2018 ANNUAL TAX CONTROVERSY INSTITUTE October 23, 2018 …business.uclaextension.edu/wp-content/uploads/Goodbye... · 2018-10-19 · Option 1 - Offshore Voluntary Disclosure Program

2018 ANNUAL TAX CONTROVERSY INSTITUTE

October 23, 2018

Beverly Hills Hotel Beverly Hills, California

Goodbye Offshore Voluntary Disclosure Program -Hello... Litigation of International Reporting Penalties

Moderator:

Dennis L. Perez, Esq. Hochman Salkin Toscher Perez P.C.

Panelists:

Cassidy Collins, Esq. Internal Revenue Service

Office of Chief Counsel Los Angeles, California

Magdalena (Maggie) Rivas-Bezerra Territory Manager LB&I - Int'l Individual Compliance

Internal Revenue Service

Gary Slavett, Esq. Holtz, Slavett & Drabkin, APLC

2018 ANNUAL TAX CONTROVERSY INSTITUTE

Goodbye Offshore Voluntary Disclosure Program -Hello... Litigation of International Reporting Penalties

Materials:

1) IRC Closing the 2014 Offshore Voluntary Disclosure Program FAQs

2) IRS Letters 6019 and 5935

3) Article re: FATCA Fraud Conspiracy Guilty Plea

4) Article re: Summons on Law Firm

5) Comprehensive IDR/Summon Request

6) IRS Announces the Identification and Selection of Six Large Business and International Compliance Campaigns, May 21, 2018

7) Internal Revenue Manual Quick Reference Guide to International Penalties (I.R.M. Ex. 20.1.9-1)

8) I.R.M. § 4.26.16.6 - FBAR Penalties

9) I.R.M. § 20.1.9.3 — IRC 6038—Information Reporting With Respect to Foreign Corporations and Partnerships (Form 5471)

10) I.R.M. § 20.1.9.10 — IRC 6039F(c)—Large Gifts From Foreign Persons (Form 3520)

11) I.R.M. § 20.1.9.13 — IRC 6677(a)—Failure to File Information with Respect to Certain Foreign Trusts—Form 3520

12) I.R.M. § 20.1.9.14 - IRC 6677(a) and (b) -Fore ign Trusts With U.S. Owners—Form 3520-A

13) I.R.M. § 20.1.9.22 — IRC 6038D—Information With Respect to Specified Foreign Financial Assets (Form 8938)

14) Indiana Rolling Mills Co. v. Commissioner, 13 B.T.A. 1 1 4 1 (1928)

15) Field Service Advisory 33381431 (February 14,1997)

Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions an... Page 1 of 8

ffl IRS Closing the 2014 Offshore Voluntary Disclosure Program Frequently Asked Questions and Answers

Your Offshore Compliance Options

Questions # Answers

Is the 2014

OVDP closing?

Yes. The IRS will close the 2014 OVDP

effective September 28,2018. The FAQs * 2 0 1 2 Offshore

for the 2014 OVDP provided tha t the

program may close stating: "[T]he terms

of this program could change at any t ime

going forward. For example, the IRS may

increase penalties or limit eligibility in

Voluntary Disclosure Program

• Delinquent FBAR Submission Procedures

the program for all or some taxpayers or . Delinquent

defined classes of taxpayers - or decide International Information Return Submission Procedures

to end the program entirely at any

point."

Why is the IRS

closing the 2014

OVDP?

While the program has been successful in

the past, there has been a significant

decline in the number of taxpayers Streamlined participating as well as an increase in Procedures awareness of offshore tax and reporting , ^ ^ Taxpayers

obligations. The IRS has previously

s tated publicly tha t the 2014 OVDP

would close at some time. Taxpayers • US Taxpayers Residing Outside the United States

Instructions for

Residing in the United States

have had the opportunity to participate

in OVDP since 2009.

https://www.irs.gov/individuals/international-taxpayers/closing-the-2014-offshore-volunt... 10/19/2018


Questions # Answers

What is the

deadline for

making a

submission to

the 2014 OVDP?

Complete offshore voluntary disclosures

conforming to the requirements of 2014

OVDP FAQ 24 must be received or

postmarked by September 28,2018 and

may not be partial, incomplete, or

placeholder submissions. Practitioners

and taxpayers must ensure complete

submissions by the deadline to request

to participate in the 2014 OVDP.

3.

Does the closing

of the 2014

OVDP signal a

change in IRS

priorities

towards

offshore tax

noncompliance?

No. Stopping offshore tax

noncompliance and evasion remain top

priorities of the IRS. The IRS enforces

offshore compliance with tax and FBAR

requirements using information received

under the Foreign Account Tax

Compliance Act (FATCA), the network of

intergovernmental agreements between

the U.S. and partner jurisdictions,

automatic third-party account reporting,

and other data-rich sources such as the

Department of Justice 's Swiss Bank

Program and various John Doe

Summonses . The IRS leverages

information resources using enhanced

data analytics to continue to make it

more difficult to evade tax by hiding

offshore.

4



Questions # Answers

Taxpayers will continue to have existing

avenues to disclose offshore

noncompliance after September 28,

2018. Additional information on how to

make disclosures after Sep tember 28,

2018 will be posted on irs.gov.

How can

taxpayers

remedy

significant

offshore

noncompliance

after Sep tember

28, 2018?

5.

Are there any

changes to the

Streamlined

Filing

Compliance

Procedures with

the closure of

the 2014 OVDP?

No. The Streamlined Filing Compliance

Procedures will remain available after

the 2014 OVDP closes. The IRS

encourages taxpayers who have offshore

compliance issues and meet all of the

qualifications of the Streamlined Filing

Compliance Procedures to use these

procedures while they are available.

Only taxpayers tha t can certify under

penalties of perjury tha t their conduct

was non-willful may use the Streamlined

Filing Compliance Procedures.

6.



Questions Answers #

No. Once a taxpayer makes a

submission unde r the Streamlined Filing

Compliance Procedures, the taxpayer

may not make a voluntary disclosure to

Criminal Investigation. Likewise, a

taxpayer who makes a voluntary

disclosure to Criminal Investigation is

not eligible to use the Streamlined Filing

Compliance Procedures.

Can a taxpayer

that uses the

Streamlined

Filing

Compliance

Procedures

make a

voluntary

disclosure to

Criminal

Investigation

after September

28,2018?

Forthe rule concerningthe

differences between the Streamlined

Filing Compliance Procedures and the

2014 OVDP, see the heading

"Coordination between streamlined

procedures and OVDP" on the main

Streamlined Filing Compliance

Procedures website.



Questions # Answers

All quiet disclosures will be reviewed and

will be subject to civil or criminal

penalties as determined under existing

law.

What happens if

a taxpayer

simply files

amended

returns

reporting

income from

previously

undisclosed

foreign financial

assets without

makinga

voluntary

disclosure

(commonly

referred to as a

"quiet

disclosure")?

8.



Questions # Answers

Will the

delinquent

FBAR

submission

procedures and

the del inquent

international

information

return

submission

procedures

remain

available after

the 2014 OVDP

closes?

Yes. The delinquent FBAR procedures

and the delinquent international

information return procedures will

remain available for eligible taxpayers

after September 28,2018. Both

procedures are for taxpayers tha t have

information reporting failures but no tax

noncompliance.

9.



Questions # Answers

I have

suggest ions to

provide the IRS

on procedures

relating to the

IRS' voluntary

disclosure

practice af ter

the 2014 OVDP

closes. How can

I provide my

input to the IRS?

Tax practitioners and members of the

public with feedback on the closure of

the 2014 OVDP and suggestions on future

voluntary disclosure practice procedures

may provide written input to the IRS at

the following email address:

[email protected]

Please use the following in the subject

line of any emails: "Suggestion for

voluntary disclosure practice after OVDP

closes."

10.

The IRS will not send responses or

acknowledgements . Do not send taxpayer identifying information (e.g., name, date of birth, taxpayer identification number, address, etc.) to this email address.

