New procedures permitting prepayment review of international information reporting penalties.

• Author: Goldberg, Walter

The IRS recently published new Internal Revenue Manual (IRM) Section 8.11.5, which permits taxpayers that have been assessed certain international information reporting penalties to elect prepayment review of those penalties by IRS Appeals. Section 8,11.5 provides for accelerated prepayment Appeals review in the case of Category 1 taxpayers and nonaccelerated prepayment Appeals review in the case of Category 2 taxpayers. The distinction between the two categories generally depends on the total value of a taxpayer's assets and whether the penalties are assessed during an examination.

The new IRM procedure resolves prior uncertainty as to whether Appeals had jurisdiction to review assessed international penalties before payment. Specifically, the IRM procedures expand taxpayers' appeals rights for penalties assessed under specific international reporting and recordkeeping penalty provisions contained in chapter 61 of the Internal Revenue Code and clarify that taxpayers may now seek prepayment Appeals review for such penalties. Prior to new IRM Section 8.11.5, taxpayers were arguably required to pay these penalties as a prerequisite to Appeals review. The IRM procedure is effective as of August 27, 2010.

Background

U.S. persons are subject to myriad international reporting rules imposed under specific provisions in chapter 61. Each provision typically has its own complex requirements and attendant penalties for failure to comply. For instance, Sec. 6038(a)(1) generally requires a U.S. person (including, generally, a U.S. citizen, resident alien, U.S. corporation, and partnership) to furnish certain information related to any foreign corporation that such person controls for an uninterrupted period of 30 days or more during the corporation's annual accounting period. For this purpose, "control" generally means ownership of more than 50% of the total voting power or stock value of the corporation. The U.S. person is required to file specified information on Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, which is filed with the person's U.S. federal income tax return.

Sec. 6038(a)(4) requires certain information reporting by a U.S. person that is a U.S. shareholder (generally, a U.S. shareholder owning 10% or more of the total voting power) of a foreign corporation that is a controlled foreign corporation (CFC) for an uninterrupted period of 30 days or more during the tax year of the foreign corporation and that owned that stock on the last day of the tax year. That U.S. person is also required to file specified information on Form 5471, which is filed with the person's U.S. federal income tax return.

Sec. 6038(a)(1) also requires a U.S. person to furnish certain information related to a foreign partnership that such person controls at any time during the partnership's tax year. Control for this purpose means ownership of more than a 50% interest in such partnership. Such U.S. person is required to file specified information on Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.

Sec. 6038(a)(5) requires certain information reporting by a U.S. person that owned, at anytime during the tax year, a 10% or greater interest in a foreign partnership controlled by U.S. persons that own 10% or greater interest in that partnership. The U.S. person is required to file specified information on Form 8865.

Monetary penalties and penalties of reduced foreign tax credits may be imposed under Secs. 6038(b) and (c), respectively, for failure to file the information required by Sec. 6038(a)(1) within the time prescribed. Regarding the monetary penalty, the regulations provide that a U.S. person that fails to timely and accurately comply with the reporting requirements of Sec. 6038(a) must pay a penalty of $10,000 for each annual accounting period or tax year of each...