, or estate tax returns. ii. Jointly owned accounts a. If two people jointly own a foreign financial account, or if several people each own a partial interest in an account, then each person has a financial interest in that account, and each person must report the entire value of the account on an FBAR. iii. Exception for Spouses
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a. Spouses do not need to file separate FBARs if they complete ang sign Form 114a, Record of Authorization to Electronically File FBARs and: a. All reportable financial accounts of the non-filing spouse are jointly owned with the filing spouse, and b. The filing spouse reports all accounts jointly-owned with the non-filing spouse on a timely-filed FBAR. c. Otherwise, both spouses must file separate FBARs, and each spouse must report the entire value of the jointly-owned accounts. d. The e-filing system will not allow both spouses’ signatures on the same electronic form—only the filing spouse signs in the system. Taxpayers do not submit Form 114a with the FBAR; they keep it for their records. iv. Children a. Generally, a child is responsible for filing their own
any reason, such as age, the child’s parent or guardian must file it for them. IF the child can’t sign their FBAR, a parent or guardian must sign it. 4. Accounts not reported on FBAR i. Individuals don’t need to report foreign financial accounts held in individual retirement accounts (described in I.R.C. § 408 and 408A) and tax-qualified retirement plans (described in §401(a), 403(a), or 403(b)). 5. How to Report the Value of Foreign Financial Accounts i. FBAR filers need to reasonably figure and report the greatest value of currency or non-monetary assets in their accounts during the calendar year. They may rely on their periodic account statements if the statements fairly show the greatest account value during the year. ii. Filers figure the greatest value in the currency of the
value into U.S. dollars using the Treasury Bureau of the Fiscal service exchange rate on the last day of the calendar
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available, they may use another valid exchange rate and give the source of the rate. a. Example: The value of an account located in Japan may be shown on the account statements in Japanese yen. Filers would figure the greatest value
dollars. 6. Comparison of Form 8938 and FBAR requirements i. In addition to the annual FBAR requirements above, certain U.S. taxpayers must also file Form 8938, Statement
FBAR, too. Unlike the FBAR, taxpayers file Form 8938 with their federal income tax returns. ii. Depending on a taxpayer’s situation, they may need to file Form 8938 or the FBAR, or both and may need to report certain foreign accounts on both forms. Taxpayers can find a comparison of Form 8938 and FBAR requirements
7. Extended due date for filing the FBAR i. Those who do not meet the April 15th due date must file by October 15th, the automatically extended due date for the FBAR. Such individuals do not need to request the
by the extended due date, they should file as a complete a report as possible by October 15 and later amend the report when they have more information. 8. Amending an FBAR i. Those who need to correct a filed FBAR must file a new FBAR with the corrected information and mark the new FBAR as “Amended.” Fill it out completely, even fields that don’t need correction. They can e-file the amended FBAR using the BSA E-Filing system or paper-file it with an e-filing exemption from FinCEN. ii. If they e-file the amended FBAR, check the “Amended” box on FinCEN Form 114. The Prior Report BSA Identifier field will activate and they’ll enter the BSA ID
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number from the original FBAR. If they e-filed the
the BSA ID number in the acknowledgment email FinCEN sent to them. If they can’t locate the BSA ID number or if they paper-filed the original FBAR, they need to enter all zeros int eh Prior Report BSA Identified field. 9. Filing Late FBARs i. If a U.S. person learns they should have filed an FBAR for a previous year, they should electronically file the late FBAR as soon as possible. The BSA E-Filing System allows them to enter the calendar year they’re reporting, including past years. It also offers them an option to explain the reason for the late filing or show if it’s part of an IRS compliance program. 10. Penalties for Failure to File an FBAR i. Those who don’t file an FBAR when required may be subject to significant civil and criminal penalties. Criminal violations of FBAR rules can result in a fine and/or five years in prison. The U.S. government adjusts the penalty amounts annually for inflation. ii. The IRS will not penalize those who properly report a foreign financial account on a late-filed FBAR, and the IRS finds they have reasonable cause for late filing. 11. Recordkeeping i. Those who must file an FBAR must keep records of accounts for generally give years from the FBAR due date, including: a. Name on each account b. Account number or other designation c. Name and address of the foreign bank or other person who keeps the account d. Type of account, and e. Greatest value of each account during the reporting period. ii. They should also keep copies of filed FBARs. iii. Officers or employees who file an FBAR to report signature authority over an employer’s foreign financial