I recognize t ha t

preclearance

from CI takes

some time. With

the IRS closing

the 2014 OVDP

on Sep tember

28, 2018, what ' s

the last day I

can ask for

preclearance

under 2014

OVDP FAQ 23?

Preclearance is not required to make a

submission u n d e r t h e 2014 OVDP.

11.

Because CI needs a minimum of 30 days

to consider preclearance requests, all

2014 OVDP FAQ 23 preclearance requests

must be submitted no la te r than August

24,2018.

Complete offshore voluntary disclosures

conforming to the requirements of 2014

OVDP FAQ 24 must be received or

postmarked by September 28,2018, and

may not be incomplete or placeholder

submissions.



Questions # Answers

I have concerns

that I

committed a tax

or tax-related

crime, and I

want to remedy

my significant

noncompliance.

What do I do

after September

28,2018?

The IRS is revising procedures for the

voluntary disclosure practice. Until

revised procedures are released, the

procedures at I.R.M. 9.5.11.9 remain in

effect.

Taxpayers and practitioners with

questions for Criminal Investigation

about the procedures at I.R.M. 9.5.11.9

may call CI at (267) 466-1607.

12.

Additional information on the Voluntary Disclosure Process after September 28,2018 is forthcoming.

Page Last Reviewed or Updated: 27-Sep-2018


Department of the Treasury Internal Revenue Service

Date:

Taxpayer ID number:

Hotline telephone number:

Respond by:

Dear [Name]:

Why we're writing to you We received information that you held an interest in one financial accounts, foreign entities, or foreign assets, including, but not limited to, an account aênwbaWc name]. Generally, U.S. taxpayers must report foreign financial assets and accounts. We shovy^j fcmy'not have met your U.S. tax and reporting requirements for these foreign investments. As of t ta aa|e ormis letter, we haven't received at least one of the following items:

• Complete and accurate federal income t ^ f c t ^ t e or amended t a ^ g t i & s showing the amount and type of taxable income from the foreign acc^pts^toi t ies , or assets ^ \

• Complete and accurate FinCEN Rania^l ,4. Report of Foreign Bank ancypmancial Accounts (FBARs) • Applicable international i r ^ r m ^ o n ^ u r n s , such as:

- Form 3520, Annual Return to Report Transactions vi|ji Fojpigri%rusts and Receipt of Certain Foreign Gifts

- Form 3520-A, Tfmallfcforffiation Return d t t o r e i ^ T r u s t with a U.S. Owner - Form 5471, InfornTS^Dnrleturn of U.S. Persons^Wth Respect to Certain Foreign Corporations - Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships - Form 926, Return by a U.S. Transfer of Property to a Foreign Corporation - Form 8938, Statement of Specified Foreign Financial Assets - Form 8621, Information Return by Shareholder of a Passive Foreign Investment Company or

Qualified Electing Fund

What you need to do We offer options for taxpayers with foreign investments to address previous failures to comply with U.S. tax and information return obligations. Respond to this letter using one of the options outlined below. If you don't respond by the date shown above, we may refer your tax returns for examination and may assess applicable penalties.

Ik

lis.

Letter 6019(12-2017) Catalog Number 71030W

Option 1 - Offshore Voluntary Disclosure Program We designed the Offshore Voluntary Disclosure Program (OVDP) for taxpayers with exposure to potential criminal liability or substantial civil penalties due to a willful failure to report foreign financial accounts and assets and pay all tax due. You can find information on how to participate in this program at www.irs.gov/uac/2012-offshore-voluntary-disclosure-program.

If you meet the criteria for OVDP, send your submission to the address in the OVDP frequently asked questions and not to the address listed on page 1 of this letter. You can find the OVDP frequently asked questions at www.irs.gov/ovdpfaqs. Send your OVDP submission by the response date shown on page 1 of this letter.

Option 2 - Streamlined filing compliance procedures We offer streamlined filing compliance procedures to taxpayers certifying that their failure to report foreign financial assets and pay all tax due in respect of those assets did not result from willful conduct on their part. You can find information on this option at www.irs.gov/individuals/international-taxpayers/streamlined-filing-conroMlkiJce-procedures.

If you meet the criteria to use the streamlined filing compliance pr^^dff tes , send your submission to the address at the webpage referenced above, and not the address listed^gn letter. Send your submission by the response date shown on page 1 of this letter.

Option 3 - Other If you believe you fully complied with all tax and infopm^^n f ^ o r t i n g requirements for your foreign financial accounts and assets, or you're unable to become ca housing one of the options listed above, provide:

• A statement of facts explaining your positionrlnCTedtni complete history of previously unreported foreign income, foreign entities, and foreign fiWicml accounts. Explain the actions you took to become compliant with U.S. reporting requirements; andprovide copieyjjf confirm compliance.

•eviously filed documents that

§1 •#! • Your contact information, including the complete address where you reside, the address where you receive

mail, and your telephone number.' -""SIS

n m include the foJJowing mlRnei i t s with your signature and date: If you choose option 3, yo

I, , d e i ^ j e u r i i e r penalty of perjury that I have examined this (Nam

entire document, including all attachments and accompanying statements, and that the enclosed is true, correct, and complete.

I also understand with respect to any submission made pursuant to Option 3, the IRS reserves the right to make further contacts with me and/or my representative(s) to clarify any written explanation and/or any other documents. Statements and documents submitted under this option will be checked against information received from banks, financial advisors, and other sources for accuracy.

Signature

Date

Mail your written explanation and any other documents to the address shown on page 1 of this letter by the response date, also shown on page 1.

Someone may represent you If you want someone to represent you regarding this matter, please send a completed Form 2848, Power of Attorney and Declaration of Representative, with your response to this letter.

Letter 6019 (12-2017) Catalog Number 71030W

Extension of time to respond If you need additional time to respond, you may send a written request for an extension of up to [# of days] days to the address shown on page 1 of this letter. We must receive your request prior to the response date shown on page 1 of this letter.

If you have any questions, call the hotline telephone number listed on page 1 of this letter and leave a message. We'll respond to all messages within three business days. Thank you for your cooperation.

Sincerely,

[Name] [Title]

>-

% %

$ sfillilllll

III, %K "

Letter 6019 (12-2017) Catalog Number 71030W

Letter 5935

Do Not Mail This Page Selectable Paragraphs

Select only one

• Selectable Paragraph A

Our records show you made a preclearance request to IRS Criminal Investigation for an Offshore Voluntary Disclosure Program/Initiative (OVDP) or submitted a voluntary disclosure letter to IRS Criminal Investigation under the terms of an OVDP. After contacting IRS Criminal Investigation, you received a letter from the IRS stating you weren't eligible to make a voluntary disclosure or that it was declined. • Selectable Paragraph B

Our records show you made a preclearance request to IRS Criminal Investigation for an Offshore Voluntary Disclosure Program/Initiative (OVDP) or submitted a voluntary disclosure let!|r to IRS Criminal Investigation under the terms of an OVDP. After contacting IRS Criminal Invej|tigation||£ou withdrew your preclearance request or your voluntary disclosure letter and communicate®' an ifrtentijlh to participate in the Streamlined Filing Compliance Procedures. • Selectable Paragraph C

Our records show you made a preclearance request to Disclosure Program/Initiative (OVDP) or submitlld^kvolbitary disclosure letter to IRS Criminal Investigation under the terms of an OVDP. After contactiry^BK^priflffinal Investigatioimvou failed to take necessary steps to complete your voluntary disclosure under Jhe%jms%f an OVDP.

below to complete ihepparî [blank - insert "approved" verbiage |

Our records show you made a preclearance request to IRS Criminal Investigation for an Offshore Voluntary

inal Investigation for an Offshore Voluntary

• Selectable Paragraph D l i se f i raph

Disclosure Program/Initiative (OVDP) or submitted a voluntary disclosure letter to IRS Criminal Investigation under the terms of an O VDP. After contacting IRS Criminal Investigation, [blank - insert "approved" verbiage]

Letter 5935 (9-2017) Catalog Number 69574J

Department of the Treasury Internal Revenue Service

_ _ [Street address]

IRS ^City'State zip] Date:

RE: Taxpayer Name & Last 4 SSN:

Person to contact:

Contact telephone number:

Employee ID number:

Response due date:

% Dear [Name]:

Our records indicate that you haven't taken necessary actionfjto rernedy%)uf non-compliance with U.S. reporting requirements relating to foreign income, foreigirentffees^br fpfeign financial accounts. We've outlined three options available for you to do this. If you don't use one of the three options below, the IRS may initiate an audit to determine your compliance with U.S. reporting requirements.

