The Price Is Right: Former I.R.S. Attorney Discusses Information Return And F.B.A.R. Penalties

• Published date: 07 April 2022
• Subject Matter: Tax, Tax Authorities
• Law Firm: Ruchelman PLLC
• Author: Mr Stanley Ruchelman and Wooyoung Lee

INTRODUCTION

If a statement was filed and no one reads it, was it filed at all? That is the uncomfortable question many taxpayers will be asking after Daniel Price, a long-time I.R.S. attorney, admitted that the I.R.S. does not read reasonable-cause statements attached to late-filed international information returns.¹

Many I.R.S. penalties are assessable penalties. This generally means that the I.R.S. is not required to provide the taxpayer with an opportunity to contest the penalty before the I.R.S. levies it. A taxpayer who believes that the penalty is incorrect must file a suit to claim a refund. Assessable penalties include those for failure to file certain information returns, including Forms 5471, U.S. Persons With Foreign Corporations), 5472, Foreign Corporations With a U.S. Trade or Business, and 3520, Foreign Trusts and Gifts. Penalties start at $10,000 or more and increase with continued noncompliance. Taxpayers who file returns late but have reasonable cause for doing so can attach statements explaining their situation. This can result in a waiver of the penalty.

Mr. Price, who was speaking at an event held by the San Francisco Tax Club, confirmed what many practitioners have suspected. Lengthy delays and vague or even incorrect form responses are common complaints of tax advisers having a cross-border practice. Such experiences are particularly concerning because the taxpayer's route to appeal may be described as "pay first, argue later" rather than appeal first, hopefully not pay at all. If the I.R.S. takes too long in addressing an appeal, the taxpayer must fight the penalty after its assessment and after having to make payment.

Need for Speed

Over the years, the I.R.S. has increased the number of information returns that must be filed by taxpayers. With more obligations come a greater need for enforcement, and it is this area that has given way to resource constraints. Originally, the I.R.S. would only discover missing information returns during audits, leading to a manual assessment of penalties. But beginning in the last decade, the I.R.S. switched many of these penalties to systemic assessment driven by computers. This means that a return filed late will lead to an automatic penalty assessment against the taxpayer. Reasonable-cause statements are supposed to be insurance against a more penalty-friendly system. They benefit both taxpayers and the I.R.S. Taxpayers are benefitted by presenting their case before the tax is assessed. The...