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account don’t need to personally keep records on their employer’s accounts. II. Practical tips for representing taxpayers contesting the imposition of FBAR penalties A. In United States v. Horowitz, 361 F. Supp. 3d 511, 511-29 (D. Md. 2019) the court relied on Hudson v. United States ruling to determine whether the FBAR penalty is remedial or penal in nature. The Hudson framework entails (1) asking whether the legislature expressed a preference for labeling the penalizing mechanism as civil or penal, and (2) applying the seven Kennedy factors to determine “ ‘whether the scheme was so punitive either in purpose or effect’ as it ‘transfor[m] what was clearly intended as a civil remedy into a criminal penalty.’” Hudson, 522 U.S. at 99-100 (citation omitted). The Kennedy factors include: 1. “[w]hether the sanction involves an affirmative disability or restraint”; 2. ‘whether it has historically been regarded as a punishment”; 3. “whether it comes into play only on a finding of scienter”; 4. ‘whether its operation will promote the traditional aims of punishment—retribution and deterrence”; 5. ‘whether the behavior to which is applies is already a crime”; 6. “whether an alternative purpose to which it may rationally be connected is assignable for it’’; 7. “whether it appears excessive in relation to the alternative purpose assigned.” 8. None of the aforementioned factors have been deemed
that the FBAR Penalty is remedial in nature. B. In United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354 (M.D.
1. The initial complaint filed against taxpayer was not a legal nullity; 2. The amended complaint related back to initial complaint; 3. The estate lacked capacity to be sued; 4. The taxpayer's son was a proper party to the suit; and
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5. The civil penalty was remedial rather than penal in nature, and therefore, action survived taxpayer's death. United States v. Estate of Schoenfeld, 344 F. Supp. 3d 1354 (M.D. Fla. 2018) C. Colliott and Progeny: last year, in United States v. Colliott, 2018 WL 227131 (W.D. Tex. 2018), the district court held that 31 CFR § 1010.820 capped the FBAR penalty at $100,000. This issue has been brought before the courts several times over the last year: 1. United States v. Wahdan, 325 F. Supp. 3d 1136 (D. Colo. 2018): agreed with the determination and rationale set forth in Colliott. 2. United States v. Garrity, 2019 WL 1004584 (D. Conn. 2019): disagreed with Colliott, stating that Congress abrogated regulation by increasing penalty amount by statute in 2004. 3. United States v. Horowitz, 2019 WL 265107 (D. Md. 2019): “The IRS, however, warned that, ‘the statute [i.e., the Jobs Creation Act] is self-executing and the new penalty ceilings apply.’” Id. at *3. 4. Kimble v. United States, 141 Fed.Cl. 373 (Ct. Cl. 2018): reasoning of Colliott and Wahdan violate Barseback Kraft AB v. United States, 121 F.3d 1475 (Fed. Cir. 1997), where regulations regarding uranium pricing were insufficient to overrule a subsequent statute. 5. United States v. Shinday, 2018 WL 6330424 (C.D. Ca. 2018): Colliott and Wahdan only indicated that penalty greater than $100,000 for a tax year was unwarranted. D. In United States v. Boyd, 2019 WL 1976472 (C.D. Cal. April 23, 2019), the court held that FBAR penalties, even non-willful penalties, apply per account. The court’s opinion was based upon Congress’s use of the singular in 31 U.S.C. §5321(a)(5)(B)(ii), (C), & (D): “the balance in the account.” Indicating that the focus was upon the specific balance for a specific account. Thus, the penalty applies to each account.
Not to be used or cited as precedent.
International Enforcement– What’s Old, What’s New and What We Can Expect 35th Annual Tax Controversy Institute October 22, 2019
Carolyn Schenck Assistant Division Counsel, SB/SE
(651) 361-1817 carolyn.a.schenck@irscounsel.treas.gov
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citizenship at birth and tax implications of relinquishing U.S. citizenship
procedures, common issues taxpayers may encounter, and how submissions will be handled
1
Not to be used or cited as precedent.
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Constitution provides that “all persons born or naturalized in the United States, and subject to the jurisdiction thereof, are citizens of the United States…”
parents acquires U.S. citizenship at birth if the statutory conditions prescribed by Congress are
Act, the Nationality Act of 1940 and earlier statutes.