Option #1 You can make a submission under the Stream! i ned' b i ling Complianc^Procedures if you meet the eligibility requirements. See the "Streamlined Filing'Compliance Procedures" at www.irs.gov for more information about eligibility criteria and how to m i l e I%ubrr¥ission.

gfL 111 If you are eligible to use t hôp^W^tou iûs t write "RESPONSE |TO LETTER 5935" in red across the top of your Form 14653, Certif i toionjly U.S. Person Residim^Wiside of the United States for Streamlined Foreign Offshore Procedures7orFSfflw 14654. Certification by U.1#Person Residing in the United States for Streamlined Domestic Offshore Procedures.

ill \ I Option #2 If you're not eligible oiiyoif"choose not to use Option 1, submit all required tax returns, information returns, and related filings to theaddress on the enclosed Form 15023, Offshore Compliance Status Response . (NOTE: FinCEN Form 114, Report of Foreign Bank and Financial Accounts (a.k.a. FBAR), must be filed electronically with FinCEN; additional information can be found at www.FinCEN.gov).

Submissions under this option are subject to all applicable penalties unless you establish that your noncompliance was due to reasonable cause. If you want to present reasonable cause, provide a statement explaining all the facts and circumstances.

Returns submitted under this option won't be subject to IRS audit automatically, but may be selected for audit under the existing audit selection processes applicable to any U.S. tax return and can also be checked against information received from banks, financial advisors, and other sources for accuracy.


Option #3 If you believe you're fully compliant with all U.S. reporting requirements relating to foreign income, foreign entities, and foreign financial accounts, then provide a narrative statement of facts explaining your position. You must provide a complete history of previous unreported foreign income, foreign entities, and foreign financial accounts and explain the actions you took to become compliant with U.S. reporting requirements.

SUMMARY Please review these three options and respond to this letter using the enclosed Form 15023, Offshore Compliance Status Response. Attach your response and the completed Form 15023 to ensure proper handling. Make and keep a copy for your records. You may need additional copies if multiple responses are required.

If you don't reply to this letter by the response date listed above the IRS may initiate an audit to determine your compliance with U.S. reporting requirements relating to foreign income, foreign entities, or foreign financial accounts. If you need additional time to respond, you can request an extension of up to 60 days by using the enclosed Form 15023.

If you have questions, contact the OVDP Hotline at 737-800^"^9îot5tol l - f ree number).

Sirffeelyl

<11 k i«aim IfTitle] \ % Enclosure: % Form 15023

i f #


t a x n o t e s DOCUMENTSERVICE

O H X >

| DOJ: Former Bank Exec Pleads Guilty to FATCA Fraud I Conspiracy 3 S « Dated Sep. 11, 2018

Full text Published By Tax Analysts X > S 00 Former Executive of Loyal Bank Ltd Pleads Guilty to Conspiring to Defraud the United States

by Failing to Comply with Foreign Account Tax Compliance Act (FATCA) Q. CD CO

3 o. First Ever Conviction for Failing to Comply with Foreign Account Tax Compliance Act

(FATCA) 3 o •O

Tuesday, September 11, 2018

| Earlier today in federal court in Brooklyn, Adrian Baron, the former Chief Business Officer and former 1 Chief Executive Officer of Loyal Bank Ltd, an off-shore bank with offices in Budapest, Hungary and £ Saint Vincent and the Grenadines, pleaded guilty to conspiring to defraud the United States by failing | to comply with the Foreign Account Tax Compliance Act (FATCA). Baron was extradited to the ~ United States from Hungary in July 2018. The guilty plea was entered before United States District 5 Judge Kiyo A. Matsumoto. O

a SB g Richard P. Donoghue, United States Attorney for the Eastern District of New York; Richard E. 8 Zuckerman, Principal Deputy Assistant Attorney General of the Justice Department's Tax Division; | William F. Sweeney, Jr., Assistant Director-in-Charge, Federal Bureau of Investigation, New York ~ Field Office (FBI); and J a m e s D. Robnett, Special Agent-in-Charge, Internal Revenue Service

Criminal Investigation, New York (IRS-CI), announced the guilty plea. Mr. Donoghue thanked the U.S. Securities and Exchange Commission (SEC), both the New York Regional Office and the Washington, D.C. Office; the City of London Police; the U.K.'s Financial Conduct Authority and the Hungarian National Bureau of Investigation for their significant cooperation and ass is tance during the investigation.

FATCA is a federal law enacted in 2010 that requires foreign financial institutions to identify their U.S. customers and report information (FATCA Information) about financial accounts held by U.S. taxpayers either directly or through a foreign entity. FATCA's primary aim is to prevent U.S. taxpayers from using foreign accounts to facilitate the commission of federal tax offenses.

According to court documents, in June 2017, an undercover agent met with Baron and explained that he w a s a U.S. citizen involved in stock manipulation s chemes and was interested in opening multiple corporate bank accounts at Loyal Bank. The undercover agent informed Baron that he did not want to appear on any of the account opening documents for his bank accounts at Loyal Bank, even though he would be the true owner of the accounts. Baron responded that Loyal Bank could open such

Document generated for Daniel Price Page 1 of 2

t a x n o t e s DOCUMENT SERVICE

accounts and provide debit cards linked to them.

9 In July 2017, the undercover agent again met with Baron and described how his stock manipulation g scheme operated, including the need to circumvent the IRS's reporting requirements under FATCA. g During the meeting, Baron stated that Loyal Bank would not submit a FATCA declaration to on regulators unless the paperwork indicated "obvious" U.S. involvement. Subsequently, in July and ^ August 2017, Loyal Bank opened multiple bank accounts for the undercover agent. At no time did = Baron or Loyal Bank request or collect FATCA Information from the undercover agent. n 3: 3 Baron's guilty plea represents the first-ever conviction for failing to comply with FATCA. When

sentenced, Baron faces a maximum of five years in prison. to CD

<D H * Baron is the second defendant to plead guilty in this case. On July 26, 2018, Arvinsingh Canaye, g formerly the General Manager of Beaufort Management Services Ltd. in Mauritius, pleaded guilty to a conspiracy to commit money laundering. Q_

CD CO The case is being handled by the Office's Business and Securities Fraud Section. Assistant United 2 States Attorneys Jacquelyn M. Kasulis, Michael T. Keilty and David Gopstein are in charge of the 3 prosecution. The Criminal Division's Office of international Affairs provided significant assis tance in 8 this matter.

| 01

S 3 The Defendant:

< £ ADRIAN BARON = Age: 63 o Residence: Budapest, Hungary 3 03 9 E.D.N.Y. Docket No. 18-CR-102 (S-1) (KAM) 3 a w 3. o

0

Document generated for Daniel Price Page 2 of 2

IRS Asks To Summon Law Firm's Clients In Tax Evasion Probe By Elise Hansen • October 9, 2018, 5:56 P M E D T

The Internal Revenue Service wants to summon clients of a Texas law firm as part of its investigation into whether the firm helped numerous clients avoid U.S. taxes, according to documents that have been filed with a Texas federal court.

The IRS asked the court for a John Doe summons of all clients of Taylor Lohmeyer Law Firm

PLLC who used its services related to foreign financial accounts, foreign corporations and other legal entities, according to a request filed Thursday. The IRS discovered that the firm used foreign accounts and entities to help at least two clients avoid U.S. taxes and learned that the firm had used similar methods for other clients as well, the agency told the court.

