- 1 Did You Receive a Foreign Form Penalty Notice from the IRS?
- 2 2023 Update re: Covid
- 3 What are Automatically Assessed Penalties?
- 4 With Penalty Abatement, Timing is Everything
- 5 Abating the Penalties is About Strategy
- 6 Late Filing Penalties May be Reduced or Avoided
- 7 Current Year vs Prior Year Non-Compliance
- 8 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
- 9 Need Help Finding an Experienced Offshore Tax Attorney?
- 10 Golding & Golding: About Our International Tax Law Firm
Did You Receive a Foreign Form Penalty Notice from the IRS?
*A 2023 update to our prior article.
In recent years, the Internal Revenue Service has significantly increased enforcement for non-compliance with foreign accounts, assets, and investment reporting. Each year, US taxpayers are required to report their foreign accounts, assets, investments, and income on a myriad of different international information reporting forms, such as:
When a taxpayer does not properly file these forms timely, they can become subject to IRS fines and penalties — and these fines and penalties may far exceed the violation. For example, a taxpayer may be penalized hundreds of thousands of dollars simply for failing to report a gift from a foreign person — even if there is no unreported income and that gift is from their sweet grandma who is a non-resident alien living overseas.
What happens when a taxpayer receives a foreign late filing notice and how to go about abating penalties?
2023 Update re: Covid
Previously, the IRS has developed procedures to automatically waive penalties for missed international reporting forms. It was referred to as the Delinquent International Information Return Submission Procedures (DIIRSP). However, in 2020, the Internal Revenue Service eliminated the DIIRSP automatic penalty waiver. Instead, the IRS determined that taxpayers may be able to have penalties abated for forms that were not filed, such as Form 3520, but it was no longer ‘guaranteed.’ Then, with COVID hitting — and most officers and agents working from home — the stacks of late-filed forms piled up on the Agents’ desks. Then, when the IRS started playing catch up, it seemed instead of reviewing and evaluating Taxpayer Reasonable Cause statements, the agents started issuing CP15 late filing penalty notices left and right — which is why this issue has become a bigger problem now than it has been in years past.
What are Automatically Assessed Penalties?
The international information reporting enforcement rules are different than other types of penalty enforcement by the IRS. Oftentimes, taxpayers are automatically assessed penalties by way of receiving a CP15 notice — in which the penalty has already been assessed, and now the taxpayer has to work to get that notice of penalty removed – instead of going through typical deficiency procedures.
Although some relief was provided by the tax court in the recent case of Farhy — in which the Tax Court determined that these types of assessed penalties involving Form 5471 are invalid — the IRS did subsequently file a Notice of Appeal, so it would appear they will attempt to have this decision reversed.
With Penalty Abatement, Timing is Everything
The initial response to a foreign late filing notice on a form CP15 or similar is time-sensitive. In other words, if the taxpayer is going to file a formal protest, they typically have 30 days from the date of the letter to do so. If they do not file the protest timely, then they may have other procedures available to them, but they will miss out on the initial attempt to reduce the penalty without having to go through the appeal or Collection Due Process Hearing. Before submitting any documents to the IRS, taxpayers should consider their strategies so they have a good plan of attack on how they will respond in case their initial protest is rejected.
Abating the Penalties is About Strategy
Typically (but not always) taxpayers may benefit by being proactive and seeking to have penalties waived by submitting to one of the offshore amnesty programs such as the streamlined procedures, delinquency procedures, or by making a reasonable cause submission. Unfortunately, this is not always possible, because sometimes taxpayers are not aware of the ramifications of filing naked late forms or incomplete reasonable cause statements (usually through the CPA or Attorney who realizes they missed the form initially) which more often than not results in a penalty and then they have to play defense.
It is important to note that not every strategy works best for every taxpayer, which is why it is important to assess the potential outcomes before making any submission to the IRS.
Late Filing Penalties May be Reduced or Avoided
For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist that specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
Need Help Finding an Experienced Offshore Tax Attorney?
When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.
Contact our firm today for assistance.