The Taxpayer Advocate Objects to Foreign Penalty Enforcement

The Taxpayer Advocate Objects to Foreign Penalty Enforcement

Taxpayers Advocate Service (TAS) Foreign Penalty Update

For many years, our international tax law team has written numerous articles on the absolute absurdity of how the Internal Revenue Service penalizes taxpayers for the failure to report certain international information reporting forms, such as Form 3520 and Form 5471. For reference, these are international reporting forms and do not necessarily reflect any income associated with the foreign assets. For example, when a person receives a foreign gift and the gift exceeds the threshold requirements for having to report that gift, the taxpayer files a Form 3520. Oftentimes, these gifts are large only because the U.S. Person recipient is either receiving an inheritance from a foreign person — or a congratulatory gift from a grandparent or other person who is simply proud of their child or grandchild for reaching a milestone such as graduating from college starting a family, etc. Oftentimes, the taxpayer only receives one of these gifts in a lifetime and there is typically never anything nefarious reflected in this type of gift, no matter how large it is — and usually no unreported foreign income. For example, a U.S. taxpayer may receive a gift of $600,000 from a foreign relative, which is the culmination of a lifetime of savings from a grandparent who just wants to help their grandchild who is living in a new country and does not qualify for credit — since they have only been off of the F-1 Student Visa for a few years and does not have sufficient employment history to qualify for credit. Let’s walk through some of the key excerpts from the taxpayer advocate services summary from May of 2024.

What Is the Problem?

• • • U.S. persons who receive money from abroad or who have foreign financial interests or cross-border activities are potentially subject to a range of U.S. reporting requirements. But these taxpayers commonly do not know they are subject to international information reporting requirements and if they do, they do not have the resources to hire tax professionals to help navigate the process. Typically, upon learning of their filing obligation, they voluntarily file the missing information returns – albeit late – only to have their compliance rewarded with a harsh penalty. This is because the IRS has decided to systemically assess many of these penalties, meaning its computer system automatically assesses the penalty upon receipt of a late international information reporting return without any review or action from IRS personnel.

    • To make matters worse, although the IRS can waive these penalties if taxpayers show they had reasonable cause for the failure to file, it often does not immediately consider requests for reasonable cause relief for international information reporting penalties. Furthermore, the IRS may tell taxpayers they can submit requests for relief, but then it doesn’t consider them and assesses taxpayers the penalty. The result is that taxpayers have to resubmit any defenses later in the process.

    • The IRS’s cavalier approach is unfair to taxpayers and inefficient for our tax system. By systemically assessing penalties when taxpayers willingly come forward and file their late returns, the IRS discourages voluntary compliance. When taxpayers know that voluntarily filing is going to result in a crushing penalty that is going to be difficult and costly to challenge, how many taxpayers decide not to file and hope the IRS doesn’t find them? 

What Is the Solution?

• • • The good news is that there is a clear and simple way for the IRS to fix this problem. The IRS needs to stop systemically assessing these penalties now. It must provide taxpayers their rights to be heard and to pay no more than is due before assessing a penalty, which must include review of any reasonable cause relief requests before assessment. Since the IRS began systemically assessing these international information return penalties, it has harmed too many taxpayers. If the IRS wants to meet its stated intention to be transformative in tax administration, this simple change would provide much-needed relief for taxpayers, encourage voluntary compliance, and be consistent with the Taxpayer Bill of Rights.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

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. 

This resource may help taxpayers seeking to hire offshore tax counsel: How to Hire an Offshore Disclosure Lawyer.

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.