The case is In the Matter of the Tax and Liabilities of John Does, case number 5:18-mc-01046, in the U.S. District Court for the Western District of Texas.

-Editing by John Oudens.

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ATTACHMENT "A" TO FORM 2039 SUMMONS IN THE MATTER OF pay

INSTRUCTIONS

In responding to this Summons, you are required to make a diligent search of your records and documents (as defined below) that are in your possession, custody, or control. This includes documents in the possession of attorneys, accountants, affiliates, advisors, representatives, or other persons directly or indirectly employed by you, hired by you, or connected with you or your representatives, and anyone else otherwise subject to your control. This also includes all records and documents created and/or maintained in the course of employment (at any business or other location) by any employee, officer, director, shareholder, partner, consultant, senior manager, manager, senior or staff employee, and/or independent contractor of any and all entities involved in the transactions (as defined below). Searches of bank and trust records include all private banking and/or private trust department records as well as "offline" record such as desk files. This further includes all documents and records used exclusively for your consideration and discussion(s). Any use of the singular includes the plural and vice-versa.

Each request in this Summons should be answered separately. If a document is responsive to more than one request, you need not provide it in response to each request if: (1) you supply a complete and legible copy in response to the first request to which the document is responsive; and (2) in response to each subsequent request to which the document is responsive, you provide a description of the document and specify the request in response to which the document has been provided. However, if a document has any change, notation, and/or modification, you are required to produce it. Each non-identical copy is a separate "document."

If any of the responsive documents have been disposed of or destroyed, state when such document was disposed of or destroyed, the reason the document was disposed of or destroyed, and the identity of the person disposing of or destroying the documents. If you are unable to locate documents, state with specificity the efforts made to locate the documents and the reasons such documents are unavailable. If the requested documents do not exist, state so. If the requested documents exist but are not available to you, state where such documents are located and provide the identity of the custodian.

If any of the documents or records requested in this Summons have previously been provided to the Internal Revenue Service, please identify, with specificity, each of the documents or records previously provided, the name of the person who provided it, to whom it was provided, the date provided, and if applicable, the Bates number(s).

You have previously provided some documents that were incomplete and/or redacted; provide complete and unaltered copies of these documents free from any redactions.

If a document is not in English, provide a certified translation of the document into English.

If a privilege or other protection is being claimed with respect to any requested document or information, state with specificity the nature of the privilege/protection and the extent of all

Page 1 of 14

PAGE 3 OF 1 5 0 6 / 1 4 / 2 0 1 8 5 : 3 6 : 2 3 PM - 0 5 0 0 IRS

allegedly privileged/protected matters. If you object to producing only part of a document, provide a redacted copy and retain the original for review by a court. With respect to each allegedly privileged/protected document, or portion of a document, provide the following:

1. General nature and description of the document withheld and the number of the request to which the production of the documents would otherwise be responsive;

2. Date appearing on the document, or if it has no date, the date or approximate date that the document was created;

3. The subject matter of the document;

4. The purpose of preparing the document;

5. Name and title of the document's author, and if different, the person who signed the document;

6. Name, title, and address of the addressee of the document;

7. Names, titles, and addresses of all recipients other than the addressee who received or were otherwise shown the document or a copy thereof at any time;

8. The identity of the person having or who may have present knowledge, possession, custody, or control of such document or a copy thereof;

9. An explanation of whether or not any draft, copy, or reproduction of such document contains any postscripts, notation, change, or addendum not appearing on the document itself, and if so, a description of each such draft, copy, or reproduction;

10. The identity, control number, file number, title, or label used by the custodian of the document to identify it for retrieval or production;

11. The privilege or protection claimed;

12. Other pertinent information necessary to establish the elements of each privilege; and

13. If a protection based on Joint Defense Agreement is being claimed provide an executed copy of the Joint Defense Agreement and all documents supporting the claim.

DEFINITIONS

The term "communication" means any contact, oral or written, formal or informal, at any time or place, and under any circumstances whatsoever, whereby information of any nature was recorded, transmitted, or transferred.

The terms "documents" and/or "records" are used in the broadest possible sense and mean any written, printed, typed, photographed, recorded, or otherwise reproduced communications or representations, whether comprised of letters, words, numbers, pictures, sounds, symbols, or any combination thereof. The terms include, but are not limited to, originals and copies of

Page 2 of 14

agreements, memoranda, notes, studies, reports, summaries, schedules, workpapers, analyses, projections, surveys, letters and other correspondence, charts, books, graphs, printed matter, audio or video tapes, outlines of oral presentations, notes of telephone or other conversations, diaries and appointment calendars, telegrams, cablegrams, facsimiles or other written communications, and all financial records, checks, drafts, instruments, checkbook stubs and records, and any other writing. This definition includes electronic mail and data, and all communications stored on electronic, digital, and other formats, including but not limited to computers, phones, memory sticks, and discs. It also includes data compilations from which information can be obtained (translated, if necessary, by you through detection devices into usable forms), and all preliminary versions, drafts, or revisions and other writings of whatever description or kind, whether produced or authored by you, or anyone else, including non-identical copies of any of the foregoing. Further, "documents" include but are not limited to items designated as internal, confidential, "not to be disclosed" and private. If a document has been prepared in several copies or additional copies have been made, and the copies are not identical (or by reason of subsequent modification or notation are no longer identical), each non-identical copy is a separate "document."

The term "taxpayer" means the individual under audit. The term "taxpayer" also means all foreign and/or domestic

entities and/or structures over which Hie individual taxpayers exercises and/or exercised control including, but not limited to corporations, partnerships, associations, limited liability companies, trusts, estates, foundations, escrows, charitable foundations, banks, and nominees.

The taxpayer has "possession, custody, or control" if the taxpayer has actual or constructive possession of the document and/or can access the document upon inquiry and/or through a legal right to obtain the document.

A taxpayer can "exercise control" by acting directly or indirectly. Indirect control includes but is not limited to, the use of nominees, agents, powers of attorney, protectors, advisors, trusts, letter of wishes, by-laws, letters of direction, or any device whatsoever.

The taxpayer has "signature or other authority" over an account if the taxpayer can control the disposition of money or other property in the account by delivery of a document containing the taxpayer' signature—either alone or with the signature of other person(s) and /or with code word(s) and/or code names(s)—to the bank or other person with whom the account is maintained, or if the taxpayer can exercise comparable authority over the account by direct or indirect communication with the bank or other person with whom the account is maintained, either orally or by some other means.

Page 3 of 14

\ s w / V I WW

A d d i t i o n a l I n s t r u c t i o n s

This summons requires that you personally appear and provide the above documents. However, your personal appearance on the scheduled date will not be required if the required records are received, by mail or private delivery service, by the appearance time and date on this summons. If you choose this option, mail the documents to:

Internal Revenue Service

Page 4 of 14

ATTACHMENT "A" TO FORM 2039 SUMMONS IN THE MATTER

DOCUMENTS REQUESTED

Unless otherwise indicated, each of the following Requests is for calendar year 2015 and 2016.

BANK RECORDS

For each of the following requests, produce the requested information for each account, foreign and domestic, under any name, over which you had signature authority and/or other authority and/or over which you exercised control during the years 2015 and 2016, covering periods of January 1, 2015 to June 30, 2017. These requests include, but are not limited to, your personal accounts, custodial accounts, business accounts, rental accounts, trust accounts, IBC accounts, LLC accounts, and other corporate accounts.

1. Produce any and all records required to be maintained pursuant to 31 C.F.R. §1010.420 (§103.32 prior to March 1, 2011) relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such account is maintained, the type of such account, and the maximum value of each such account during each specified year. Such accounts include, but are not limited to, accounts in the names of"

2. For each account produce the documents identifying the bank and/or financial institution name, address, and telephone number.

