International information return penalties are civil penalties assessed on a United States (U.S.) person for failure to timely file complete and accurate international information returns required by specific Internal Revenue Code (IRC) sections.

Authority for the administration of international information reporting penalties are found in the Internal Revenue Code (IRC) and corresponding Treasury Regulations. Some of the more prominent IRC Sections related to international penalties include:

For a comprehensive list of related IRC Sections and Explanations see Exhibit 20.1.9-1, Quick Reference Guide to International Penalties.

The Director of Business Support, within SB/SE Operations Support, is the director responsible for the servicewide civil penalty program.

Overall responsibility for civil penalty programs is assigned to OSP. OSP is a matrix organization residing in the Business Support (Small Business/Self Employed) Function. OSP is charged with coordinating policy and procedures concerning the administration of civil penalty programs, ensuring consistency with the penalty policy statement, reviewing and analyzing penalty information, researching penalty effectiveness on compliance trends, and determining appropriate action necessary to promote voluntary compliance.

Each IRS organization is responsible for establishing an internal process for managing their procedures based upon these Servicewide policies and may develop additional guidance or reference materials for their specific functional administrative needs. However, such reference material must receive approval from OSP prior to distribution and must remain consistent with the policies and general procedural requirements set forth in this IRM, Policy Statement 20-1 (e.g., Penalty Policy Statement) in IRM 1.2.1.12.1, and any other guidance relating to civil penalties.

All employees should keep the following objectives in mind when handling each penalty case:

In 2014, the IRS adopted a Taxpayer Bill of Rights that outlines fundamental rights of every taxpayer (see Pub 1 and IRC 7803(a)(3)). It is imperative that all penalty considerations take place within the framework of those rights.

Every function in the IRS has a role in proper penalty administration. It is essential that each function conduct its operations with an emphasis on promoting voluntary compliance. Appropriate reviews should be conducted to ensure consistency with the penalty policy statement (Policy Statement 20-1) and philosophy.

To promote the goal of consistency and fairness, OSP will review semi-annually a sample of penalty assessments, provided by SB/SE Research. See IRM 20.3.1, Civil Penalty Accuracy Review Process. The report of findings is shared with the Director, Business Support, the CFO, and other leadership as needed. The completed report is uploaded to an enterprise shared folder. Reports may be prepared when a significant issue develops, such as a correction to programming that affects many taxpayers.

U. S. Person—Unless otherwise indicated, the term "U.S. person" includes citizens or residents of the United States, domestic corporations, domestic partnerships, U.S. estates, or trusts. Trusts are considered U.S. persons only if a court within the U.S. is able to exercise primary supervision over the administration of the trust, and one or more U.S. persons have the authority to control all substantial decisions of the trust. See IRC 7701(a)(30)(E). With the exception of certain penalties, penalties cannot be assessed on married taxpayers jointly, but can be assessed on each person separately.

Assessable Penalties—Penalties listed in this section, unless otherwise noted, are assessable penalties and are not covered by deficiency procedures of IRC 6211 through IRC 6215 (relating to deficiency procedures for income, estate, gift, and certain excise taxes). Assessable penalties are paid upon notice and demand. For assessable penalties, there is no 30-day letter, no agreement form, and no notice requirements prior to assessment. See Exhibit 20.1.9-3, Quick Guide for Reference Numbers to Process International Penalty Assessments, for a list of penalty reference numbers (PRNs). The PRN identifies the applicable IRC section and dictates the explanatory language in the assessment notice.

Statute of Limitations—In general, international information returns are assessed in the same manner as taxes pursuant to IRC 6201(a) and IRC 6671(a). Therefore, pursuant to IRC 6501(a), international information return penalties generally must be assessed within three years after the return was filed. This three-year period of limitations also applies to late-filed international information returns. The following points should be considered:

Reasonable Cause—Reasonable cause applies to most, but not all, penalties. However, taxpayers who conduct business or transactions offshore or in foreign countries have a responsibility to exercise ordinary business care and prudence in determining their filing obligations and other requirements. It is not reasonable or prudent for taxpayers to have no knowledge of, or to solely rely on others for, the tax treatment of international transactions. When considering reasonable cause, examiners must consider the following:

Appeal Rights—Appeals currently provides a prepayment, post assessment appeal process for all international penalties. See IRM 8.11.5, Penalties Worked in Appeals, International Penalties. Also, Appeals provides for an accelerated process for certain international penalties. See IRM 8.11.5.14, International Penalty—Accelerated Appeals Consideration.

Specific Powers of Attorney or Authorizations to Disclose Tax Information—These documents (such as Form 2848 or Form 8821) are required prior to discussing penalty issues with a person other than the person subject to the assessment or required to file the returns.

Information Returns—These documents are generally required to be attached to the related income tax return. In addition, certain information returns must also be separately filed with the IRS campus site identified in the instructions for such form. Any information return required to be attached to the related income tax return is due on the due date of the income tax return, including extensions. Examiners should focus on the requirement to attach the information returns to the related income tax return when determining whether or not the required return has been filed timely. Form 3520, Annual Return to Report Transactions With Foreign Trust and Receipt of Certain Foreign Gifts, and Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner, are processed to Master File (on MFT 68 and 42 respectively) and are not required to be attached to an income tax return.

Field Office Penalty Cases—These cases are not controlled on AIMS. However, penalties assessed are associated with an examination of the taxpayer. Use CFOLZ to identify closed examinations.

Campus Penalty Cases—Examiners are authorized to assess penalties on late filed or incomplete information returns received at the campus. Campus employees can abate penalties asserted by campus personnel.

Form 8278—International penalties are assessed on Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, with a Form 886-A, Explanation of Items, attached to identify what penalty is being assessed, how the penalty was calculated, and why reasonable cause was not applicable.

Penalty Tax Adjustments—Some of the IRC penalty sections include penalty adjustments to income tax or penalties that are based on the amount of income tax. Penalties based on the amount of income tax, income tax deficiency, adjustments to taxable income, tax credits, or income tax computations are return-related penalties and are covered by deficiency procedures. Return-related penalties must be included in an examination report. These penalties are noted in Exhibit 20.1.9-4 for information purposes.

Related Statute for Assessment—IRC 6501(c)(8) extends the statute for assessment on the related income tax return regarding items related to the information required to be reported until 3 years after the information required by IRC 6038, IRC 6038A, IRC 6038B, IRC 6038D, IRC 6046, IRC 6046A, and IRC 6048 is furnished to the Secretary. Examiners should be aware that filing or failing to file information returns may affect the statute for assessment on the related income tax return.

Notice—A notice and demand for payment is a legally due and payable assessment (bill) mailed to the taxpayer.

Notice Letters—Notice letters are pre-assessment requests for returns (or complete and accurate return information) sent by certified mail to the taxpayer.

Common Acronyms

See Exhibit 20.1.9-2, Reference Guide to Forms, for a listing of forms applicable to issues within this IRM.

Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

For international return processing, see IRM 3.21, International Returns and Documents Analysis; IRM 3.22, International Error Resolution; IRM 3.37, International ISRP; and IRM 3.38, International Tax Returns and Documents.