Not to be used or cited as precedent.
2
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John’s parents were travelling on vacation to the United States. John’s mother went into premature labor and gave birth to John in Orlando, Florida. After his mother recovered in an Orlando hospital for a week, John’s parents returned with him to their country of origin. John never received a Social Security Number or U.S. passport. John was completely unaware of his U.S. citizenship until a banker in the country of his residence informed him of his U.S. citizenship by virtue of his birth in the United States.
Not to be used or cited as precedent.
3
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(if income is over specified threshold)
FinCEN Form 114
a specified threshold)
Not to be used or cited as precedent.
4
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citizenship by committing an expatriating act voluntarily and with the intent to relinquish U.S. nationality. See Immigration and Nationality Act § 349 et. seq., 8 USC §1481.
U.S. nationality before a diplomatic or consular officer of the United States in a foreign state, in the manner prescribed by the Secretary of State. See INA § 349(a)(5), 8 USC § 1481(a)(5).
Not to be used or cited as precedent.
5
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taken an oath of renunciation or performed another expatriating act voluntarily and with intent to lose U.S. nationality will be issued a Certificate of Loss of
For more information see
https://travel.state.gov/content/travel/en/legal/travel- legal-considerations/us-citizenship/Renunciation-US- Nationality-Abroad.html
Not to be used or cited as precedent.
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Not to be used or cited as precedent.
7
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Not to be used or cited as precedent.
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citizens who relinquish U.S. nationality
comply with all federal tax reporting requirements in the year of expatriation and for the 5 tax years prior to expatriation to avoid being treated as a “covered expatriate” under IRC § 877A
Not to be used or cited as precedent.
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U.S. Tax Consequences of Expatriating (cont’d)
expatriates” are:
before their expatriation date
resulting from the deemed disposition of their worldwide assets
deferred compensation items, specified tax deferred accounts, and trust distributions
Not to be used or cited as precedent.
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U.S. Tax Consequences of Expatriating (cont’d)
An individual will be treated as a “covered expatriate” under IRC § 877A(g)(1)(A) if any one of the following apply:
exceeds a specified amount adjusted for inflation (for example, $161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019) (“average income tax liability test”),
expatriation date (“net worth test”), or
Form 8854, that the individual is compliant with all U.S. Federal tax obligations for the five tax years preceding the tax year that includes the expatriation date (“certification test”).
Not to be used or cited as precedent.
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U.S. Tax Consequences of Expatriating (cont’d)
individual must file a Form 8854, Initial and Annual Expatriation Statement, with the tax return for the year of expatriation and certify compliance for the prior five tax years
all federal tax returns for the five tax years before the year of expatriation were properly filed, complete, and accurate. For more information, see Expatriation Tax and Instructions for Form 8854 https://www.irs.gov/forms-pubs/about-form-8854
Not to be used or cited as precedent.
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U.S. Tax Consequences of Expatriating (cont’d)
https://www.irs.gov/forms-pubs/about-form-8854
Not to be used or cited as precedent.
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The relief procedures provide relief from taxes, interest, and penalties for certain former citizens. The relief procedures provide an alternative means for satisfying the tax compliance certification process for citizens who expatriate after March 18, 2010. If the individuals meet all of the requirements for the relief procedures, the individuals will not be “covered expatriates” under IRC § 877A. The relief procedures also relieve the need for these individuals to pay tax, interest, and penalties associated with non-willful non-compliance for the year of expatriation and the 5 years prior to expatriation.
Not to be used or cited as precedent.
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The relief procedures are posted on IRS.gov at https://www.irs.gov/individuals/international- taxpayers/relief-procedures-for-certain-former-citizens
Not to be used or cited as precedent.
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failures were due to non-willful conduct may use these procedures
negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements of the law
Not to be used or cited as precedent.
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1. Relinquished U.S. citizenship after March 18, 2010 2. Have no filing history as a U.S. citizen or resident 3. Have not exceeded the threshold in IRC § 877(a)(2)(A), related to average annual net income tax for the period of 5 tax years ending before the date of expatriation 4. Have net worth of less than $2,000,000 at the time of expatriation and at the time of making a submission under these procedures 5. Have aggregate total tax liability of $25,000 or less for the 5 years preceding expatriation and the year of expatriation 6. Agree to file federal tax returns for the six years at issue, including all required schedules, and information returns
Not to be used or cited as precedent.