3. For each bank account, produce all documents in your possession, custody, and control including, but not limited to:

A. Account application (regardless of date) B. Monthly or periodic statements C. Wire transfer authorizations and confirmations D. Deposit slips and deposited items E. Credit and debit memos and advices F. Canceled checks G. Passbooks H. Check registers I. Loan applications (regardless of date) J. Promissory Notes K. Letters of credit L. Money orders M. Cashier's checks

Page 5 of 14

N. Safe deposit box rental agreements (regardless of date) O. Safe deposit box visitation ledgers P. All correspondence Q. All memorandum files maintained by the bank reflecting communications with

yourself or anyone on your behalf R. All documents verifying the origin of all funds used to open the accounts and

funds deposited into the accounts (regardless of date) S. Signature cards (regardless of date) T. Substantiation of expenses associated with the account

4. For each bank account, produce the Know Your Customer Account information given to and maintained by the bank by you or on your behalf, including but not limited to all account set up documents (regardless of date), such as signature cards, opening deposit slips, passport copies, certificates of beneficial ownership, letters of reference, certificates of clean funds and/or other sources of Anti-Money Laundering documentation.

5. For each bank account, produce the Desk Files, including but not limited to all offline files, drop files and other files maintained by the private banking department, private trust department, or any other department possessing records that are not covered by the requests enumerated above,

6. For each certificate of deposit, time deposit or equivalent account, produce all statements reflecting the purchase, earnings, basis, redemption and disposition of the deposit account. All documents verifying the origin of all funds used to open the accounts and funds deposited into the accounts (regardless of date).

7. For all transfers of funds between any and all bank accounts and/or financial accounts, produce:

A. List of transfers B. Documents showing the source of the funds transferred C. Documents showing the deposits of funds transferred D. Advice memos, correspondence or other directions the taxpayer sent or received

BROKERAGE ACCOUNTS, MUTUAL FUNDS, AND SECURITY ACCOUNTS

For each of the following requests, produce the requested information for both domestic and foreign brokerage accounts, mutual funds, security accounts, hedge funds, private equity funds, and other investment funds, including every account or fund in which you had a beneficial interest or over which you had signature authority and/or other authority and/or over which you exercised control during the years 2015 and 2016. covering periods of January 1, 2015 to June 30, 2017. These requests include, but are not limited to your personal accounts, custodial accounts, business accounts, rental accounts, trust accounts, IBC accounts, LLC accounts, and other corporate accounts.

8. Produce any and all records required to be maintained pursuant to 31 C.F.R. §1010.420 (§103.32 prior to March 1, 2011) relating to foreign financial accounts that you had/have a financial interest in, or signature authority over, including records reflecting the name in which each such account is maintained, the number or other designation of such account, the name and address of the foreign bank or other person with whom such

Page 6 of 14

0 6 / 1 4 / z u m t>:at>:za fpi - u d u u in.o

account is maintained, the type of such account, and the maximum value of each such account during each specified year. Such accounts include, but are not limited to, accounts in the names of :

9. For each account or fund, produce all documents in you possession, custody, control, including but not limited to:

A. Account application (regardless of date) B. Substantiation of basis for all stocks and other investments held in the accounts C. Signature cards (regardless of date) D. Monthly or periodic statements E. Annual account summaries F. Performance reports G. Directions given to the financial institution on investment strategies and

diversification H. Requests, authorizations and confirmations on specific trades I. Wire transfer authorizations and confirmations J. All correspondence including written, facsimiles, digital and electronic K. All memorandum files maintained by the bank reflecting communications with

yourself and/or anyone on your behalf L. Know-your-customer (KYC) files or other similar records maintained for anti-

money laundering purposes (regardless of date), including but not limited to account set up documents, identification documents such as passports, driver's licenses, opening deposit slips, certificates of beneficial ownership, letters of reference, certificates of clean funds and other sources of funds documentation

M. All documents verifying the origin of all funds used to open the accounts and/or deposited into the accounts (regardless of date)

N. Substantiation of expenses associated with the accounts O. For hedge funds, private equity funds or other non-pub licly traded funds, all pitch

books or other marketing materials, private placement memoranda, subscription agreements, limited partnership agreements, and other organizational documents.

10. For each investment account, produce the Desk Files, including but not limited to all offline files, drop files and other files maintained by the private banking department, private trust department, or any other department possessing records that are not covered by the requests enumerated above.

CREDIT, DEBIT AND CHARGE CARDS

Produce all records for the year(s) 2015 and 2016. covering periods of January 1, 2015 to June 30, 2017, relating to credit, debit or charge cards of which you had the use, issued either in your name or the name of any entity, foreign or domestic, in which you held an ownership or beneficial interest, directly or through any nominee, agent, power of attorney, letter of direction, or any device whatsoever.

11. For each card, produce all documents including, but not limited to: A. Card application B. Cardholder agreement C. All credit, debit, or charge card issued on the account

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D. Customer relationship records or other similar records identifying persons with signature or other authority over the account

E. Monthly or periodic charge statements F. Charge receipts G. Cash advance confirmations H. Records of payments or funds transferred to account to pay balances DUE

OWNERSHIP OF ENTITIES AND STRUCTURES

For each of the following requests, produce the requested information for both domestic and foreign entities/structures, including each entity/structure in which the taxpayer exercised control and/or held an ownership interest, legal interest, fiduciary interest and/or beneficial interest at any time during the years 2015 and 2016. covering periods of January 1, 2015 to June 30, 2017.

12. For each entity/structure, produce all documents relating to the creation, governance, and operation of each entity/structure including but not limited to:

A. Organizational documents, deeds of incorporation, by-laws, registrations, articles of incorporation, statutes, memoranda of association, partnership agreements, joint venture agreements (regardless of date)

B. Ownership documents including those reflecting your percentage of legal ownership, percentage of beneficial ownership, and all changes of ownership (regardless of date)

C. Stock records book and/or other listing of shareholders and stock certificates D. Documents designating beneficiaries, designating trustees, designating protectors,

designating partners, designating percentage ownership E. Correspondence files F. Powers of attorney, letters of wishes, letters of direction or similar documents

granting authority to agents to act on behalf of the entity/structure

13. For each entity/structure, produce all books and records including, but not limited to: A. General ledgers B. General journals C. Sales journals and similar records of sales D. Cash receipt journals and similar records of cash receipts E. Cash disbursement journals and similar records of cash disbursements F. Account payable journals and similar records of accounts payable G. Payroll journals and similar records of payroll H. Sales and purchase invoices I. Real estate closing records J. Minute books K. Contracts and agreements L. Records of bank, brokerage and other investment accounts M. Financial statements-both audited and unaudited-including but not limited to

income statements and balance sheets N. Rental agreements O. Documents reflecting rental income and expenses P. Correspondence files Q. Certificates of good standing

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Z'

R. Records reflecting the names, street addresses, e-mail addresses and telephone numbers of the legal and beneficial owners

S. Records reflecting the names, street addresses, e-mail addresses, and telephone numbers of the board of directors, board of supervisors and managing directors

T. Records reflecting the names, street addresses, e-mail addresses, and telephone numbers of the officers and all employees

U. Records reflecting the names, street addresses, e-mail addresses, and telephone numbers of all business partners

V. All records of dissolution, termination, name change, winding up or similar record of cessation of operations

W. Foreign tax returns

14. For each entity/structure produce all documents distributed, sent and/or transmitted by or to any legal, fiduciary and/or beneficial owners to and from professionals (e.g., attorneys, accountants, bankers, brokers, trust advisory, etc.), including but not limited to contracts, agreements, advisories, schedules, letters, memoranda, notes and instructions.

15. For each entity/structure, produce documents reflecting the name, address and telephone number of the person(s) controlling the assets of the entity/structure.

16. All written contracts, agreements, and all other documents pertaining to the assignment and transfer of ownership interest in and rights to use the real, personal or intangible property to you or on your behalf.

17. All powers of attorney giving you authority to act on behalf of any person or entity.

18. All powers of attorney executed by you giving another the authority to act on your behalf or on behalf of any person or entity over which you exercised control.

19. All certificates of beneficial ownership, stock certificates, including bearer shares or other similar evidence of ownership interests owned by the taxpayer.