Opening Penalty Case Controls—Penalty issues often arise during the course of a related examination. After examiners determine that a penalty is warranted and there is no preliminary indication of any reasonable cause by the taxpayer, they will complete the appropriate form and gain their manager’s approval to open a penalty case.

Inputting Penalty Case Controls—Different procedures apply depending on whether or not the group has access to ERCS.

After consideration of all facts and circumstances, if it is determined that a penalty applies, examiners will prepare Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and Form 886-A, Explanation of Items, or its equivalent. See IRM 20.1.9.2.2, Penalty Assessment–Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties.

Examiners will advise the taxpayer and/or representative of the proposed penalty, solicit payment, offer a supervisory conference, and provide an explanation of the dispute process. A copy of Form 886-A, (or its equivalent) and other pertinent documents or workpapers should be included with this correspondence.

Closing Penalty Case Controls—Once the case is closed (agreed or unagreed) or if examiners determine that no penalty is warranted.

The examiner will enter the dollar amount of the penalty on Form 8278 and attach Form 886-A, Explanation of Items.

Form 8278 is the assessment document for the civil penalty module. The penalty assessment is posted to the module using the PRN reflected on the Form 8278. The PRNs included in section "H" of Form 8278 are the PRNs referred to in Exhibit 20.1.9-3, Quick Guide for Reference Numbers to Process International Penalty Assessments. When completing the form, remember to take the following actions:

Attach Form 886-A to each Form 8278 and include the following information:

If the taxpayer agrees to the penalty assessment, note this in your workpapers and on Form 886-A. The taxpayer’s signature is not required with respect to these penalties.

Examiners will prepare a separate penalty case file for penalties that contains all relevant information. The "penalty report" consists of Form 8278 and Form 886-A with supporting explanations and computations. For each penalty case file, be sure to do the following:

Prepare the case file as follows:

Include a copy of the following with your workpapers:

Keep the penalty case file separate from any related income tax cases. Identify related penalty cases as "related returns." Keep a copy of the following in the penalty file:

For cases submitted to Appeals, be sure to do the following:

In certain instances, taxpayers will ask for reconsideration of a penalty that has been assessed. It is recommended that the examiner first determine if the taxpayer is in full compliance for all open years (not on extension) with the respective provisions of the law. It is important to ensure that the taxpayer has filed, reported, and maintained all information as provided in the Code. The examiner will then determine whether all the facts were considered when the penalty was assessed (see IRM 20.1.9.2 (15)).

In the case of Wheaton vs. U.S., 888 F. Supp. 622 (D.N.J. 1995), the court held that after a penalty is assessed, the taxpayer must make "…a 'plausible and believable' assertion that, viewing the facts and law most favorably to the government, the government is certain to fail on the merits of its case. In his affidavit, plaintiff simply denies control over the ten foreign corporations as that term is used in IRC 6038. Although in theory this allegation may be plausible and believable, the Court does not deem it sufficient to shift the burden of proof to the government."

Payment of claims on penalties or abatement of penalties must be approved by the organizational unit that assessed the penalties. This includes the following situations:

Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, are used for reporting purposes.

Foreign Corporations—IRC 6038(a) and Treas. Reg. 1.6038-2(a) require a U.S. person to furnish information with respect to certain foreign corporations. The required information may include foreign corporation entity data, stock ownership data, financial statements, and intercompany transactions with related persons. Other provisions that must be considered include the following:

Foreign Partnerships—IRC 6038(a) and Treas. Reg. 1.6038-3(a) require a U.S. person to furnish information with respect to certain foreign partnerships. The required information may include foreign partnership entity data, ownership data, financial statements, and intercompany transactions with related persons. Other provisions that must be considered include the following:

Generally, examiners verify fact of filing of the required information return(s) by inspecting the original income tax return. When examiners believe that neither Form 5471 nor Form 8865 was filed timely, examiners should be sure to secure delinquent forms and attach copies to the related income tax return.

See IRC 6501(c)(8) for statute of limitations on assessment.

Failure to File Form 5471—Reserved.

Failure to File Form 8865—Reserved.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

An initial penalty is asserted by field examiners on Form 8278 using PRN 623 when an examiner determines the taxpayer has not timely filed the required information or has not filed complete and accurate information.

Penalties may be systemically asserted during initial processing of a late-filed Form 5471 that is attached to a late-filed Form 1120 as follows:

Penalties may be systemically asserted during initial processing of a late-filed Form 5471 that is attached to a late-filed Form 1065, U.S. Return of Partnership Income, as follows:

Initial Penalty—The initial penalty is $10,000 per failure to timely file complete and accurate information on each Form 5471 or Form 8865. The penalty is assessed for each form (of each foreign corporation or partnership) for each year that was not timely filed with complete and accurate information.

Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 using PRN 619. Also note the following:

The maximum total failure to file penalty under IRC 6038(b) is $60,000 per Form 5471 or Form 8865 required to be filed per year (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per return).

Initial Penalty—It is recommended that reasonable cause not be considered for any year until all delinquent returns have been filed (see IRM 20.1.9.2 (15)). To show that reasonable cause exists, the person required to report such information must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement. For failure to file Form 5471, the written statement must contain a declaration that it is made under the penalties of perjury. Additional information is available for the following:

Continuation Penalty—There is no reasonable cause exception for this penalty.

Systemically Assessed Initial Penalty With PRN 599 and PRN 712—When this penalty is systemically assessed because Form 5471 is attached to a late filed Form 1120 or Form 1065 return, penalty relief may be considered in conjunction with the failure to file penalty relief granted on the related Form 1120 or Form 1065 return in the following manner:

For reporting and filing requirements including Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, refer to IRM 20.1.9.3.1, Reporting and Filing Requirements.

Failure to File Form 5471—Reserved.

Failure to File Form 8865—Reserved.

The foreign tax credit reduction is limited to the greater of $10,000 or the income of the foreign entity for the applicable accounting period.

Not every controlled foreign entity carries a foreign tax credit to the U.S. income tax return.

Coordination With IRC 6038(b). The amount of the IRC 6038(c) penalty is reduced by the amount of the dollar penalty imposed by IRC 6038(b).

Initial Penalties:

Continuation Penalties—If such failure continues for more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), the amount of the reduction is increased by an additional reduction of 5 percent for each 3-month period, or fraction thereof, during which such failure continues after the expiration of the 90-day period.

Limitation—The amount of the foreign tax credit reduction for each failure to furnish information with respect to a foreign entity may not exceed the greater of the following:

Initial Penalties—It is recommended that reasonable cause not be considered for any year until all delinquent returns have been filed (see IRM 20.1.9.2 (15)). To show that reasonable cause exists, the person required to report such information must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement. For failure to file Form 5471, the written statement must contain a declaration that it is made under the penalties of perjury. Additional information is available for the following:

Continuation Penalty—There is no reasonable cause exception for this penalty.

