IRS RESPONSE TO RECOMMENDATION: Assessment of International Information Return (IIR) penalties encourages taxpayer compliance with IIR filing requirements, and IIRs provide the IRS with information that is essential to combat tax evasion and close the international tax gap. Assessing these penalties at filing holds all taxpayers equally accountable for fulfilling their reporting obligations, not just those selected for audit. Taxpayers may request review by the Independent Office of Appeals before payment of the assessed penalty.

Currently, the IRS follows the same procedures for assessing Chapter 61 IIR penalties as with the analogous Chapter 68 IIR penalties. Given the frequency with which combinations of these penalties are imposed simultaneously, separating the procedures for the different penalties—including by possibly introducing new deficiency procedures only for Chapter 61 IIR penalties—would create additional administrative burdens and confusion for affected taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS strongly disagrees with the IRS’s justification for inaction and continues to renew its request to stop systemic assessments. The argument that adopting the recommendation would create additional administrative burdens falls short because the current process is administratively burdensome and unnecessarily harms lower- and middle-income taxpayers and small and mid-size businesses. The IRS ultimately abates many of these penalties, often because it determines that granting reasonable cause relief is appropriate, which illustrates the inefficiency of the existing process. The high abatement rates, especially in comparison to other penalties, show that taxpayers and the IRS expend significant time, energy, and money addressing penalties that the IRS should not have assessed in the first place.

TAS recognizes the important policies underlying the IIR penalty regime. However, we are deeply concerned that the IRS is applying penalties in an unfair and draconian way, particularly with respect to lower- and middle-income individuals and small and mid-size businesses. By systemically assessing penalties when taxpayers willingly come forward and file their late returns, the IRS discourages voluntary compliance. The IRS’s cavalier approach is unfair to taxpayers and inefficient for our tax system.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

IRS RESPONSE TO RECOMMENDATION: ​The IRS agrees to update policy and procedural guidance in the Internal Revenue Manual to require review and consideration of reasonable cause statements included with late-filed Forms 3520 and 3520-A prior to making the penalty assessment.

CORRECTIVE ACTION: The IRS agrees to update policy and procedural guidance in the Internal Revenue Manual to require review and consideration of reasonable cause statements included with late-filed Forms 3520 and 3520-A prior to making the penalty assessment.

TAS RESPONSE: TAS commends the IRS’s decision to update the IRM in this manner. TAS encourages the IRS to consider similarly updating the IRM for other IIR penalties, including penalties assessed under IRC § 6038 due to the high dollar value of those assessments.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 10/1/2024

IRS RESPONSE TO RECOMMENDATION: The IRS is responsible for enforcing the tax law and using the tools Congress provides effectively to prevent tax evasion and abuse. Penalties are one of the tools the IRS uses to promote voluntary compliance. Where prior non-reporting of offshore assets and income is unintentional, the IRS is already working to improve and streamline IIR assessment programs to avoid assessing penalties and, if a penalty is assessed, to resolve the taxpayer’s case more quickly. Expanding First Time Abate (FTA) to address these IIR penalties is not the best way to accomplish these goals.

FTA is an administrative waiver that provides relief from certain failure to file, failure to pay, and failure to deposit penalties for taxpayers with a history of good tax compliance. Because eligibility for FTA is generally based on the taxpayer having filed and paid on time in the prior three tax years, FTA is only available to one filing every 4 years. In contrast, IIR filings are event based and may not be required every year, making it difficult to establish compliance history. Taxpayers also frequently file multiple years of delinquent IIRs at once, in which case FTA would only apply to one of the periods and taxpayers would still need to rely on alternative abatement requests or reasonable cause statements for the other years. Allowing FTA for all delinquent IIRs filed together would allow taxpayers who had been hiding money offshore to avoid using established voluntary disclosure programs without adverse consequence; instead, these taxpayers could “quietly disclose” past non-compliance by filing an amended return that triggers the statute of limitations and still avoid penalties.

​CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS is deeply concerned that the IRS is applying IIR penalties in an unfair and draconian way that harms taxpayers, especially lower- and middle-income individuals and small and midsize businesses who voluntarily come forward and who overwhelmingly bear the impact of these penalties. We are encouraged by the IRS’s statement that it is working to improve and streamline IIR assessment programs and resolve those cases more quickly. However, this does not mean the IRS should not take other actions. Expanding FTA to all IIR penalties is one additional way to improve the IIR assessment process, and the IRS can do so in a manner that does not undermine the important policies underlying the penalty regime while promoting voluntary past and future compliance. The IRS may need to tailor FTA when applying it to certain taxpayers, but that is not a justification for inaction.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

IRS RESPONSE TO RECOMMENDATION: The IRS, with IRS Chief Counsel and the Department of Treasury, agree with the TAS recommendation and are working on proposed regulations under IRC section 6039F (REG-124850-08 and RIN 1545-BI04), which, when finalized, will fully implement the recommendation. The NPRM is anticipated to be published by end of 2024.

CORRECTIVE ACTION: The IRS, with IRS Chief Counsel and the Department of Treasury are working on proposed regulations under IRC section 6039F (REG-124850-08 and RIN 1545-BI04), which, when finalized, will fully implement the recommendation. The NPRM is anticipated to be published by end of 2024.

TAS RESPONSE: TAS commends the IRS, IRS Chief Counsel, and the Department of the Treasury for their efforts on the proposed regulations that, when implemented, will make the administrative threshold in Notice 97-34 subject to the same inflation adjustments as the $10,000 threshold set forth in IRC § 6039F. TAS is encouraged by the IRS’s steps to alleviate the disparity between the penalties.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): Ongoing

IRS RESPONSE TO RECOMMENDATION: Currently, Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts records gratuitous transfers that may be reportable events, which are described in detail on page 2 of Form 3520, Part I, and Schedule B, Line 13. In addition, we do not believe Form 1040 would be the proper vehicle for such a question, as the Form is filed by over 160 million taxpayers each year, the vast majority of whom do not have any foreign transactions, gifts, or inheritances – such a question would have to be written in such a narrow way that all 160 million taxpayers would not need to be required to file the Schedule B (Form 1040) solely to answer the question regarding a foreign gift.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS disagrees with the IRS’s justification for not acting. We believe there are alternative ways of implementing this recommendation, such as by expanding Question 8 on the Form 1040, Schedule B, and adding a short explanation in the accompanying instructions, neither of which would require a programming change. Making these modifications to the Schedule B and its instructions would provide important notice to taxpayers who are already required to complete Part III of the Schedule of their potential reporting requirements. Because taxpayers are often not aware of reporting requirements for foreign gifts, particularly when there are no tax consequences, and yet face potentially life-altering consequences for not filing the information return, TAS urges the IRS to take every reasonable opportunity available to notify taxpayers of these requirements.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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