20. All profession and commercial licenses owned by you directly or indirectly

21. Provide a schematic diagram of all entities, foreign and domestic, in which you held an ownership interest, either legal or beneficial. This diagram should include partnerships, joint ventures and trusts as well as corporate entities, including their foreign branches and any other type of entity provided for by foreign laws, in which you held a direct or indirect, legal or beneficial, ownership interest. A. Indicate your percentage of ownership interest in each entity. B. Indicate the country in which the entity was created or organized. C. Indicate the country where the entity operates. D. Indicate whether the entity was formed for a particular purpose and what assets are

held by the entity. E. Indicate any changes in ownership. F. Provide detailed information regarding any corporation or other entities which you

owned but which you no longer own. Include the tax treatment of each change.

Page 9 of 14

r

PERSONAL OWNERSHIP

For each of the following requests, produce records both foreign and domestic for each of the years 2015 and 2016, covering periods of January 1, 2015 to June 30, 2017:

22. Produce all documents reflecting real estate owned by you directly or indirectly including but not limited to purchase and sale agreements, mortgages, deeds, closing documents, property records, tax records, and insurance records.

23. Produce all documents reflecting payments for the purchase of real estate, the improvement of real estate, real estate taxes and insurance.

24. Produce all applications for mortgages, equity loans and other loans related to your real estate or for which your real estate serves as collateral

25. Produce all documents reflecting automobiles, SUVs, RVs, trucks, boats and airplanes owned by you directly or indirectly including but not limited to Department of Motor Vehicle records, purchase and sale agreements, titles, property records, tax records and insurance records.

26. Produce all documents reflecting personal property owned by you with a value in excess of $25,000.

27. Produce all insurance records.

28. Produce all records reflecting compensation earned by you.

RENTAL ACTIVITIES

For each of the following requests, produce records both foreign and domestic for each of the years 2015 and 2016. covering periods of January 1, 2015 to June 30, 2017:

29. For each rental property owned by you directly or indirectly, produce all records both foreign and domestic, including but not limited to:

A. Settlement sheet (regardless of date) B. Purchase and sale agreement (regardless of date) C. Rental contracts and agreements (regardless of date) D. General ledgers E. General j ournals F. Cash receipt journals and similar records of cash receipts G. Cash disbursement journals and similar records of cash disbursements H. Account payable journals and similar records of accounts payable I. Depreciation schedules (regardless of date) J. Correspondence files (regardless of date) K. Records reflecting the names, street addresses, e-mail addresses, and telephone

numbers of the renters (regardless of date)

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NON-TAXABLE SOURCES OF INCOME


30. Produce all documents reflecting any inheritance, foreign or domestic, that you received (regardless of date), including but not limited to the will, documents identifying you as a beneficiary of the estate, documents reflecting the assets of the estates and all probate documents, asset records reflecting the amounts and date of any bequests received by you.

31. For each loan, commercial or private, made or obtained by you or on your behalf and which was in existence during any of the years 2015 and 2016, covering periods of January 1, 2015 to June 30, 2017, provide foreign and domestic records:

A. Loan application (regardless of date) B. Loan agreements and contracts (regardless of date) C. Loan amortization schedules (regardless of date) D. Promissory notes E. Grant deeds, deeds of trust, mortgages, or other security F. Documents sowing disbursement of the loan proceeds (e.g., wire transfer

authorization) G. Records of receipt of principal and interest H. All other documents evidencing the terms and performance of the transaction

32. All records, foreign and domestic, pertaining to any non-taxable source of income including but not limited to gifts, insurance settlements, tax refunds, and tax exempt interest.

PROFESSIONALS


33. Produce all financial statements prepared by you, for you, or on your behalf for any purpose.

34. Provide the name, street address, e-mail address, telephone number of each private banker, broker, trust advisor, investment or other financial advisory, advisor on privacy matters, lawyer and accountant from whom you have received advice either directly or indirectly

35. Produce all business cards for professionals in your possession and/or within your control

36. Produce all records relating to any payments by you or on your behalf for professional fees including: management fees, accounting fees, legal fees, consulting fees, brokerage fees, other personal service fees, salaries or wages, insurance premiums, royalties, lease or rental fees, loan fees, interest.

Page 11 of 14

37. Produce all records relating to any payments by any nonpublic entity in which you held a direct or indirect ownership or beneficial interest or over which you exercised control, either directly or through a nominee, power of attorney, letter of direction, letter of wishes or any device whatsoever for professional fees including: management fees, accounting fees, legal fees, consulting fees, brokerage fees, other personal service fees, salaries or wages, insurance premiums, royalties, lease or rental fees, loan fees, interest.

PROFESSIONAL AFFILIATIONS


38. Identify all professional, social and civic organizations for which you have been a. member or officer, from 2015 to the present. Include in your response the following:

A. Name, telephone number, and current address of the organization B. Dates of membership C. Offices held (and dates) D. membership number or other identifying numbers (e.g., State Bar Numbers,

C.P.A, ID numbers)

39. If you are/were a member of an organization with and oversight committee or disciplinary board, identify any complaints filed against you including:

A. name and address of the Complainant (if anonymous, so indicate) B. date of complaint C. specific allegations D. case or investigation number E. date and location of any hearing, including the tribunal you appeared before F. copy of your written response G. disposition or result of investigation

TRAVEL


40. All of your original U.S. passports, both current and expired

41. All of your original foreign passports, both current and expired

42. If you destroyed a passport, explain in detail how you destroyed it, when you destroyed it and why you destroyed it

43. If you lost a passport or it was stolen, provide a copy of Form DS-64 Statement Regarding a Lost or Stolen Passport filed with the U.S. State Department

44. Produce your current state driver's license and all foreign driver's licenses

45. All vehicle registrations foreign and domestic

Page 12 of 14

46. All records of foreign travel including but not limited to commercial transportation, private leasing, visas, hotel and meal expenses

TAX INFORMATION

For each of the following requests, produce copies of all of the returns, schedules and forms you filed for each of the years 2015 and 2016. covering periods of January 1, 2015 to June 30, 2017:

47. Complete copies of your previously filed original (and, if applicable, previously filed amended or original returns if not previously filed) U.S. Individual Income Tax Returns Forms 1040 (and, if applicable, Forms 1040X), including all schedules and attached information returns (i.e., Form 5471, Form 8865, Form 3520, Form 926, etc.).

48. All Schedules K- l ' s received.

49. All Form 1099 information returns received.

50. All Form 1099 information returns issued by you.

51. Complete copies of all U.S. Partnership Return of Income Forms 1065 including all schedules and attached information returns for which you were either a General Partner or named as the Tax Mattel's Partner.

52. Complete copies of all U.S. Corporation Income Tax Returns Form 1120 and 1120S, including all schedules and attached information returns for each corporation of which you owned more than 50 percent of the total combined voting power of all classes of stock or more than 50 percent of the total value of the stock of the corporation.

53. Complete copies of all U.S. Income Tax Return of a Foreign Corporation Forms 1120F, including all schedules and attached information returns for which you owned more than 50 percent of the total combined voting power of all classes of stock or more than 50 percent of the total value of the stock of the corporation.

54. Complete copies of all U.S. Income Tax Return for Estates and Trusts Forms 1041, including all schedules and attached information returns for which you were the fiduciary or a beneficiary of the Estate or Trust.

55. Complete copies of all U.S. Income Tax Return for Nonresident Alien Form 1040NR (used also for foreign trusts), including all schedules and attached information returns for which you were the taxpayer, administrator, executor, fiduciary, trustee, grantor or a beneficiary.

56. Copies of all Annual Information Returns of Foreign Trust with a U.S. Owner Form 3520-A filed for the years.

57. Copies of all Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520 for which you are or are treated as an owner.

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58. Copies of all Annual Withholding Tax Returns for U.S. Sourced Income of Foreign Persons Form 1042.

