I’ve discussed the good and bad IRS responses to the administrative recommendations in my 2023 Annual Report to Congress. Now, it’s time to address the concerning responses that need improvement. Two Most Serious Problems – international information return (IIR) penalties and compliance challenges faced by taxpayers abroad – had disappointing responses from the IRS. Of the 15 recommendations I made regarding these two problems, the IRS fully adopted only two and completely rejected six for this underserved community of international taxpayers. I highlight a few of the IRS responses in this blog.
Mail Delays
One of the IRS’s most disappointing and baffling responses deals with mail delays. Outside stakeholders consistently raise delays U.S. taxpayers abroad face receiving and sending mail to the IRS as a major burden. I made the simple, common-sense recommendation that the IRS allow taxpayers located outside of the United States an additional 60 days up front to respond to all IRS correspondence that requires a response or other action from the taxpayer.
The IRS rejected this recommendation outright stating that it already provides additional time for overseas taxpayers to respond to correspondence, citing that it gives international taxpayers 30 days versus 20 to provide information to complete processing their return. Most notably, the IRS suggests taxpayers abroad can respond to it faster, stating: “Using regular mail is only one option available to overseas taxpayers” and offering ways international taxpayers can contact the IRS. This cavalier response places the entire burden on taxpayers without recognizing that mail delays on the front end (i.e., delays in receiving IRS notices in the first place) may be the cause of the problem.
Mail delays experienced by taxpayers outside of the United States are real and result in taxpayers losing critical administrative, due process, and judicial rights.
Although a simple solution is for the IRS to allow additional time to these taxpayers, it is unwilling to do so beyond the few circumstances where it already provides additional, albeit insufficient, time. My recommendation would protect the rights of taxpayers abroad and help them with minimal effort from the IRS.
Passport Revocation or Denial
If the Secretary of the Treasury receives certification from the IRS that a taxpayer has a “seriously delinquent tax debt” under IRC § 7345, the Secretary is required to provide the certification to the State Department. For 2024, a seriously delinquent tax debt is when a taxpayer has unpaid taxes totaling more than $62,000 for which the IRS has filed a Notice of Federal Tax Lien and provided related administrative remedies or has issued a levy. The State Department generally will not renew a passport or issue a new one and can also revoke a passport once it receives the certification. The IRS does not send a standalone precertification notice to taxpayers; it only informs them at the time it makes the certification. Because of the critical role of a passport, especially to taxpayers abroad, I recommended that the IRS provide a precertification notice to taxpayers that allows them to try to resolve the liabilities and appeal a proposed IRS certification before the IRS transmits the certification to the State Department.
The IRS rejected this recommendation. It stated that “at this late stage in the collection process, the taxpayer has had multiple opportunities to resolve their tax debt and pay their liability.” The IRS further noted that taxpayers receive a Collection Due Process notice, along with a publication discussing the collection process, which advises of possible passport revocation or denial. The IRS fails to note, however, that the notice is for the filed lien or proposed levy, not delinquent tax debt certification. Finally, the IRS states that prior to making a recommendation for revocation, it sends a Notice of Intent to Request U.S. Department of State Revoke Your Passport, which allows the taxpayer an opportunity to resolve the tax liability. But this letter is only issued after the IRS has already certified the debt to the State Department and when the decision to revoke the taxpayer’s passport lies solely with the State Department. I would have assumed the IRS would be more interested in resolving the outstanding tax liability than cutting off a taxpayer’s ability to travel abroad.
It might come as a surprise to the IRS, but not every taxpayer reads each notice line by line, from front to back, or can understand the consequences stated in its letters.
The only direct precertification notice that the IRS provides to taxpayers that the State Department may revoke their passports is a paragraph on the second page of a Collection Due Process notice that the IRS may have issued months or even years prior to a certification. Because a passport is vitally important to U.S. citizens, especially those abroad, providing a precertification notice to taxpayers would ensure that taxpayers understand the consequences of a seriously delinquent tax debt certification and encourage compliance. This was a simple and practical request. However, rather than a flat-out no, I would propose the IRS consider conducting a study to determine if the additional notice would benefit taxpayers and potentially increase collections.
Assessment and Collection of International Information Return (IIR) Penalties
U.S. persons who receive money from abroad or have foreign financial interests or activities may need to file IIRs and face significant penalties if a filing is late, incomplete, or inaccurate. The IRS systemically assesses most of the penalties when a taxpayer files a late return, thus the taxpayer has no way to dispute the penalties before assessment. The IRS ultimately abates many of these penalties, which means taxpayers and the IRS expend time, energy, and money addressing penalties that the IRS should not have assessed in the first place. In the 2023 Annual Report to Congress, TAS found that for the most frequently assessed IIR penalties (IRC §§ 6038 and 6038A) averaged across 2018-2021, the abatement percentage as measured by number of penalties was 74 percent and by dollar value was 84 percent. I am deeply concerned the IRS applies the penalties in an unfair and draconian way, particularly impacting lower- and middle-income individuals and small and mid-size businesses. I recommended the IRS stop automatic assessment and collection of Chapter 61 IIR penalties prior to considering the taxpayer’s specific facts and circumstances, including providing the taxpayer appeal rights. Automatically assessing penalties on taxpayers who voluntarily come forward encourages taxpayers to hide in the weeds as there are limited benefits to coming forward.