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Relinquished U.S. citizenship after March 18, 2010
See FAQ 6
Not to be used or cited as precedent.
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Return) under the good faith belief that you were not a U.S. citizen does not disqualify you from using these procedures See FAQ 3
Not to be used or cited as precedent.
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annual net income tax liability for the five years preceding the year of expatriation below a specified amount adjusted for inflation (for example, $161,000 for 2016, $162,000 for 2017, $165,000 for 2018, and $168,000 for 2019) (“average income tax liability test”)
tests to determine if a taxpayer is a “covered expatriate” (IRC § 877(a)(2))
exceed the average income tax liability test
Not to be used or cited as precedent.
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submission under the relief procedures
Not to be used or cited as precedent.
21
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Aggregate total tax liability of $25,000 or less for the five years preceding expatriation and the year of expatriation after application of all applicable:
under IRC 911)
Not to be used or cited as precedent.
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the Earned Income Tax Credit – see FAQ 13
threshold
threshold
Not to be used or cited as precedent.
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Not to be used or cited as precedent.
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Not to be used or cited as precedent.
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relevant to computing tax liability for citizens residing abroad
Individuals
taxpayers/foreign-earned-income-exclusion See FAQ 9, hypotheticals 1 and 2
Not to be used or cited as precedent.
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including all required schedules, and information returns
See FAQ 11, items 3 and 4
Not to be used or cited as precedent.
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Submission documents are summarized in FAQ 11 1. Copy of Certificate of Loss of Nationality (CLN) of the United States, Form DS-4083, or copy of court order cancelling a naturalized citizen’s certificate of naturalization 2. Identification 3. Year of expatriation: “Dual-status” return including Form 1040NR with all required information returns 4. Five tax years preceding the tax year of expatriation: Forms 1040 with all required information returns On the first page of every document submitted, write in red ink “Relief for Certain Former Citizens” at the top of the document
Not to be used or cited as precedent.
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Not to be used or cited as precedent.
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submission under these procedures. Leave the boxes blank where an SSN/ITIN is requested
SSN or an ITIN See FAQ 16
Not to be used or cited as precedent.
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89
SSN, otherwise the tax software may not allow you to proceed
placeholder with a thick black marker before you mail your returns to the IRS
Not to be used or cited as precedent.
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90
required
not be considered See FAQ 12
Not to be used or cited as precedent.
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Mail submissions to: Internal Revenue Service 3651 South I-H 35 Mail Stop 4301 AUSC Attn: Relief for Certain Former Citizens Austin, TX 78741 See FAQ 14
Not to be used or cited as precedent.
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automatically subject to IRS audit. But they may be selected for audit under the existing audit selection processes applicable to any U.S. tax return
“placeholder” See FAQs 15 and 17
Not to be used or cited as precedent.
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relief procedures
with FinCEN
before your submission or contemporaneously with your submission, the IRS will not assert FBAR penalties
your submission is selected for examination
may contact FinCEN's Regulatory Helpline at 1-800-949-2732
See FAQ 18
Not to be used or cited as precedent.
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eligibility criteria, the IRS will send you a letter notifying you that your submission was received and complete (Letter 6225)
have not received a response to your submission See FAQs 19 and 20
Not to be used or cited as precedent.
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apply to determine if you are a resident alien or a nonresident alien for tax purposes. See FAQ 21
your world wide income
tax on U.S. source FDAP income and income connected with a U.S. trade or business. Filing a Form 1040NR may be required
Aliens
Not to be used or cited as precedent.
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96
How Long Will These Procedures Be Available?
termination date
procedures
Not to be used or cited as precedent.
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97
procedures and still make a submission, the IRS will process your returns using normal processing procedures. You will be liable for all taxes, penalties, and interest associated with the submission
See FAQ 8
Not to be used or cited as precedent.
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procedures, you may call (267) 466-0020. Leave a message, and an IRS employee will call you back
See FAQ 23
Not to be used or cited as precedent.
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to IRSvideos.gov very soon
https://www.irsvideos.gov/Individual/PayingTaxes/ForeignEar nedIncomeExclusion
https://www.irsvideos.gov/ReportingOfForeignBankAndFinanc ialAccountsOnTheElectronicFBAR/
sion
sTaxpayers_Webinar20160629/
Not to be used or cited as precedent.
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