59. Copies of all Foreign Person's U.S. Source Income Subject to Withholding.

60. Copies of all Information Returns to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Forms 5471.

61. Copies of all Information Return of a 25-percent Foreign Owned Corporation or Foreign Corporation Engaged in a U.S. Trade or Business Form 5472.

62. Copies of all Information Returns of U.S. Persons with Respect To Certain Foreign Corporations filed.

63. Copies of all Financial Crimes Enforcement Network (FinCEN) 114, R e p o r t o f F o r e i g n B a r i i a n d F i n a n c i a l A c c o u n t s (FBAR) (formerly TD F90-22.1).

64. Copies of all Forms 8938, Statement of Specified Foreign Financial Assets.

65. Complete copies of Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons including Form(s) 1042S, Foreign Person's U.S. Source Income Subject to Withholding, filed.

66. All amended tax returns and amended informational returns.

67. All tax returns and informational returns prepared but not filed.

68. Original or copy of any tax organizer or questionnaire you prepared and submitted to your CPA in each of the years 2015 and 2016, covering periods of January 1,2015 to June 30, 2017.

69. The tax materials use by you and those submitted by you to your CPA for preparation of your U.S. tax returns in each of the tax years 2015 and 2016, covering periods of January 1, 2015 to June 30, 2017.

70. Copies of all tax advice received from any source worldwide. This request includes, but is not limited to, advice and discussions with bankers, wealth managers, tax preparers, and CPAs.

71. Complete copies of all foreign tax returns.

Please be advised that we may require additional information and documentation as we determine necessary as the examination progresses.

Please Provide This Information and Documentation at or before due date of July 18,2018 at 9:00 am.

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10/18/2018 IRS Announces the Identification and Selection of Six Large Business and International Compliance Campaigns | Internal Revenue Ser...

0IRS IRS Announces the Identification and Selection of Six Large Business and International Compliance Campaigns

May 21,2018

IRS Announces the Identification and Selection of Six Large Business and International Compliance Campaigns

The IRS Large Business and International division (LB&I) has announced the approval of six additional compliance campaigns. LB&I announced on January 31,2017, the rollout of its first 13 campaigns, followed by an additional 11 on November 3,2017, and five more on March 13 of this year.

LB&I is reviewing legislation enacted on December 22,2017, to determine which existing campaigns, if any, could be impacted as a result of a change in the controlling statutory framework. Information regarding any identified impact will be communicated after that analysis has been completed.

LB&I continues to move toward issue-based examinations and a compliance campaign process in which the organization decides which compliance issues that present risk require a response in the form of one or multiple treatment streams to achieve compliance objectives. This approach makes use of IRS knowledge and deploys the right resources to address those issues.

The campaigns are the culmination of an extensive effort to redefine large business compliance work and build a supportive infrastructure inside LB&I. Campaign development requires strategic planning and deployment of resources, training and tools, metrics and feedback. LB&I is investing the time and resources necessary to build well-run and well-planned compliance campaigns.

These six additional campaigns were identified through LB&I data analysis and suggestions from IRS employees. LB&l's goal is to improve return selection, identify issues representing a risk of non-compliance, and make the greatest use of limited resources.

The six campaigns selected for this rollout are:

• Interest Capitalization for Self-Constructed Assets

Practice Area: Enterprise Activities Practice Area

Lead Executive: Scott Ballint, Director, Corporate Issues and Credits, Enterprise Activities Practice Area

When a taxpayer engages in certain production activities they are required to capitalize interest expense under Internal Revenue Code (IRC) Section 263A. Interest capitalization applies to interest a taxpayer pays or incurs during the production period when producing property that meets the definition of

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designated property. Designated property under IRC Section 263A(f) is defined as (a) any real property, or (b) tangible personal property that has: (i) a long useful life (depreciable class life of 20 years or more), or (ii) an estimated production period exceeding two years, or (iii) an estimated production period exceeding one year and an estimated cost exceeding $1,000,000.

The goal of this campaign is to ensure taxpayer compliance by verifying that interest is properly capitalized for designated property and the computation to capitalize that interest is accurate. The t reatment stream for this campaign is issue-based examinations, education soft letters, and educating taxpayers and practitioners to encourage voluntary compliance

• F3520/3520-A Non-Compliance and Campus Assessed Penalties

Practice Area: Withholding & International Individual Compliance

Lead Executive: John Cardone, Director, WIIC

This campaign will take a multifaceted approach to improving compliance with respect to the timely and accurate filing of information returns reporting ownership of and transactions with foreign trusts. The Service will address noncompliance through a variety of treatment streams including, but not limited to, examinations and penalties assessed by the campus when the forms are received late or are incomplete.

• Forms 1042/1042-S Compliance


Lead Executive: John Cardone

Taxpayers who make payments of certain U.S.-source income to foreign persons must comply with the related withholding, deposit, and reporting requirements. This campaign addresses Withholding Agents who make such payments but do not meet all their compliance duties. The Internal Revenue Service will address noncompliance and errors through a variety of t reatment streams, including examination.

• Nonresident Alien Tax Treaty Exemptions



This campaign is intended to increase compliance in nonresident alien (NRA) individual tax treaty exemption claims related to both effectively connected income and Fixed, Determinable, Annual Periodical income. Some NRA taxpayers may either misunderstand or misinterpret applicable treaty articles, provide incorrect or incomplete forms to the withholding agents or rely on incorrect information returns provided by U.S. payors to improperly claim treaty benefits and exempt U.S. source income from taxation. This campaign will address noncompliance through a variety of t reatment streams including outreach/education and traditional examinations.

• Nonresident Alien Schedule A and Other Deductions

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This campaign is intended to increase compliance in the proper deduction of eligible expenses by nonresident alien (NRA) individuals on Form 1040NR Schedule A. NRA taxpayers may either misunderstand or misinterpret the rules for allowable deductions under the previous and new Internal Revenue Code provisions, do not meet all the qualifications for claiming the deduction and/or do not maintain proper records to substantiate the expenses claimed. The campaign will address noncompliance through a variety of t reatment streams including outreach/education and traditional examinations.

• NRA Tax Credits



This campaign is intended to increase compliance in nonresident alien individual (NRA) tax credits. NRAs who either have no qualifying earned income, do not provide substantiation/proper documentation, or do not have qualifying dependents may erroneously claim certain dependent related tax credits. In addition, some NRA taxpayers may also claim education credits (which are only available to U.S. persons) by improperly filing Form 1040 tax returns. This campaign will address noncompliance through a variety of t reatment streams including outreach/education and traditional examinations.

Page Last Reviewed or Updated: 22-Jun-2018

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10/18/2018 20.1.9 International Penalties | Internal Revenue Service

Exhibit 20.1.9-1 Quick Reference Guide to International Penalties

Penalty Code Filing

Requirement Section Taxpayer

Foreign person with Corporation interest in: (FC)

U.S. Form 5471 IRC 6038(b)

Foreign Partnership

Form 8865

(FP)

Foreign Disregarded Entity

Form 8858

Penalty reducing

Foreign Corporation

Form 5471 IRC 6038(c)

Foreign Tax (FC) Credit:

Foreign Partnership

Form 8865

(FP)

FC or FP Form 8858 with Foreign Disregarded Entity

25 percent foreign-owned Form 5472 U.S. corporations

IRC 6038A(d)

25 percent foreign-owned Not U.S. corporations that fail applicable to: 1) authorize the reporting corporation to act as agent of a foreign related party, or 2) substantially comply with a summons for information

IRC 6038A(e)

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Penalty Code Filing


Transferor of certain

Foreign Corporation

Form 926 IRC 6038B(c)

property to Foreign Partnership

Form 8865 Schedule O

foreign persons:

Foreign corporations engaged in U.S. business

Form 5472 IRC 6038C(c)

Individuals receiving gifts from foreign persons exceeding $100,000 or $10,000 in the case of a gift from a foreign corporation or foreign partnership (adjusted annually for cost of living)

Form 3520 IRC 6039F(c)

Individuals that relinquish their U.S. citizenship or abandon their long-term resident status

