Tax Court Offshore Penalty Negotiation and Trials

Tax Court Offshore Penalty Negotiation and Trials

Tax Court Offshore Penalty Negotiation Trials & IRS Settlement: The number of Offshore Penalty tax court cases for non-filing or non-compliance with IRS International Information Return Reporting is on the rise.

Tax Court can get become infinitely more complicated when the matter involves international penalties than it does with non-international penalties, due to enforcement procedures and the complexities of a CP15 Notice.

In recent years, the IRS has taken an aggressive approach on matters involving foreign accounts compliance and unreported offshore income.

This also includes reporting foreign trusts and foreign corporations.

Some Taxpayers are able to safely and effectively get into compliance before a penalty is issued by using offshore disclosure (New-OVDP or Streamlined Disclosure).

Other Taxpayers are issued an offshore penalty, but are able to abate or remove the penalty with reasonable cause.

Some Taxpayers are stuck with a heft penalty, and tax court is there only way out.

Tax Court Offshore Penalty Negotiation Trials & Settlement

Tax Court is a great method to litigate a offshore penalties – except of course, for the FBAR which cannot be litigated in tax court.

Also, when a Taxpayer is hit with certain penalties, such as a CP15 Notice, the path to tax court is more complex.

Going to Tax Court is generally a last resort, but since the Taxpayer does not have to pay the penalty before litigation – it is a much more viable option than federal court, which generally requires that the penalty be paid and then a lawsuit for refund.

*Generally, a Taxpayer will first complete a CDP request (Collection Due Process Hearing)  Form 12153 before going to tax court.

Tax Audit

In a common example, a taxpayer is audited for any number of reasons such: income, expenses or penalties. The Taxpayer appears for audit, or hires their attorney to appear.

Oftentimes foreign or offshore assets/income is not the catalyst for the audit, but it is discovered by the agent during the audit. This may be the result of an eggshell or reverse eggshell audit.

At the conclusion of the audit, the taxpayer is penalized (usually in the tens of hundreds of thousands of dollars) for non-compliance with reporting of overseas income, assets, investments or accounts.

As the Taxpayer negotiates with agent and possibly the supervisor or manager, a stalemate is reached — and the Taxpayer receives the notice of deficiency  (90-day letter).

What if the Penalties are Not Abated?

If the penalty is not avoided or abated, and the other pre-litigation methods for reducing the penalty are exhausted, the 90-day letter, which provides very specific timelines for the Taxpayer to respond.

These are hard and fast dates, and if the Taxpayer misses the statute, they may lose the right to take the matter to tax court.

Presuming the matter went through CDP, the Taxpayer may now challenge the CDP finding in Tax Court.

*Tax Court options may be limited depending on the path Taxpayer took to receive the 90-day letter.

IRM 8.11.5 (Internal Revenue Manual)

Here is the introduction of How IRM 8.11.5 works:

Introduction of International Penalties

  1. Overview – International penalties generally have post-assessment pre-payment appeal rights. International penalties include the IRC 6038 series located in Chapter 61 – Subchapter A –Part III of the IRC; and, the IRC 6677 and IRC 6679 series located in Chapter 68 – Subchapter B – Assessable Penalties. The prior IRS policy was to allow a post-assessment and pre-payment appeal for only Chapter 68 International penalties. The IRS expanded post-assessment pre-payment Appeals consideration to Chapter 61 International penalties in 2010.


    FBAR penalties are not considered International penalties. See IRM 4.26.16, Report of Foreign Bank and Financial Accounts (FBAR), IRM 4.26.17, Report of Foreign Bank and Financial Accounts (FBAR) Procedures, and IRM 8.11.6, Penalties Worked in Appeals, FBAR, for additional information.

  2. Purpose – This IRM section provides procedural guidance for post-assessed pre-payment International penalties in Appeals.


    Most International Penalties are not subject to deficiency procedures and must be assessed before coming to Appeals. See IRM Exhibit 20.1.9-4, International Penalties Subject to or Not Subject to Deficiency Procedures, for exceptions.

