Can I Use IRS First Time Penalty Relief for Foreign Penalties?

Foreign Penalties and First-Time Penalty Relief?

For some US taxpayers, depending on their specific facts and circumstances, they may qualify to utilize the first-time penalty abatement to remove certain types of IRS penalties, such as failure to file and failure to pay tax. The IRS has been very receptive to these types of situations and removing penalties. A common question we receive is whether or not a taxpayer can use the first-time penalty abatement for Foreign Account and Asset Penalties. While technically the first-time penalty abatement mechanism is not available for international penalty relief, if it is the first time that a person had a requirement to file an international form and failed to do so — this can be a factor in potentially abating or minimizing penalties.

Abating an International Penalty

Abating international penalties such as failure to file Form 3520 or Form 5471 is a complex undertaking. Our team has successfully eliminated penalties on several occasions. It is important to note, that the first-time penalty abatement tool does not apply to internationally assessed penalties. Rather, it is limited to penalties associated with missed or late tax return filings. But, if this was the first time that a person was required to file the form and failed to do so, this may help serve as a key factor necessary to show reasonable cause and ultimately avoid or abate international penalties. Unfortunately, all too often, less experienced counsel rely on other types of unproven (and costly) tactics to try to challenge international penalties such as IRC 6751 and FOIA requests – which go nowhere.

IRM 20.1.9.3.5 

• • • First Time Abate – The first time abatement (FTA) penalty relief provisions do not apply to event-based filing requirements such as with Form 5471 (see IRM 20.1.1.3.3.2.1(7)). However, if the failure to file penalty on the related Form 1120 or Form 1065 filing is abated under the FTA provisions using PRC 018, (or would have been eligible for FTA abatement but a failure to file penalty wasn’t assessed because there was $0 tax due or it was a fully paid return) then the penalty assessed with PRN 599 or PRN 712 may be abated with PRC 018 as well, so long as the taxpayer meets the following additional criteria:

      • • The taxpayer had no similar penalties (PRNs 599, 623 or 712) in the three prior periods.

        • The related Form 1120 or Form 1065 return was not filed late in the three prior periods.

Internal Revenue Manual

Let’s take an example of what the IRS agents use as factors to determine whether or not it international penalty should be waived.

20.1.1.3.2.2 – Ordinary Business Care and Prudence

• • • Ordinary business care and prudence includes making provisions for business obligations to be met when reasonably foreseeable events occur. A taxpayer may establish reasonable cause by providing facts and circumstances showing that he or she exercised ordinary business care and prudence (taking that degree of care that a reasonably prudent person would exercise), but nevertheless were unable to comply with the law.

    • In determining if the taxpayer exercised ordinary business care and prudence, review available information including the following:

      • • Taxpayer’s Reason:The taxpayer’s reason should address the penalty imposed. To show reasonable cause, the dates and explanations should clearly correspond with events on which the penalties are based. If the dates and explanations do not correspond to the events on which the penalties are based, request additional information from the taxpayer that may clarify the explanation. See IRM 20.1.1.3.2, Reasonable Cause.

        • Compliance History:Check the preceding tax years (at least three) for payment patterns and the taxpayer’s overall compliance history. The same penalty, previously assessed or abated, may indicate that the taxpayer is not exercising ordinary business care. If this is the taxpayer’s first incident of noncompliant behavior, weigh this factor with other reasons the taxpayer gives for reasonable cause, since a first-time failure to comply does not by itself establish reasonable cause.

        • Length of Time: Consider the length of time between the event cited as a reason for the noncompliance and subsequent compliance. See IRM 20.1.1.3.2, Reasonable Cause. Consider: (1) when the act was required by law, (2) the period of time during which the taxpayer was unable to comply with the law due to circumstances beyond the taxpayer’s control, and (3) when the taxpayer complied with the law.

        • Circumstances Beyond the Taxpayer’s Control:Consider whether or not the taxpayer could have anticipated the event that caused the noncompliance. Reasonable cause is generally established when the taxpayer exercises ordinary business care and prudence, but, due to circumstances beyond the taxpayer’s control, the taxpayer was unable to timely meet the tax obligation. The taxpayer’s obligation to meet the tax law requirements is ongoing. Ordinary business care and prudence requires that the taxpayer continue to attempt to meet the requirements, even though late.

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. 

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.