Avoiding the “Automatic” $10,000 penalty for late filing of International Information Returns

By admin of MillarLaw A Professional Corporation On Sunday, November 12, 2017

Taxpayers who fail to timely file international information returns, such as Form 3520, Annual Return of a Controlled Foreign Corporation are subject to an automatic assessment of $10,000 per return per year up to a maximum of $60,000 per return per year if the simply file the return late. However for those taxpayers who use the Delinquent International Information Returns Procedure (“Delinquent Procedure”) the penalty can be avoided.

“Taxpayers who do not need to use the OVDP or the Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who:

1. have not filed one or more required international information returns,
2. have reasonable cause for not timely filing the information returns,are not under a civil examination or a criminal investigation by the IRS, and
have not already been contacted by the IRS about the delinquent information returns should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.”

Although there are no regulations defining “reasonable cause” within the specific context of IRC section 6038,the applicable penalty section, the few cases that have confronted this issue have adopted the Supreme Court’s definition as stated in United States v. Boyle, 469 U.S. 241, 246 (1985). See, e.g., Congdon v. United States, No. 4:09-CV-289, 2011 WL 3880524, at *2 (E.D. Tex. Aug. 11, 2011); In re Wyly, 552 B.R. 338, 442 (Bankr. N.D. Tex. 2016). A taxpayer must demonstrate that he exercised ordinary business care and prudence but nevertheless was unable to file within the prescribed time. Boyle, 469 U.S. at 246.”

The key to making a successful filing under the Delinquent Procedure is the statement of “reasonable cause”. A reasonable cause statement must be attached to each delinquent information return filed for which reasonable cause is being requested. The IRS provides that reasonable cause may be established by taxpayer’s reliance on erroneous advice by the IRS, the taxpayer is unable to obtain records, (emphasis added) or death, serious illness, or unavoidable absence. (See I.R.M.; I.R.M.; I.R.M.”

In a recent case we handled, the potential penalty expose was greater than $100,000. The facts clearly demonstrated that the taxpayer who was a shareholder in a Controlled Foreign Corporation was denied access to information to enable him to complete a Form 5471 and file it timely. The taxpayers was a 10 percent shareholder in a holding company that had several wholly owned foreign investment corporations, one set up for each country in which it invested. The holding company was the only source of the information that would have allowed the taxpayer to prepare a proper and complete return. The holding company provided the taxpayer with the information and a letter explaining why the records were late. The taxpayer under the Congdon rule should be able to avoid penalties and save over $100,000.

Before you assume that you will have to pay a $10,000 per return per year penalty for late filing of an international information return, talk with us, we may be able to help.