IRC 6038A(a) and Treas. Reg. 1.6038A-2 generally require a reporting corporation to furnish detailed information regarding each person who is a related party and had any transaction with the reporting corporation during the taxable year, including, but not limited to the following:

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code), is filed with the U.S. income tax return by the due date of that return, including extensions. In addition:

The following exceptions apply to a reporting corporation that is not a foreign-owned U.S. disregarded entity:

Reporting Corporation—For purposes of IRC 6038A, a reporting corporation is a domestic corporation that is 25 percent (or more) foreign-owned. Also, for purposes of the reporting required under section 6038A, a foreign-owned U.S. disregarded entity is treated as a reporting corporation. See Treas. Reg. 301.7701-2(c)(2)(vi).

25 Percent Foreign-Owned—A corporation is 25 percent foreign-owned if it has, at any time during the taxable year, at least one direct or indirect 25 percent foreign shareholder (a foreign person owning at least 25 percent of the total voting power of all classes of stock of such corporation entitled to vote or the total value of all classes of stock of such corporation). The attribution rules of IRC 318 apply, with modifications. See IRC 6038A(c)(5).

Related Party—The term "related party" means:

Foreign Person—For purposes of IRC 6038A, the term "foreign person" generally means:

Failure to File Form 5472—Reserved.

Failure to Maintain Required Documents—Reserved.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a BMF, CP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 625 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-7, Sample CP 215 Notice.

An initial penalty is asserted on Form 8278 using PRN 625 when the examiner determines that a U.S. corporation that is 25 percent foreign-owned during a taxable year has had transaction(s) with a related party and:

Meeting Records Requirements—Generally, a taxpayer meets the requirement by complying with the request for books, records, or documents.

Penalties may be systemically asserted during initial processing of a late-filed Form 5472 that is attached to a late-filed Form 1120 as follows:

Initial Penalty—The initial penalty is $25,000 ($10,000 for tax years beginning before January 1, 2018) for each failure during a taxable year of a reporting corporation to:

Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $25,000 ($10,000 for tax years beginning before January 1, 2018) for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. The continuation penalty is not subject to a maximum limit, it may continue to accrue until the failure is cured. These additional penalties are also asserted on Form 8278 using PRN 701 (prior to January 2013, PRN 619 was used for this continuation penalty). Unlike the initial penalty, if both a reporting failure and a maintenance failure continue with respect to the same related party, separate continuing penalties are asserted (i.e., for a total of $50,000 each month).

Initial Penalty—It is recommended that reasonable cause not be considered for any year until all delinquent returns have been filed (see IRM 20.1.9.2 (15)). To show that reasonable cause exists, the reporting corporation must make an affirmative showing of all the facts alleged as reasonable cause for the failure in a written statement containing a declaration that it was made under the penalties of perjury. See Treas. Reg. 1.6038A-4(b) and note the following:

Continuation Penalty—Generally, if there is reasonable cause for a failure to file or maintain records, the latest date reasonable cause can exist is 90 days from the date of notification of the failure by the Service. See Treas. Reg. 1.6038A-4(b)(1). As such, there is no reasonable cause exception for this penalty.

Systemically Assessed Initial Penalty With PRN 711—When this penalty is systemically asserted because Form 5472 is attached to a late filed Form 1120, penalty relief may be considered in conjunction with the failure to file penalty relief granted on the related Form 1120 return in the following manner:

A taxpayer meets the requirement by providing an executed "Authorization of Agent" within 30 days of request by the Service or, in the case of production of records, by complying with the request for books, records, or documents. The penalty is not imposed if a taxpayer quashes a summons other than on grounds that the records were not maintained as required by IRC 6038A(a).

Statute of Limitations—The running of any period of limitations under IRC 6501 and IRC 6531 may be suspended as provided in IRC 6038A(e)(4)(D).

Failure to Authorize as Agent—Reserved.

Failure to Maintain Required Documents—Reserved.

A penalty is asserted when the examiner determines the following:

The noncompliance penalty follows deficiency procedures and is reflected on the notice of deficiency.

The noncompliance penalty adjustment permits the Service, in its sole discretion, to adjust the amount of deductions and to adjust cost of property with respect to the related party transaction(s) based upon information available to the Service. See IRC 6038A(e)(3).

In exceptional circumstances, the IRS may treat a reporting corporation as authorized to act as agent for a related party for IRS summons purposes in the absence of an actual agency appointment by the foreign related party in circumstances where the absence of an appointment is reasonable. See Treas. Reg. 1.6038A-5(f).

Form 8865 , Transfer of Property to a Foreign Partnership (Under section 6038B), Schedule O and Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, are used for reporting purposes.

Foreign Corporations—IRC 6038B(a) and the regulations issued thereunder require that any U.S. person that transfers property to a foreign corporation (including cash, stock, or securities) in an exchange described in IRC 332, IRC 351, IRC 354, IRC 355, IRC 356, IRC 361, IRC 367(d), or IRC 367(e) to report certain information concerning the transfer:

Exceptions Relating to Certain Transfers to Foreign Corporations—Under the section 6038B regulations a Form 926 is not required to be filed (and therefore the penalty does not apply) in certain situations as follows:

Transfers to Foreign Partnerships—In certain circumstances IRC 6038B(a), IRC 6038B(b) and Treas. Reg. 1.6038B-2 require a U.S. person that transfers property to a foreign partnership in a contribution described in IRC 721 to report certain information concerning the transfer. Note the following:

Description of Transfer to Foreign Corporations—A transfer described in IRC 367(a) occurs if a U.S. person transfers property to a foreign person in connection with an exchange described in IRC 332, IRC 351, IRC 354, IRC 355, IRC 356, or IRC 361, provided an exception in IRC 367(a) is not applicable.

Description of Transfer to Foreign Partnerships—A transfer described in IRC 721 occurs if a U.S. person transfers property to a foreign partnership in exchange for an interest in the partnership.

Statute of Limitations—The HIRE Act amendments to IRC 6501(c)(8), as well as the additional amendments in the Education Jobs and Medicaid Assistance Act, Public Law No. 111-226, make clear that the IRC 6501(c)(8) period applies to the entire return, not just those items associated with the failure to file under IRC 6038B, unless the taxpayer can show reasonable cause. In the case of a taxpayer who demonstrates reasonable cause, only those items related to the failure under IRC 6038B will be subject to the longer period under IRC 6501(c)(8).

Failure to File Form 926—Reserved.

Failure to File Form 8865 Schedule O—Reserved.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

A penalty is asserted on Form 8278 using PRN 676 when the examiner establishes that the taxpayer:

The penalty under IRC 6038B(c) is not subject to deficiency procedures. However, the income tax adjustment for gain recognition is subject to deficiency procedures.

If a U.S. person fails to furnish information in accordance with IRC 6038B regarding some or all of the property transferred and the reasonable cause exception does not apply, then:

The period for limitations on assessment of tax on the transfer of such property does not begin to run until the date on which the U.S. person complies with the reporting requirements.

See examples under Treas. Reg. 1.6038B-2.

It is recommended reasonable cause not be considered until the taxpayer has filed all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6038B(c)(2) provides that no penalty shall apply to any failure if the U.S. person shows such failure is due to reasonable cause and not to willful neglect.

Generally, each reporting corporation as defined in Treas. Reg. 1.6038A-1(c) shall make a separate annual information return on Form 5472 with respect to each related party as described in Treas. Reg. 1.6038A-1(d) with which the reporting corporation has had any "reportable transaction." See Treas. Reg. 1.6038A-2(a)(2) and Treas. Reg. 1.6038A-2(a)(1).

