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MSP #8: INTERNATIONAL

The IRS’s Assessment of International Penalties Under IRC §§ 6038 and 6038A Is Not Supported by Statute, and Systemic Assessments Burden Both Taxpayers and the IRS

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #8-1

Stop erroneously assessing Chapter 61 penalties, including the IRC §§ 6038 and 6038A penalties, and refer assessment and collection efforts to the Department of Justice when appropriate.

IRS RESPONSE TO RECOMMENDATION: We disagree the IRS lacks legal authority to assess Chapter 61 penalties. As previously stated, the Internal Revenue Code provides two methods to assess penalties, either (1) pursuant to deficiency procedures or (2) as assessable penalties, that is, those penalties not subject to deficiency procedures. Penalties under Chapter 61, including sections 6038 and 6038A, are meant to enforce reporting requirements, are not based on the tax shown on a return or the existence of a deficiency, and may be imposed even when the taxpayer has an overpayment. No court has ever ruled that the IRS lacks authority to assess these penalties without following deficiency procedures, and the IRS has consistently treated Chapter 61 penalties as assessable as far back as records are available.

Further, the authority in section 6201(a) to assess “all taxes” is an expansive provision broad enough to include Chapter 61 penalties without regard to whether assessable penalties refers exclusively to penalties in Chapter 68B of the Code or had a broader meaning of penalties not subject to deficiency procedures.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s argument that it has the legal authority to assess Chapter 61 penalties is unpersuasive. TAS concurs that the IRC does not provide authority for the use of deficiency procedures with respect to these penalties. Beyond this negative proposition, the IRS does not provide any unambiguous statutory language or on-point judicial rulings regarding how Chapter 61 penalties can be properly assessed.  IRC § 6201 simply states that assessable penalties can be assessed and the caselaw only stands for the proposition that penalties not subject to deficiency procedures do not require deficiency procedures. These circumstances, however, do not establish that Chapter 61 penalties are assessable in the first instance. The IRS primarily relies on the circular logic that just because the IRS cannot apply deficiency procedures, it therefore, by definition, must be able to treat these penalties as assessable. Nevertheless, the IRS fails to explain how the authority to assess is affirmatively conferred by its inability to proceed using deficiency procedures. The IRS seeks to create a false dichotomy, under which the lack of one right automatically gives rise to another. The National Taxpayer Advocate and some legal commentators, however, see nothing in the law giving the IRS the actual or implied authority to assess Chapter 61 penalties. This is why, in the absence of Congressional action, assessment and collection of Chapter 61 penalties must be referred to the Department of Justice.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #8-2

Send soft notices to taxpayers upon discovery of late-filed international information returns as a means of enhancing compliance and minimizing the number of penalties being asserted.

IRS RESPONSE TO RECOMMENDATION: Generally, soft notices are used by the IRS to alert taxpayers to potentially non-compliant behavior, enabling them to take action to become compliant if applicable. Because section 6038 and 6038A filing requirements are event based, the IRS can’t determine who has a requirement prior to the taxpayer filing the form, except in cases of direct taxpayer communication such as a field audit. As such, the IRS would be unable to identify missing forms in advance and send soft letters as an encouragement for compliance before assessing a penalty. These penalties are only systemically assessed after the taxpayer has resolved their non-filing issue by filing late. Sending a soft letter to the taxpayer, where there are no actions for them to take to rectify their non-compliance, would be confusing to taxpayers, may increase taxpayer burden, and would be a poor use of IRS resources. It would also be a disservice to taxpayers make a concerted effort to understand their tax obligations and timely comply. Assessment of these penalties at filing, much like with other assessable penalties, provides the most equitable treatment of enforcement.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Pre-assessment correspondence could benefit both taxpayers and the IRS. We agree that the classic soft letter allowing for initial compliance as a means of avoiding a penalty would be inoperable in the instant case. The high rates of IRC §§ 6038 and 6038A penalty abatements, however, indicate that many of these penalties are being unnecessarily, and unjustifiably, assessed. One means of addressing this circumstance is to send correspondence, be it designated as a soft letter or something else, giving potentially impacted taxpayers the opportunity to explain why no penalty should be assessed in the first instance. This approach would contribute to the education of taxpayers and minimize the inefficient and burdensome practice of first assessing and then abating these penalties. Further, it would contribute to tax equity by placing the IRS in a better position to distinguish between good-faith mistakes and intentional tax noncompliance.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #8-3

Extend eligibility for the first-time abatement to all Chapter 61 penalties, including the IRC §§ 6038 and 6038A penalties, regardless of whether the underlying return was filed late.

IRS RESPONSE TO RECOMMENDATION: The IRS’s policy of First Time Abatement (FTA) has only ever been applicable to the three common civil penalties: failure to file2, failure to pay, and failure to deposit. Information returns, both domestic and international, are not eligible.

CORRECTIVE ACTION: N/A

TAS RESPONSE: A first-time abatement of Chapter 61 penalties is both possible and desirable. The IRS already allows an abatement of the IRC §§ 6038 and 6038A penalties whenever a related IRC § 6651 penalty receives a first-time abatement. In information provided to TAS by the IRS, it estimates that 40 percent of the abatements in this area are attributable to this practice. Becau se the first-time abatement is a matter of policy, the IRS is free to provide a broad first-time abatement for all Chapter 61 penalties and we continue to recommend the IRS abate these penalties through the first-time abatement procedures. This expansion would help to educate taxpayers and streamline tax administration. It would foster a better understanding of the law by taxpayers, facilitate information gathering by the IRS, and substantially decrease the number of penalties asserted. Good faith taxpayers would have their rights protected, while the IRS would still receive necessary information.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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