National Taxpayer Advocate Calls Out IRS on International Information Return Penalties

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TL Fahring focuses on helping individuals and businesses with a wide variety of matters involving state, federal, and international taxation. He has represented clients in all stages of federal and state tax disputes, including audits, administrative appeals, litigation, and collection matters. Mr. Fahring also has used his tax knowledge to assist clients in planning complex domestic and international transactions, including advising as to potential reporting and withholding requirements.

Mr. Fahring received his J.D. from the University of Texas School of Law, where he graduated with high honors and was inducted into the Order of the Coif and Chancellors honors societies. After clerking for a year at the Texas Eleventh Court of Appeals, he attended New York University School of Law, where he received an LL.M. (Master of Laws) in Taxation and served as a student editor on the Tax Law Review.

In a blog post on May 21, 2024, National Taxpayer Advocate Erin Collins called for the IRS to cease its systemic assessment of international information return penalties and for Congress to amend the Internal Revenue Code to provide taxpayers with a prepayment forum in U.S. Tax Court to challenge the assessment of these penalties.

Collins pointed out that, contrary to expectations, these penalties disproportionately affect lower- and middle-income individuals and small to midsize businesses. An array of penalties may be assessed against U.S. persons in connection with failure to report certain foreign assets and activities, including the receipt of gifts from a foreign person over a certain amount, ownership of foreign business entities or trusts, and the transfer of money or property to certain foreign persons. Taxpayers often don’t even know they have these information reporting requirements and are shocked when they receive penalty assessments from the IRS that may be completely out of line with any unreported taxes at issue.

While the IRS can abate these penalties if taxpayers have reasonable cause for failure to file, the IRS often doesn’t immediately consider these requests for abatement before assessing them. Instead, taxpayers are often left with the long, torturous, and expensive process of attempting to get these penalties abated after assessment.

Collins notes:

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?

And if the IRS doesn’t abate these penalties, taxpayer cannot further appeal these penalties without first paying them and then seeking a refund in U.S. district court or the U.S. Court of Federal Claims. The typical prepayment forum for federal taxes—the U.S. Tax Court—is generally unavailable for these penalties because the provision in the Internal Revenue Code granting the U.S. Tax Court jurisdiction over federal taxes does not include these international information reporting penalties.

Collins argues that “[i]t is unconscionable to require taxpayers to fully pay a penalty that can be disproportionate to the tax owed without first giving taxpayers an opportunity to obtain independent judicial review of the IRS’s determination.”

Collins’s post is a distillation and reminder of the recommendations in the National Taxpayer Advocate’s Annual Report to Congress regarding the IRS’s “draconian” approach to international information return penalties.