Generally, a reporting corporation must keep the permanent books of account or records as required by IRC 6001 that are sufficient to establish the correctness of the federal income tax return of the corporation, including information, documents, or records to the extent they may be relevant to determine the correct U.S. tax treatment of transactions with related parties. Such records must be permanent, accurate, and complete, and must clearly establish income, deductions, and credits. See Treas. Reg. 1.6038A-3(a)(1).

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a BMFCP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 603 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-7, Sample CP 215 Notice.

An initial penalty is asserted on Form 8278 using PRN 603 when the examiner determines a penalty under Treas. Reg. 1.6038A-4(a).

Initial Penalty—Generally, if a reporting corporation fails to furnish the information described in Treas. Reg. 1.6038A-2 within the time and manner prescribed by Treas. Reg. 1.6038A-2(d) and (e), fails to maintain or cause another to maintain records as required by Treas. Reg. 1.6038A-3, or (in the case of records maintained outside the United States) fails to meet the non-U.S. record maintenance requirements, within the applicable time prescribed in Treas. Reg. 1.6038A-3(f), a penalty of $25,000 ($10,000 for tax years beginning before January 1, 2018) shall be assessed for each taxable year with respect to which such failure occurs. See Treas. Reg. 1.6038A-4(a)(1).

Continuation Penalty—Generally, if any such failure continues for more than 90 days after the day on which the Service mails notice the failure to the reporting corporation, the reporting corporation shall pay an additional penalty of $25,000 ($10,000 for tax years beginning before January 1, 2018) with respect to each related party for which a failure occurs for each 30-day period during which the failure continues after the expiration of the 90-day period. Any uncompleted fraction of a 30-day period shall count as a 30-day period for this purpose. See Treas. Reg. 1.6038A-4(d)(1). These additional penalties are also asserted on Form 8278 using PRN 705.

It is recommended that reasonable cause not be considered until the taxpayer has furnished and maintained the required records for all open years (not on extension) (see IRM 20.1.9.2 (15)).

Generally, certain failures may be excused for reasonable cause, including not timely filing Form 5472, not maintaining or causing another to maintain records as required by Treas. Reg. 1.6038A-3, and not complying with the non-U.S. maintenance requirements described in Treas. Reg. 1.6038A-3(f). See Treas. Reg. 1.6038A-4(b)(1).

Generally, if there is reasonable cause for a failure, the beginning of the 90-day period after mailing of a notice by the Service of a failure shall be treated as not earlier than the last day on which reasonable cause existed. Meaning the reasonable cause exception can generally only apply to the initial penalty and not to the continuation penalty. See Treas. Reg. 1.6038A-4(b)(1).

The requirement is the same as that of IRC 6038A(e). See IRM 20.1.9.6.

Generally, a penalty is asserted when:

The noncompliance penalty follows deficiency procedures and is reflected in the notice of deficiency.

The noncompliance penalty adjustment permits the Service, in its sole discretion, to deny deductions and adjust cost of goods sold with respect to the related party transaction(s) based upon information available to the Service. See IRC 6038(d)(3).

There is no reasonable cause exception for this penalty.

Form 3520, Annual Return to Report Transactions With Foreign Trust and Receipt of Certain Foreign Gifts, has four different parts that relate to different filing requirements for filing a Form 3520. The obligation to file a Form 3520 to report the receipt of a large gift (or bequest) from a foreign person by a U.S. person is reportable on Part IV of the form.

U.S. persons who receive gifts from a foreign individual or foreign estate during the taxable year that in the aggregate exceed $10,000 must file Form 3520 and fill out Part IV. These gifts are reportable under IRC 6039F(a). See Notice 97-34.

The threshold for gifts (or bequests) received from nonresident alien individuals and foreign estates is statutorily $10,000, but the amount was raised to $100,000 under Notice 97-34. Once that threshold is reached, reporting is only required with respect to each such gift that is in excess of $5,000.

The threshold for gifts (or bequests) received from a foreign corporation or a foreign partnership was statutorily $10,000, but the amount is adjusted each year for inflation; for example, in 2019 the amount is $16,388. The instructions for Form 3520 for any year will have the applicable dollar threshold for the filing requirement for that year.

Failure to report gifts (or bequests) above the applicable dollar threshold for the relevant year is subject to penalties under IRC 6039F.

Form 3520 is required to be filed with the Ogden Campus, separately from the U.S. person’s income tax return. In addition:

Filing Verification—Form 3520 is processed to Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust and for multiple foreign gifts (or bequests), the filing is further identified with a Report Plan Number. See IRM 21.8.2.19.2(5). The steps for filing verification are as follows:

Secured Returns—When an examiner secures a delinquent Form 3520, determine if it provides all of the required information and is accurate. If the Form 3520 is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520, perform the following actions:

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

The penalty is asserted on Form 8278 using PRN 668 when the examiner determines the following:

Penalty Tax Adjustment—IRC 6039F(c)(1)(A) states that the Secretary will determine the tax consequence of the receipt of such gift (or bequest) if the information is not filed timely. This adjustment is subject to deficiency procedures.

The penalty for failure to report a large gift (or bequest) from a foreign person on a timely, complete, and accurate Form 3520 is 5 % of the amount of such foreign gift (or bequest) for each month for which the failure continues after the due date of the reporting U.S. person’s Form 3520 (not to exceed 25% of such amount in the aggregate).

Before reasonable cause is considered, it is recommended that the examiner ensure the taxpayer did not receive similar gifts (or bequests) in any other open year (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6039F(c)(2) provides that no penalty shall apply for failure to furnish the required information if the U.S. person shows that the failure is due to reasonable cause and not to willful neglect.

Pre-AJCA—For individuals who expatriated prior to June 4, 2004, a Form 8854 was due on the date of expatriation (for U.S. citizens) or the due date of the individual’s U.S. income tax return (for long-term residents). There was no annual requirement to file a Form 8854 after the initial form was filed.

Post-AJCA—For individuals who expatriated after June 3, 2004, and before June 17, 2008, there was no due date for the initial Form 8854. But their expatriation will not be recognized for tax purposes until a complete initial Form 8854 is filed with the IRS. If the expatriate was subject to the alternate expatriation tax regime (under IRC 877(b)) on the date of expatriation, an annual Form 8854 is then required for each of 10 tax years after the date of expatriation.

IRC 877A—Section 877A applies to individuals who expatriate on or after June 17, 2008. This section generally provides that all property of a "covered expatriate" (defined below) is treated as sold on the day before the individual's expatriation date (“mark-to-market” rules of IRC 877A(a)). Gain or loss from the deemed sale must be taken into account at that time (subject to an exclusion amount that is indexed for inflation annually).

The following information is required on the Form 8854 by the individual who expatriates:

Post-HEART Act-U.S. citizens and long-term residents who expatriate on or after June 17, 2008 must file Form 8854 by the due date of their income tax return (including extensions) for the year that includes their expatriation date. Under certain circumstances, such expatriates must file Form 8854 for subsequent years. For more information, see Section 8C of Notice 2009-85 and the instructions to Form 8854.

