Challenging IRS International Assessable Reporting Penalties

How to Challenge International Information Reporting Penalties

Foreign Assessable Penalties

When it comes to international information reporting penalties, the Internal Revenue Service does not play fairly. That is because international information reporting penalties such as Form 3520, Form 5471, and Form 5472 are not subject to typical deficiency procedures. Rather, when it comes to these types of foreign penalties, the IRS will simply issue a CP15 Notice— putting the Taxpayer on notice that the IRS has assessed a penalty and that they have 30 days to protest the letter. These types of procedures are not fair to the Taxpayer and have led to various lawsuits and litigation. In the recent 2023 case of Farhy, the United States Tax Court ruled against the IRS specifically on the issue of whether the IRS is empowered to assess 5471 international reporting penalties (short of filing a lawsuit against the Taxpayer).

What can a Taxpayer do when they receive an assessable penalty notice?

No Pre-Assessment Review

One of the biggest problems with the way international information penalties are enforced is that taxpayers are not afforded the opportunity for a pre-assessment review. If the taxpayer had the opportunity for a pre-assessment review, then once they received a notice of deficiency, they would have the opportunity to challenge the IRS before the penalty has been assessed. Instead, under the current procedures, the taxpayer can only challenge the IRS after the penalties have been assessed. In addition, unresolved assessed penalties can lead to federal tax liens and levies.

Delinquent International Information Return Submission Procedures (DIIRSP)

Prior to November 2020, the Internal Revenue Service offered a procedure referred to as the Delinquent International Information Return Submission Procedures (DIIRSP), which allows taxpayers to submit previously unreported international reporting forms (in situations in which there was no unreported income) and the IRS almost always guaranteed to waive any potential penalties.

Since November 2020, the IRS has eliminated the automatic DIIRSP penalty waiver. 

Farhy (U.S. Tax Court 2023)

In Farhy, the Tax Court took the position that the IRS is simply not authorized to issue assessable penalties because the code section does not authorize it. Thus, the Form 5471 penalties were held to not have been properly assessed. This was a big win for Taxpayers, although it may be short-lived since the IRS also filed a Notice of Appeal which means they intend on challenging the Tax Court’s ruling. If the IRS is unsuccessful on appeal, it could also ultimately lead to an extension of the ruling in Farhy to other international information reporting forms, such as Forms 3520, 3520-A, and 5471.

What Can Taxpayers Do at this Time?

If you received an assessable penalty notice — which will usually arrive on a CP15 notice — it is important to take action in order to preserve your rights. Oftentimes, this will begin with a protest letter, followed by either an Appeal or Collection Due Process Hearing. There are pros and cons to each approach and we have a separate article detailing the procedures for challenging a Form 3520 Penalty.

In order to go to the Federal District Court or the Court of Federal Claims, taxpayers typically have to pay the amount due first under the Flora Rule, although, in the recent case of Mendu, the court said this rule does not apply to FBAR so there is the argument that Flora should not apply to Form 3520 either. 

Typically, the protest must file the Protest within 30 days of the date of the CP15 Notice.

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 who 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. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

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.