Tuesday, August 28, 2012

Stacking Up Penalties Is Nothing New For The IRS

A reader posted the following on another web site asking for my input, my response is below his post: 

IRC code 6677 title 26

Published on August 28, 2012 by mach73 in Issues regarding US persons abroad.

“Hoping Mr. Mopsick will chime in on this, but it seems every time I read something and begin to understand it, it either changes or I cannot find the text for clarification.”

“My understanding of the Internal Revenue Code 6677, specifically title 26, was that the IRS could not penalize you for more than the account was worth (for failure to file paperwork). In other words, if the gross reportable amount of an account was 1000 dollars, the penalty would be 10k, or 35% of 1000, but in no case would said penalty exceed 1000 ( in this case).”

“It seems that an individual on one of the tax forms has been penalized 10k for a 1000 dollar account. Now…this individual does go on to mention that, when confirmed he did send a reasonable cause letter for his late filing of a 3520 form, the IRS agent told him on the phone to ignore the fine.”

“I have re-read the code…but find myself more confused than before as i cannot find the language that says ‘at no time shall the penalty exceed the gross reportable amount’….and it is driving me crazy because i DO remember reading that.”

“If this is not the case…does it not seem that the punishment does not fit the crime if the IRS is able to hand out 10k penalties for accounts with a reportable amount of 1, 100, or even 1000 dollars??”

Response from 30 Year IRS Vet:

@Mach73 your reading of Internal Revenue Code section 6677 is absolutely correct. This is the Code section which authorized the IRS to generate form 3520 pertaining to foreign trusts.  It provides for a 35% penalty of the gross reportable amount but the very last sentence of paragraph 6677(a) says, “in no event shall the penalty under this subsection  [6677(a)] with respect to any failure exceed the gross reportable amount.”

But the problem to which you allude really stems from the fact that the IRS may stack up penalties with respect to the same transaction or set of facts based on multiple other Code sections.  For example, take a look at FAQ number 5 under the OVDI guidelines.  It asks,  “what are some of the civil penalties that might apply if I don’t come in under voluntary disclosure and the IRS examines me? How do they work?”  The answer fills a whole column on the next page where we learn that a person is at risk for multiple penalties and there is absolutely nothing in the Internal Revenue Code which prohibits the IRS from stacking up multiple penalties with respect to the same transaction even if the total exceeds the amount under reported or which was not reported at all. 

This whole area is called “Penalty Administration,” and it is a topic which has been addressed by the National Taxpayer Advocate repeatedly over the years. It’s not fair and it makes no sense but it happens over and over again.  A lot of the problem stems from the fact that most IRS notices are computer generated  and once the IRS computer gets cranked up, it is pretty hard to stop it without a lot of effort and personal input.


  1. "IRS notices are computer generated and once the IRS computer gets cranked up, it is pretty hard to stop it without a lot of effort and personal input."

    I suspect most of such generated notices are sent via first class mail, which may take a longer time to arrive overseas than to addresses in the US.

    Also, what about the hague convention? Some countries hague convention stipulations do not allow direct service by mail, requiring submission to a central authority, translation into local language, etc.

  2. @Steven: Why can't all those "good-willed," intelligent, hard-workng folks at IRS resolve computer problems?

  3. http://www.businessinsider.com/rs-goofing-on-foreign-trust-letters-says-aicpa-2012-8
    As if trying to become 'compliant' weren't already about to bankrupt ourselves and our non-US families living outside the US, the infamous 3520 threatening letters start coming - and take expensive US tax and legal specialists to decipher on our behalf. And, as usual, in the complete absence of any US tax owed

    Steven, there have been lots of hot debates amongst those living outside the US about whether we have a hope in hell of getting any fair or ethical treatment from the US and the IRS. And this latest instance re the erroneous 3520 threatening letters just adds to the overwhelming feeling that it doesn't matter what the motivation of the US and IRS is - because the outcome for us is still the same - whether it's deliberate or another of those 'unintended consequences', we're still maimed, in pain, and in danger of losing all that we have of our legally earned and duly post-taxed savings.

    And that's while many are still waiting - on August 31st, for that 'commonsense' approach by the IRS, for 'Canadian grannies' who've been 'sitting tight' - ala US Ambassador Jacobson's advice - after a year of hell.


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