Form W-8CE—"Covered expatriates" who had an interest in a deferred compensation plan, a specified tax-deferred account (which includes an IRA), or a non-grantor trust on the day before their date of expatriation must file a Form W-8CE with each payer of these interests. The purpose of the Form W-8CE is to notify each payer that the individual is a "covered expatriate" and is subject to special withholding rules with regard to these interests. Form W-8CE is filed with each payer on the earlier of (a) the day before the first distribution on or after the expatriation date, or (b) 30 days after the expatriation date for each item of deferred compensation, specified tax deferred account or interest in a non-grantor trust.

"Covered Expatriate" —An individual is a "covered expatriate" if the individual is either a former citizen or former long-term resident and meets at least one of the following tests:

Former Long-Term Resident—A former long-term-resident is any individual who was a lawful permanent resident of the United States for all or any part of 8 of the last 15 years preceding the date of expatriation.

Treatment of Deferred Compensation Plans, Specified Tax-Deferred Accounts, and Non-Grantor Trusts—The "mark-to-market" rules (of IRC 877A(a)) do not apply to a covered expatriate’s interest in a deferred compensation plan, a specified tax-deferred account nor a non-grantor trust. See Notice 2009-85 and the Form 8854 instructions for more information about the tax treatment of these types of interests.

Deferral of "Mark-to-Market" Tax—Covered expatriates may elect to defer the payment of all or part of the amount of the "mark-to-market" tax to which they are subject. This election is not available for tax due with respect to a covered expatriate's interest in a deferred compensation plan, a specified tax-deferred account, or a non-grantor trust in which the covered expatriate held an interest on the day before expatriation. See Notice 2009-85 and the Form 8854 instructions for more information.

Form 8854—Correspondex letter (C-Letter) 2401C, Failure to File Annual Form 8854 Notification Letter, can be systemically generated for such failure. A sample of the letter, containing approved notice language, can be found through the Correspondex Letters web page at http://serp.enterprise.irs.gov/databases/forms-ltrs-pubs.dr/crxltrs.dr/crx_letters.toc.htm.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) an IMF CP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with PRN 671 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-6, Sample CP 15 Notice.

IRC 6039G(c) imposes a $10,000 penalty for a failure to timely file a complete and accurate Form 8854, unless it is shown such failure is due to reasonable cause and not to willful neglect. The penalty is asserted on Form 8278 using PRN 671 when the examiner determines that the required Form 8854 is not filed or the individual failed to include all required information on the statement or included incorrect information. The penalty is applied as follows:

The penalty computation under IRC 6039G depends on the date an individual expatriates as follows:

It is recommended that reasonable cause not be considered until the taxpayer has filed the required information for all open years (not on extension) (see IRM 20.1.9.2 (15)).

The penalty, whether Pre-AJCA, Post-AJCA, or Post-HEART, will not be asserted if the failure to provide the required statement and information was due to reasonable cause and not to willful neglect.

IRC 6039C states that, to the extent provided in the regulations, any foreign person holding a direct investment in U.S. real property interests for a calendar year must file a return. The requirement is met by providing information such as name and address, a description of all U.S. real property interests, etc.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

The penalty is asserted on Form 8278 using PRN 604. It will apply when it has been established that the foreign person has failed to meet the above requirements.

IRC 6652(f)(2) provides that the amount of penalty with respect to any failure shall be $25 for each day during which such failure continues.

IRC 6652(f)(3) limits the amount of the penalty determined to the lesser of the following:

It is recommended that reasonable cause not be considered until the taxpayer has filed the required information for all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6652(f)(1) provides that no penalty shall apply if it is shown that such failure is due to reasonable cause and not to willful neglect.

Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is required to be filed by the responsible party (most likely the U.S. person) to:

Form 3520 must be timely, complete and accurate to be considered filed. IRC 6048 authorizes the Secretary to prescribe the information required to be reported. Notice 97-34 and the instructions for Form 3520 describe the information required to be reported.

U.S. Owners: Creation or Transfer—IRC 6048(a) generally provides that any U.S. person who creates a foreign trust and directly or indirectly transfers money or other property to a foreign trust (including a transfer by reason of death) must report such transfer. This reporting is done on Part I of Form 3520. Generally, a U.S. person who transfers property to a foreign trust is considered the owner of that portion of the foreign trust unless there is no possibility now or in the future of the trust having a U.S. beneficiary. IRC 679 and the regulations thereunder more specifically describe individuals who are considered owners of foreign trusts and describe exceptions to the general rule. Other things to consider are as follows:

IRC 6048(b) provides that if at any time during the taxable year a U.S. person is treated as the owner of any portion of a foreign trust under the grantor trust rules (IRC 671 through IRC 679), such person must submit certain information and must ensure that the trust files certain information. The U.S. person must report ownership of the trust for the current tax year on Part II of Form 3520 and, if available, must attach a copy of the owner's statement (from Form 3520-A) to Form 3520. Even if the U.S. owner is not required to complete and file the other parts of Form 3520 in a particular year, the U.S. owner must nevertheless complete and file Part II of Form 3520. In addition, the U.S. owner must ensure that the foreign trust files Form 3520-A annually. If the foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to his or her Form 3520. See IRM 20.1.9.14.

Distributions: U.S. Beneficiaries—IRC 6048(c) generally requires a U.S. person who receives a distribution or is treated as receiving a distribution, directly or indirectly, from a foreign trust, to report on Part III of Form 3520 the name of the trust, the aggregate amount of distributions received from the trust during the taxable year and such other information as the Secretary may prescribe. Refer to Notice 97-34 and the instructions to Form 3520 for more information. Some examples of distributions to U.S. persons from a foreign trust that are reportable or nonreportable are as follows:

Form 3520 is required to be filed separately from the U.S. person’s income tax return and must not be attached to the related income tax return. In addition:

Filing Verification—Form 3520 is on the Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust, the filing is further identified with a plan number.

Secured Returns—When an examiner secures a delinquent Form 3520, determine whether it provides all of the required information and is accurate. If the Form 3520 is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520, perform the following actions:

Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under the provisions of IRC 6677(a). This letter is five pages.

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.

Letter 3944—This is the closing no response letter to be utilized when a taxpayer either fails to respond to notice letter (Letter 3804) or when a taxpayer does not provide a statement of reasonable cause for failing to file such returns.

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.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

An initial penalty is asserted by field examiners on Form 8278 using PRN 659 (for Part I and/or Part III failures) when the examiner determines that Form 3520 returns were required to be filed and were not timely filed or were not complete and accurate, and that the failure was not due to reasonable cause.

Penalties may be asserted by the campus for a late-filed Form 3520. Refer to IRM 21.8.2.19, Information Reporting Under IRC 6048 and IRC 6039F. For additional information see the following:

Gross Reportable Amount—The gross reportable amount is defined in IRC 6677(c) as follows:

Each Filing Requirement Penalized Separately—Each Part of Form 3520 and Form 3520-A is considered a separate requirement when applicable, and the penalty for each requirement is calculated independent of the others.

