IRS releases procedures allowing appeals review of international penalties prior to payment.

• Author: Chambers, Valrie

The IRS has established a strategic goal to improve tax administration, to deal more effectively with the increased globalization of individual and business taxpayers. To accomplish this goal, the IRS has made it a priority to improve voluntary compliance with the international tax provisions and to reduce the tax gap attributable to international transactions. This focus on international compliance has led to increased enforcement of international information-reporting requirements and the associated penalties.

Automatic Assessment of Penalties

In August 2008, the IRS began issuing letters to taxpayers in the Large and Mid-Size Business Division (now the Large Business and International Division) who may not have timely filed their corporate returns and/or Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, to notify them about the implementation of new procedures that would result in the automatic assessment of penalties for late-filed Forms 5471. These procedures were a significant change because late-filed penalties related to Form 5471 had previously been assessed at the discretion of an examiner after a return was selected for examination. Effective January 1, 2009, the IRS began its automatic assessment of penalties for late-filed Forms 5471 attached to a late-filed Form 1120, U.S. Corporation Income Tax Return.

The increased focus on international compliance, along with the new automatic penalty assessment regime, created some confusion as to how taxpayers could administratively appeal the penalties and whether payment of penalties was required prior to Appeals' review. On August 27, 2010, the IRS added Internal Revenue Manual (IRM) Section 8.11.5, which sets forth new procedures for international penalty appeals. IRM Section 8.11.5 was effective immediately.

Overview of the New International Penalty Appeals Procedures

The international penalty appeals procedures allow taxpayers who have been assessed an international penalty under chapter 61 of the Internal Revenue Code, such as for failure to file Forms 5471; 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business; or 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships, to seek reconsideration of the penalty assessment by Appeals prior to paying the assessment. Under certain circumstances, the new procedures allow some taxpayers to use an accelerated...