Thursday, March 4, 2021

NATIONAL TAXPAYER ADVOCATE: IRS ASSESSMENT OF SOME INTERNATIONAL INFORMATION RETURN PENALTIES MAY BE ILLEGAL

It has been a year since Erin Collins’ appointment as Nina Olsen’s replacement as the National Taxpayer Advocate. The NTA reports directly to the Commissioner and reports to Congress on areas of the tax law that impose significant burdens on taxpayers or the IRS, including recommending potential legislative changes.

In taking the position as NTA, Ms. Collins returned from retirement after a long and distinguished career which started with the IRS Office of Chief Counsel and included the directorship of KPMG’s Tax Controversy Services practice for the Western area.

In her second Annual Report to Congress, Ms. Collins has identified several issues as The Most Serious Problems Encountered by Taxpayers.  Number 8 is titled,

 The IRS’s Assessment of International Penalties Under IRC §§ 6038 and 6038A Is Not Supported by Statute, and Systemic Assessments Burden Both Taxpayers and the IRS.

IRC section 6038 is of course the legislative authorization inter. alia., for IRS Form No. 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, one of the most challenging and time-intensive IRS forms for any practitioner/preparer with clients holding an interest in an offshore corporation.

In describing the problem, the Report does not mince words:

The IRS’s treatment of IRC §§ 6038 and 6038A foreign information reporting penalties as systemically assessable is legally unsupportable, administratively problematic, and imposes costs, delays, and stress for taxpayers. Because the penalties are immediately assessed, taxpayers’ only recourse is to rely on IRS discretion and request a reasonable cause abatement of the penalties or pay them and seek a refund in federal court.

You can find the executive summary of this issue here. You can find the full report on this issue here.

IRC §§ 6038 and 6038A impose harsh penalties for failure to file certain required international information returns.

The NTA argues the IRS’s treatment of the penalties as summarily assessable is burdensome for taxpayers. She argues that there is nothing in the Code or case law to support this treatment.

The National Taxpayer Advocate recommends that the IRS stop erroneously assessing Chapter 61 (information and returns) penalties, including the IRC §§ 6038 and 6038A penalties, and that Congress expand deficiency procedures to cover Chapter 61, including the IRC §§ 6038 and 6038A penalties.

In other words, she recommends that taxpayers who are confronted by the IRS with non-compliance issues regarding some foreign information reporting penalties should be allowed to receive a statutory notice of deficiency, have the right to meet with Appeals before assessment,  and ultimately litigate these issues in the United States Tax Court in pre-assessment status.

The NTA’s full report on this issue is worth reading. Her proposed solution to the problem of having to challenge international reporting and related issues in two forums is a logical one: permit the taxpayer to resolve the problem in a single Tax Court proceeding.