Initial Penalty—Prior to 2010 under IRC 6677, the initial penalty for failure to timely file a complete and accurate Form 3520 or Form 3520-A was calculated based on the respective percentages below of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added. In cases where the gross reportable amount is less than $10,000 the initial penalty is equal to the gross reportable amount. In cases where the gross reportable amount is $10,000 or greater, the initial penalty for each requirement is equal to the greater of $10,000 or the following:

Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 using PRN 702 for Part I and/or Part III, and PRN 706 for Part II.

The maximum penalty (both initial penalty and continuation penalty combined) for each failure per year is the gross reportable amount. The penalty for each Part of Form 3520 required to be filed is considered separately.

Example When Gross Reportable Amount CAN Be Determined—When the Service has evidence that the taxpayer formed a foreign trust and has specifics on the gross reportable amount, a notice letter can be issued, and if the taxpayer does not respond, the continuation penalty can be assessed. For example, IRS has information that a taxpayer created a foreign trust and transferred $1,000,000 (cash or property) to the foreign trust in the same year and has not filed Form 3520. The taxpayer was issued a notice letter and had not filed the return after 35 days following the expiration of the 90-day period:

Example When Gross Reportable Amount CANNOT Be Determined—When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued, and if the taxpayer does not respond, the initial penalty can be assessed. For example, IRS has information that a taxpayer created a foreign trust and has not filed Form 3520. The taxpayer was issued a notice letter and did not respond:

Non-Compliance Tax Adjustment—IRC 6048(c)(2) provides that any distribution from a foreign trust, whether from income or corpus, to a U.S. person will be treated as an accumulation distribution includible in the gross income of that U.S. person if adequate records are not provided to the Secretary to determine the proper treatment of the distribution.

It is recommended that reasonable cause not be considered until the taxpayer has filed the complete and accurate information required for all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6677 provides specific exclusions with respect to the initial penalty for reasonable cause and Notice 97-34 provides additional information:

The fact that the trustee did not provide the taxpayer with a copy of the owner’s statement of Form 3520-A is not reasonable cause. The taxpayer owner is also the person responsible for ensuring that the Form 3520-A is filed and that he or she receives a copy of the owner’s statement.

Each U.S. person treated as an owner of a foreign trust under IRC 671 through IRC 679 is responsible for ensuring that the foreign trust files an annual return (Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b))) setting forth a full and complete accounting of all trust activities, trust operations, and other relevant information as the Secretary prescribes. See IRC 6048(b)(1). In addition, the U.S. owner is responsible for ensuring that the trust annually furnishes such information as the Secretary prescribes to U.S. owners and U.S. beneficiaries of the trust. See IRC 6048(b)(1)(B), and Notice 97-34. IRC 6048 authorizes the Secretary to prescribe the information required to be reported; the instructions to Form 3520-A include all information required to be provided.

Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under section 6048(b)), is due by the 15th day of the third month after the end of the trust’s tax year. A six month extension is available by filing Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, under the TIN of the foreign trust.

If the foreign trust fails to timely file Form 3520-A, the U.S. owner may be able to avoid penalties by completing and attaching a substitute Form 3520-A to their timely filed Form 3520.

U.S. persons who are treated as owners of Canadian retirement plans (including RRSPs or RRIFs) do not need to ensure that the retirement plan files a Form 3520-A and do not need to file a substitute Form 3520-A. See Rev. Proc. 2014-55 .

Certain eligible U.S. citizen and resident individuals who are treated as owners of certain tax-favored foreign retirement trusts and/or certain tax-favored foreign nonretirement savings trusts are provided an exemption from IRC 6048 information reporting requirements under Rev. Proc. 2020-17; meaning they are granted relief from the Form 3520-A filing requirements. Additionally, penalty abatement relief may be available to the owners of these tax-favored foreign trusts for penalties assessed prior to the release of Rev. Proc. 2020-17. See Rev. Proc. 2020-17 for additional information on the qualifying criteria for eligible individuals and eligible trusts as well as information on requesting penalty abatements, including eligibility requirements.

Form 3520-A includes an owner’s statement (Foreign Grantor Trust Owner Statement) for each U.S. person considered to be an owner of a portion of the foreign trust. The owner’s statement is required to be provided to each U.S. owner of the foreign trust.

Form 3520-A includes a beneficiary’s statement (Foreign Grantor Trust Beneficiary Statement) for any distributions made to U.S. persons. The beneficiary’s statement is required to be provided to each U.S. beneficiary.

U.S. Agent—A copy of the authorization of agent must be attached to the Form 3520-A and must be substantially identical to the format shown in the instructions. The U.S. agent has a binding contract with the foreign trust to act as the foreign trust’s limited agent for purposes of applying IRC 7602, IRC 7603, and IRC 7604 with respect to a request by the IRS to examine records, produce testimony, or respond to a summons by the IRS for such records or testimony.

Trusts without U.S. agents must have the following attached to the Form 3520-A to be considered complete:

Filing Verification—Form 3520-A is processed to Master File with MFT 42 as a BMF account under the TIN of the foreign trust. Form 7004 is used to request an extension of time to file Form 3520-A, and the extension will post on MFT 42 as a TC 460 with a date.

Secured Returns—When an examiner secures a delinquent Form 3520-A, determine if it provides all of the required information and is accurate. If the Form 3520-A is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520-A, perform the following actions:

Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under the provisions of IRC 6677(a). This letter is five pages.

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.

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.

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.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

An initial penalty is asserted by field examiners using Form 8278 with PRN 660 when the examiner determines that a Form 3520-A filing requirement existed, but the return was not timely filed or was not complete and accurate. No penalties will be imposed if the taxpayer can demonstrate that the failure to comply with the reporting requirements was due to reasonable cause and not willful neglect.

The following are examples of some items that may render Form 3520-A incomplete:

Penalties may be asserted by the campus for a late-filed Form 3520-A. For more information see the following:

Initial Penalty—Prior to 2010, the initial penalty for failure to timely file a complete and accurate Form 3520-A was 5 percent of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added. In cases where the gross reportable amount is less than $10,000 the initial penalty is equal to the gross reportable amount. In cases where the gross reportable amount is $10,000 or greater, the initial penalty is the greater of $10,000 or 5 percent of the gross reportable amount. The gross reportable amount is defined in IRC 6677(c)(2) as the gross value of the portion of the trust's assets at the close of the year treated as owned by the U.S. person. See IRC 6677(b) for the penalty and IRC 6677(c) for the meaning of "gross reportable amount." In addition:

Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted using Form 8278 with PRN 703.

The maximum penalty (both the initial penalty and continuation penalty combined) for failure to file Form 3520-A is the gross reportable amount (i.e. the gross value of the portion of the trust’s assets at the close of the year treated as owned by the U.S. person).

When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued and if the taxpayer does not respond within 90 days after the day on which the notice was mailed, the continuation penalty can be assessed.

It is recommended that reasonable cause not be considered until the taxpayer has filed the complete and accurate information required for all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6677(d) provides specific exceptions with respect to the penalty for reasonable cause and Notice 97-34 provides additional information. In addition:

For tax years that began before January 1, 2005, IRC 6679 provided a penalty for failure to furnish information and timely file a return required under IRC 6035. Prior to its repeal, IRC 6035 required a U.S. citizen or resident who was an officer, director, or 10 percent shareholder of a foreign personal holding company to file Form 5471 Schedule N by the due date of the taxpayer’s income tax return, including extensions.