  3. The most commonly appealed International penalties include:
    • IRC 6038(b) – U.S. person with interest in: foreign corporation (FC), foreign partnership (FP), and FC or FP with foreign disregarded entity. Penalty for failure to furnish information. Form 5471, Form 8865. See IRM for guidance.
    • IRC 6038A(d)– Information reporting with respect to 25 percent foreign owned U.S. corporations. Form 5472. See IRM for guidance.
    • IRC 6038C (c)– Information reporting with respect to foreign corporations engaged in U.S. Business. Form 5472. See IRM for guidance.
    • IRC 6038D(d) – Failure to provide information with respect to foreign financial assets. Form 8938. See IRM for FATCA guidance.
    • IRC 6677(a) – U.S. person who creates a foreign trust, transfers property to a foreign trust or receives a distribution from a foreign trust. Form 3520. See IRM for guidance.
    • IRC 6677(b) – U.S. owner of a foreign trust. Form 3520-A. See IRM for guidance.

90-Day Letter – Statutory Notice of Deficiency

With the 90-day letter, the IRS has made the determination that the taxpayer owes tax, penalties and/or interest.

If Taxpayer resides overseas, they generally receive an automatic extension to 150-days to respond, instead of 90-days.

26 U.S.C. 6212

(a)In general

If the Secretary determines that there is a deficiency in respect of any tax imposed by subtitles A or B or chapter 41, 42, 43, or 44 he is authorized to send notice of such deficiency to the taxpayer by certified mail or registered mail. Such notice shall include a notice to the taxpayer of the taxpayer’s right to contact a local office of the taxpayer advocate and the location and phone number of the appropriate office.

How to Respond

The Taxpayer has now received the IRS notice of deficiency.

From the IRS’ perspective, the Taxpayer now owes a tax liability and/or penalty and interest. And, the IRS is only providing a limited amount of time to respond.

What is Tax Court?

Tax court can be a great option for taxpayers.

It allows taxpayers to fight the dispute, before a judge with extensive tax knowledge – without paying the debt first.

While interest will continue to accrue (if the deficiency is confirmed), Taxpayer will have a chance to prove their case to the IRS.

Do NOT Miss this Deadline

The 90-day deadline is a hard and fast rule. If the deadline is missed, it may result in having blown the statute with no chance of going to tax court – although some exceptions may apply.

Avoid Penalties with IRS Offshore Disclosure

If you have unreported foreign accounts, assets, investments or income, and are not currently under audit — you may qualify for offshore disclosure.

The IRS Offshore various voluntary disclosure or “tax amnesty” programs.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

We are the “go-to” firm for other Attorneys, CPAs, Enrolled Agents, Accountants, and Financial Professionals across the globe. Our attorneys have worked with thousands of clients on offshore disclosure matters, including FATCA & FBAR.

Each case is led by a Board-Certified Tax Law Specialist with 20 years of experience, and the entire matter (tax and legal) is handled by our team, in-house.

*Please beware of copycat tax and law firms misleading the public about their credentials and experience.

Less than 1% of Tax Attorneys Nationwide Are Certified Specialists

Sean M. Golding is one of less than 350 Attorneys (out of more than 200,000 practicing California Attorneys) to earn the Certified Tax Law Specialist credential. The credential is awarded to less than 1% of Attorneys.

Recent Golding & Golding Case Highlights

  • We represented a client in an 8-figure disclosure that spanned 7 countries.
  • We represented a high-net-worth client to facilitate a complex expatriation with offshore disclosure.
  • We represented an overseas family with bringing multiple businesses & personal investments into U.S. tax and offshore compliance.
  • We took over a case from a small firm that unsuccessfully submitted multiple clients to IRS Offshore Disclosure.
  • We successfully completed several recent disclosures for clients with assets ranging from $50,000 – $7,000,000+.

How to Hire Experienced Offshore Counsel

Generally, experienced attorneys in this field will have the following credentials/experience:

  • 20-years experience as a practicing attorney
  • Extensive litigation, high-stakes audit and trial experience
  • Board Certified Tax Law Specialist credential
  • Master’s of Tax Law (LL.M.)
  • Dually Licensed as an EA (Enrolled Agent) or CPA

Interested in Learning More about Golding & Golding?

No matter where in the world you reside, our international tax team can get you IRS offshore compliant. 

Golding & Golding specializes in FBAR and FATCA. Contact our firm today for assistance with getting compliant.