If the IRS discovers the error upon examination, the penalty is the same amount, and the taxpayer can establish their reasonable cause during an examination. So, taxpayers ask, “Why should I voluntarily comply? Why not take the odds that the IRS won’t find the error?”
The IRS rejected this recommendation. In support of the current inequitable approach, the IRS stated that it follows the same procedures for assessing other IIR penalties under Chapter 68 and that allowing different procedures for Chapter 61 IIR penalties would “create additional administrative burdens and confusion for affected taxpayers.” It further stated that assessing the IIR penalties “encourages taxpayer compliance” and “provides the IRS with information that is essential to combat tax evasion and close the international tax gap,” noting that taxpayers may request review by Appeals before paying the penalties.
This response is hypocritical as the current approach creates undue burden and confusion to taxpayers when they voluntarily come forward to comply with their filing obligations only to open their mail to see large penalties assessed without any consideration or the ability to set forth their reasonable cause defense. The IRS saddles taxpayers with potentially huge liabilities up front, before even considering their circumstances, and then makes them work backward to show why the penalty should not apply. Further, by systemically assessing penalties when taxpayers willingly come forward and file their late returns, the IRS discourages voluntary compliance. Its continued automatic assessment of IIR penalties reflects a callous disregard of taxpayer rights. The IRS should provide taxpayers the ability to present their reasonable cause defense and to have a review by the Independent Office of Appeals before any assessment of penalties.
First-Time Abatement Relief for International Information Return Penalties
Under first-time abatement (FTA), the IRS will waive a penalty for one tax period if the taxpayer has not had a similar penalty in the prior three tax periods. The IRS does not offer FTA for certain standalone penalties, including IIR penalties, unless it waives the failure-to-file penalty for the associated late-filed tax form. IIR filing requirements are wide-ranging and complex, and taxpayers are often unaware of them and inadvertently trigger penalties. Many of the penalties apply even when there is no underlying tax liability or are disproportionate to any potential liability. I recommended the IRS extend eligibility for FTA to all IIR penalties regardless of whether the taxpayer filed the underlying return.
The IRS rejected this recommendation, stating it 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.” Although the IRS provided no information on what it is doing in this regard, it concluded that “expanding FTA to IIRs is not the best way to accomplish these goals.” It added that establishing compliance history for IIRs is difficult and suggested that bad actors who had been hiding money offshore could use FTA to avoid using established voluntary disclosure programs without adverse consequence.
The IRS’s response is unpersuasive. Its current practices harm taxpayers, especially lower- and middle-income individuals and small and midsize businesses who voluntarily come forward and who overwhelmingly bear the impact of the penalties. The IRS must find ways to fix this. One way is by expanding FTA to all IIR penalties, which it can do in a manner that encourages voluntary past and future compliance without undermining the policies behind the IIR regime.
Better Information for Taxpayers About Requirements to Report Foreign Gifts
Taxpayers are often not aware of reporting requirements for foreign gifts, particularly when there are no U.S. tax consequences, yet they face potentially life-altering consequences for not filing the information return. To alert more taxpayers to these requirements, I recommended the IRS update the Form 1040 Schedule B and its instructions to highlight that foreign gifts are potentially reportable transfers.
In rejecting the recommendation, the IRS noted that the information return and its instructions already explain the requirements and argued that the Form 1040 is not the “proper vehicle” for the question since it would have to be written in such a narrow way so that all Form 1040 filers would not have to file the Schedule B just to answer the foreign gift question.
The IRS’s response misses the point. Yes, the information return and its instructions contain the information; the problem is that many individuals caught up in the IIR regime are not aware of the requirements and are therefore not aware of the return. Further, the fact that the IRS may have to carefully write a question doesn’t excuse inaction. The IRS must do a better job of alerting unsuspecting taxpayers about these requirements and should take every reasonable opportunity to expand awareness, including by placing the information on the forms and instructions where more taxpayers will see it.
Conclusion
The IRS’s disappointing responses to my recommendations regarding international issues reflect its continued disregard for the problems facing international taxpayers. International taxpayers and U.S. citizens residing abroad continue to struggle with U.S. tax compliance, including the IRS’s draconian IIR penalty regime. My recommendations would alleviate some of the problems encountered by international taxpayers and show this population that that the IRS is committed to helping. Unfortunately, the IRS failed to take these opportunities. I will continue to advocate for international taxpayers to improve tax administration for all taxpayers regardless of where they reside.
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The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.