IRC 6046 requires Form 5471 Schedule O to be filed by the due date of the taxpayer’s income tax return, including extensions and must be filed by the following:

IRC 6046A requires a U.S. person who had a reportable event under IRC 6046A during that person's tax year to file Form 8865 Schedule P, by the due date of the U.S. person’s income tax return, including extensions. There are three categories of reportable events under IRC 6046A : acquisitions, dispositions, and changes in proportional interests.

Form 5471, Schedule O—Reserved.

Form 8865 Schedule P—Reserved.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a BMFCP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 613 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-7, Sample CP 215 Notice.

An initial penalty is asserted on Form 8278 using PRN 613 when the examiner has established that the taxpayer:

Initial Penalty—The penalty is $10,000 per failure.

Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period will apply. The maximum continuation penalty is limited to $50,000 per failure. These additional penalties are also asserted on Form 8278 using PRN 704.

The maximum total penalty under IRC 6679 is $60,000 per failure (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per failure).

It is recommended that reasonable cause not be considered until the taxpayer has furnished and filed the required information for all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6679(a)(1) provides a reasonable cause exception to the initial penalty.

Reasonable cause does not apply to the continuation penalty.

S corporation shareholders report their S corporation-related net 965 tax liability as well as their IRC 965(i) election on Form 965-A, Individual Report of Net 965 Tax Liability, Part III, S Corporation Shareholder: Report of Calculation of Net 965 Tax Liability Related to 965 Amounts Allocated from an S Corporation and Election To Defer Such Net 965 Tax Liability.

Shareholders who make an IRC 965(i) election are required to annually report the amount of the S corporation-related net 965 tax liability remaining unpaid on Form 965-A, Part IV, Annual Report of Deferred Net 965 Tax Liability Related to 965 Amounts Allocated From S Corporations. The annual report is required every year until the liability is fully paid.

Form 965-A is filed with the taxpayer’s income tax return for the reporting year by the due date of the income tax return (taking into account extensions, if any).

The 2017 tax year is the earliest applicable year requiring reporting.

If an S corporation shareholder makes a IRC 965(i) election with respect to an S corporation-related net 965 tax liability, the S corporation is jointly and severally liable for the deferred tax liability, as well as any penalties, additions to tax, or other additional amounts attributable to the S corporation-related net 965 tax liability. See Treas. Reg. 1.965-7(c)(4).

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 3870 in field cases) a CP notice is generated and sent to the taxpayer as follows:

The penalty is not subject to deficiency procedures. It applies when it has been established that the S corporation shareholder (certain individuals, trusts, or estates) made an IRC 965(i) election and failed to report the S corporation-related net 965 tax liability per the above requirements.

Unlike most penalties covered in this IRM, statutory language requires this penalty to be assessed on the S corporation shareholder’s income tax return module (MFT 30 for individuals or MFT 05 for trusts). Thus the penalty is asserted with a Form 3870 using PRN 707. The Form 3870 job aid to assess a penalty under IRC 6038D against married filing joint taxpayers (see IRM 20.1.9.22.3.1 (2)) may be used with the following adjustments:

The penalty is assessed to the income tax module for the year where the reporting requirement was not met.

The penalty under IRC 965(i)(7)(C) is 5% of the deferred S corporation-related net 965 tax liability that is not timely reported.

There is no reasonable cause exception for this penalty.

An IC-DISC is a domestic corporation that has elected to be an IC-DISC on Form 4876-A, Election To Be Treated as an Interest Charge DISC, and its election is still in effect.

An IC-DISC must file an annual U.S. tax return even though it pays no U.S. income taxes. See IRC 6011(c)(2) and Treas. Reg. 1.991-1.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a BMFCP 215, Notice of Penalty Charge, for penalties assessed on MFT 13 with PRN 605 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown at Exhibit 20.1.9-7, Sample CP 215 Notice.

A penalty is asserted by field examiners on Form 8278 using PRN 605 when the examiner has established the following:

Penalties may also be asserted by the campus for incomplete or inaccurate returns filed. Refer to IRM 3.11.16.39.7, Civil Penalty—IRC Section 6686.

The penalty under IRC 6686 is $100 for each failure to supply information (but the total amount imposed for all such failures during any calendar year shall not exceed $25,000) and $1,000 for each failure to file a Form 1120-IC-DISC.

It is recommended that reasonable cause not be considered until the taxpayer has filed all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6686 provides for such penalties unless it is shown that such failure to file or supply information is due to reasonable cause.

To be considered for reasonable cause, the taxpayer must make an affirmative showing of reasonable cause in a written statement containing a declaration that it was made under the penalties of perjury.

IRC 6688 provides a penalty for individuals with total worldwide gross income of more than $75,000 who take the position that, for U.S. income tax reporting purposes (see IRC 937(c)), they became or ceased to be bona fide residents of a U.S. possession (U.S. territory) and fail to meet the requirements under IRC 937 by filing Form 8898, Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession. Note that:

The penalty also applies to individuals who have adjusted gross income of $50,000 and gross income of $5,000 from sources within Guam or CNMI and who fail to file Form 5074, Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (CNMI), as required under Treas. Reg. 301.7654-1(d) for individuals who file U.S. income tax returns.

For tax years 2001 through 2005, Form 8898 must be filed by October 16, 2006.

Subsequent to 2005, Form 8898 must be filed by the due date (including extensions) for filing Form 1040, U.S. Individual Income Tax Return, or Form 1040NR, U.S. Nonresident Alien Income Tax Return.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) an IMFCP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with PRN 669 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-6, Sample CP 15 Notice.

The penalty is asserted on Form 8278 using PRN 669 when an examiner determines the following:

For tax years ending after October 22, 2004, the penalty is $1,000 for failure to file the respective Form 8898, Form 5074, Form 8689, or for filing incorrect or incomplete information.

For tax years ending before October 23, 2004, the penalty is $100.

It is recommended that reasonable cause not be considered until the taxpayer has furnished and filed the required information for all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6688 provides for such penalties unless it is shown that such failure is due to reasonable cause and not to willful neglect.

A taxpayer is required to notify the Service of any foreign tax redetermination that may affect U.S. tax liability. If a taxpayer has a reduction in the amount of foreign tax liability, the taxpayer must provide notification by filing Form 1040X, Amended U.S. Individual Income Tax Return, or Form 1120X, Amended U.S. Corporation Income Tax Return, and Form 1116, Foreign Tax Credit, or Form 1118, Foreign Tax Credit—Corporations, by the due date (with extensions) of the original return for the taxpayer's taxable year in which the foreign tax redetermination occurred. See former Treas. Reg. 1.905-4T(b)(1)(ii) and Prop. Treas. Reg. 1.905-4(b)(1)(ii).

Redetermination of IRC 404A Deduction—A taxpayer is required to notify the Service, in the time and manner specified in the regulations under IRC 905, if the foreign tax deduction for deferred compensation expense is adjusted. See IRC 404A(g)(2)(B).

Foreign Tax Redetermination—Treas. Reg. 1.905-3(a) defines a foreign tax redetermination as a change in the liability for foreign income tax or certain other changes that may affect a taxpayer’s foreign tax credit and includes the following:

Statute of Limitations—IRC 6501(c)(5) independently suspends the normal statute of limitations for additions to tax resulting from a redetermination of foreign tax. IRC 905(c) contains special rules for such changes.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer.

The assessment of the penalty is not subject to deficiency proceedings and is asserted on Form 8278 using PRN 570 when the examiner determines the following:

The examiner determines the deficiency attributable to the foreign tax redetermination and to this deficiency is added a penalty computed as follows:

It is recommended that reasonable cause only be considered if the taxpayer has filed amended returns for all affected years for which the particular foreign tax redetermination results in a U.S. tax deficiency and for which amended returns are required under former temporary Treas. Reg. 1.905-4T or subsequent final regulations (see Prop. Treas. Reg. 1.905-4). See IRM 20.1.9.2 (15).

IRC 6689(a) provides for such a penalty unless it is shown that such failure is due to reasonable cause and not due to willful neglect.

IRC 6114 generally requires that if a taxpayer takes a position that any treaty of the U.S. overrules or modifies any provision of the Code, the taxpayer must disclose the position. A taxpayer meets the disclosure requirement by attaching Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), or appropriate successor form to his or her timely filed tax return (including extensions).

If an individual would not otherwise be required to file a tax return, the individual must file Form 8833 at the IRS campus where he or she would normally file a return to make the treaty-based return position disclosure under IRC 6114. See Treas. Reg. 301.6114-1(a)(1)(ii) or Treas. Reg. 301.7701(b)-7.

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) a CP notice is generated and sent to the taxpayer as follows:

The penalty is not subject to deficiency proceedings. It is asserted on Form 8278 using PRN 664 when the examiner determines the following:

Individuals—For an individual, the penalty is $1,000 for each separate treaty-based return position taken and not properly disclosed.

Corporations—For a C corporation, the penalty is $10,000 for each separate failure to disclose a treaty-based return position.

It is recommended that reasonable cause not be considered until the taxpayer has filed all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6712(b) provides that the Secretary may waive all or any part of the penalty on a showing by the taxpayer that there was reasonable cause for the failure and that the taxpayer acted in good faith.

Waiver Criteria—Treas. Reg. 301.6712-1(b) provides the authority to waive, in whole or in part, the penalty imposed under IRC 6712 if the taxpayer’s failure to disclose the required information is not due to willful neglect. An affirmative showing of lack of willful neglect must be made by the taxpayer in the form of a written statement setting forth all the facts alleged to show lack of willful neglect and must contain a declaration by the taxpayer that the statement is made under penalties of perjury.

Passports—IRC 6039E generally requires that any individual, who applies for a United States (U.S.) passport, must include with such application the taxpayer’s TIN (if the individual has one), any foreign country in which such individual is residing, and any other information as the Secretary may prescribe.

Immigration—IRC 6039E generally requires that any individual, who applies to be lawfully accorded the privilege of residing permanently in the U.S. as an immigrant in accordance with the immigration laws, must include with such application the taxpayer’s TIN (if the individual has one), information with respect to whether such individual is required to file a return of the tax imposed by Chapter 1 for such individual’s most recent 3 taxable years, and any other information as the Secretary may prescribe.

Passports—The following letters should be used:

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 in field cases) an IMFCP 15, Notice of Penalty Charge, for penalties assessed on MFT 55 with PRN 679 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-6, Sample CP 15 Notice.

Immigration—Reserved.

The penalty is not subject to deficiency proceedings. It is asserted on Form 8278 using PRN 679 when the examiner determines the following:

The penalty is $500 for such failure.

Only one $500 penalty may be asserted per application.

IRC 6039E provides for such penalties unless it is shown that such failure is due to reasonable cause and not to willful neglect.

A taxpayer must file a Form 8938 if they meet the following criteria:

A complete and accurate Form 8938, Statement of Specified Foreign Financial Assets, attached to a timely filed tax return fulfills the reporting requirements.

The required information for such specified foreign financial assets include the following:

Letter 4618—This is a notice letter required to be mailed to the taxpayer under the provisions of IRC 6038D(d).

CP Notices—Once a penalty is assessed (systemically, by the campus, or via processing of Form 8278 or Form 3870 in field cases) a CP notice is generated and sent to the taxpayer as follows:

BMF taxpayers. BMF civil penalties are developed and then asserted using Form 8278 which, when closed and input, will create a MFT 13 module for the penalty. The initial penalty is distinguished from the continuation penalty by a unique PRN as follows:

IMF taxpayers. IMF civil penalties are asserted differently depending on whether or not the taxpayers have filed a joint income tax return as follows:

Initial Penalty—The initial penalty is $10,000 for each taxable year with respect to which such failure occurs.

Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 using PRN 710. The maximum continuation penalty is limited to $50,000 per failure.

It is recommended that reasonable cause not be considered until the taxpayer has filed all open years (not on extension) (see IRM 20.1.9.2 (15)).

IRC 6038D(g) provides that no penalty shall apply if the individual shows that the failure is due to reasonable cause and not to willful neglect.

An individual will not have reasonable cause merely because a foreign jurisdiction would impose a civil or criminal penalty on any person for disclosing the required information.

The 2009 Offshore Voluntary Disclosure Program (2009 OVDP) was available to taxpayers beginning March 23, 2009, for voluntary disclosures received by the IRS through October 15, 2009. The offshore penalty was a percentage of the amount in foreign bank accounts, or fair market value of assets, that was paid in lieu of other penalties during the six-year look-back period. The penalty was asserted on Form 8278 as follows:

The 2011 Offshore Voluntary Disclosure Initiative (2011 OVDI), with a different penalty framework, was available to taxpayers beginning February 8, 2011, for voluntary disclosures received by the IRS through September 9, 2011. The offshore penalty was a percentage of the amount in foreign bank accounts, or fair market value of assets, that were paid in lieu of other penalties during the eight-year look-back period. The penalty is asserted on Form 8278 as follows:

The 2012 OVDP was announced January 9, 2012, and is similar to the 2011 OVDI except that PRN 594 was designated for a new 27.5 percent penalty.

Effective for OVDP submissions made on or after July 1, 2014, the terms of the 2012 OVDP were modified. The modified program may be referred to as the 2014 OVDP. The 2014 OVDP differs from the original 2012 OVDP in the following respects:

Aside from the formal Offshore Voluntary Disclosure Programs, other offshore compliance options exist for taxpayers who did not commit any tax or tax-related crimes and wish to correct mistakes or file delinquent returns. These options include:

The Streamlined Filing Compliance Procedures, when first established on September 1, 2012, were available to U.S. taxpayers residing outside the United States (Streamlined Foreign Offshore Procedures). On June 18, 2014, the IRS announced an expansion of the Streamlined Filing Compliance Procedures to, among other things, include U.S. taxpayers residing in the United States (Streamlined Domestic Offshore Procedures). The Streamlined Domestic Offshore Procedures provide U.S. taxpayers who filed income tax returns and who reside in the United States the opportunity to certify that their conduct was non-willful and pay a 5 percent miscellaneous offshore penalty.