Form 8854 IRC 6039G(c)

Foreign persons holding Not direct investments in U.S. applicable real property interests

IRC 6652(f)

U.S. person who creates a foreign trust, transfers property to a foreign trust or receives a distribution from a foreign trust

Form 3520 IRC 6677(a)

U.S. Owner of a foreign trust

Form 3520-A IRC 6677(b)

Failure to file returns with respect to acquisitions

Foreign Corporation

Form 5471 Schedule O

IRC 6679

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20.1.9 International Penalties | Internal Revenue Service 10/18/2018

of interests Penalty Code in: Filing


Foreign Partnership

Form 8865 Schedule P

IRC 6679

IC-DISC, or IC-DISC FSC failure to file returns or pgQ supply

Form 1120-IC-DISC

IRC 6686

Form 1120-FSC

information:

IRC Allocation of Individual Income Tax to Guam or the CMNI

Form 5074 6688

IRC Statement for Individuals Who Begin or End Bona Fide Residence in a U.S. Possession

Form 8898 6688

IRC Taxpayer's failure to file notice of foreign tax redetermination under IRC 905(c) or IRC 404A(g)(2)

Form 1116 or Form 1118 (attached to Form 1040-X or Form 1120-X)

6689

IRC Taxpayer's failure to file notice of foreign deferred compensation plan under IRC 404A(g)(2)

Not applicable 6689

Taxpayer's failure to disclose treaty-based return position

Form 8833 or statement

IRC 6712

Failure to Provide Information Concerning Resident Status (Passports and Immigration)

Not IRC applicable 6039E(c)

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Penalty Code Filing


Taxpayer's failure to furnish information with respect to specified foreign financial a s s e t s

Form 8938 IRC 6038D(d)

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4.26.16 Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service 10/18/2018

4.26.16.6 (11-06-2015) FBAR Penalties

1. The IRS has been delegated authority to assess civil FBAR penalties.

2. When there is an FBAR violation, the examiner will either issue the FBAR warning letter, Letter 3800, Warning Letter Respecting Foreign Bank and Financial Accounts Report Apparent Violations, or determine a penalty. However, when multiple years are under examination and a monetary penalty is imposed for some but not all of the years under examination, a Letter 3800 will not be issued for the year(s) for which a monetary penalty is not imposed. See IRM 4.26.17 for further information.

Penalties should be determined to promote compliance with the FBAR reporting and recordkeeping requirements. In exercising discretion, examiners must consider whether the issuance of a warning letter and the securing of delinquent FBARs, rather than the determination of a penalty, will achieve the desired result of improving compliance in the future. Example: An individual failed to report the existence of five small foreign accounts with a combined balance of $20,000 for all five accounts, but properly reported the income from each account and made no attempt to conceal the existence of the accounts. The examiner must consider all the facts and circumstances of this case to determine if a warning letter is appropriate in this case or if it would be appropriate to determine civil FBAR penalties.

3.

Civil FBAR penalties have varying upper limits, but no floor. The examiner has discretion in determining the amount of the penalty, if any.

4

5. The IRS developed mitigation guidelines to assist examiners in determining the amount of civil FBAR penalties.

6. There may be multiple civil FBAR penalties if there is more than one account owner, or if a person other than the account owner has signature or other authority over the foreign account. Each person can be liable for the full amount of the penalty.

7. Managers must perform a meaningful review of the employee's penalty determination prior to as se s smen t . SeelRM 4.26.16.6.8.

4.26.16.6.1 (11-06-2015) FBAR Penalty Authority

IRS was delegated the authority to assess and collect civil FBAR penalties. 31 CFR 1010.810(g). The delegation includes the authority to investigate possible civil FBAR violations, provided in Treasury Directive No. 15-41 (December 1, 1992), and the authority to assess and collect the penalties for violations of the reporting and recordkeeping requirements.

2. When performing these functions, IRS is not acting under Title 26 but, instead, is acting under the authority of Title 31. Provisions of the Internal Revenue Code generally do not apply to FBARs.

Criminal Investigation was delegated the authority to investigate possible criminal violations of the Bank Secrecy Act. 31 CFR 1010.810(c)(2).

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10/18/2018 4.26.16 Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service

4.26.16.6.2 (11-06-2015) FBAR Penalty Structure

1. There are four civil penalties available for FBAR violations:

a. Negligence. 31 USC 5321(a)(6)(A). b. Pattern of negligent activity. 31 USC 5321 (a)(6)(B). c. Penalty for non-willful violation. 31 USC 5321(a)(5)(A) and (B).

Note: Although the term "non-willful" is not used in the statute, we use it to distinguish this penalty from the penalty for willful violations.

d. Penalty for willful violations. 31 USC 5321 (a)(5)(C).

2. A filing violation occurs at the end of the day on June 30th of the year following the calendar year to be reported (the due date for filing the FBAR).

3. A recordkeeping violation occurs on the date when the records are requested by the IRS examiner if the records are not provided.

4. A civil money penalty may be imposed for an FBAR violation even if a criminal penalty is imposed for the same violation. 31 USC 5321(d).

4.26.16.6.3 (11-06-2015) BSA Negligence Penalties

1. There are two negligence penalties that apply generally to all BSA provisions. 31 USC 5321(a)(6)

a. A negligence penalty up to $500 may be assessed against a financial institution or non-financial trade or business for any negligent violation of the BSA, including FBAR violations.

b. An additional penalty up to $50,000 may be assessed for a pattern of negligent violations.

2. These two negligence penalties apply only to trades or businesses, and not to individuals.

3. The FBAR penalties under section 5321 (a)(5) and the FBAR warning letter, Letter 3800, adequately address most FBAR violations identified. The FBAR warning letter may be issued in the cases where the revenue agent determines none of the 5321(a)(5) FBAR penalties are warranted. If the revenue agent believes, however, that assertion of a section 5321(a)(6) negligence penalty is warranted in a particular case, the revenue agent should contact a Bank Secrecy Act FBAR program analyst for guidance.

4.26.16.6.3.1 (11-06-2015) Negligence Defined

Actual knowledge of the reporting requirement is not required to find negligence. For example, if a financial institution or nonfinancial trade or business exercising ordinary business care and prudence for its particular industry should have known about the FBAR filing and record keeping requirements, failure to file or maintain records is negligent. Therefore, standards of practice for a particular industry are relevant in determining whether a negligent violation of 31 USC 5314 occurred. If the failure to file the FBAR or to keep records is due to reasonable cause, and not due to the negligence of the person who had the obligation to file or keep records, the negligence penalty should not be asserted.


4.26.16 Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service 10/18/2018 2. Negligent failure to file does NOT exist when, despite the exercise of ordinary business care and

prudence, the person was unable to file the FBAR or keep the required records.

3. Use general negligence principles in determining whether or not to apply the negligence penalty. Treas. Reg. 1.6664-4, Reasonable Cause and Good Faith Exception to section 6662 penalties, may serve as useful guidance in determining the factors to consider.

4.26.16.6.3.2 (11-06-2015) BSA Simple Negligence Penalty

1. A negligence penalty up to $500 may be assessed against a business for any negligent violation of the BSA, including FBAR violations.

2. The simple negligence penalty applies only to businesses, not individuals.

4.26.16.6.3.3 (07-01-2008) BSA Simple Negligence Penalty Amount

1. For each negligent violation of any requirement of the Bank Secrecy Act committed after October 27 1986, a civil penalty may be assessed not to exceed $500.

2. Generally, the full amount of this $500 penalty is assessed. Although 31 USC 5321(a)(6) permits discretion to assert a lower amount, there are no mitigation guidelines for this penalty.

4.26.16.6.3.4 (11-06-2015) BSA Pattern of Negligence Penalty

1. 31 USC 5321(a)(6)(B) provides for a civil money penalty of not more than $50,000 on a business that engages in a pattern of negligent BSA violations including violations of the FBAR rules. This penalty is in addition to any $500 negligence penalty.

2. The pattern of negligence penalty has applied to financial institutions since 1986. For violations occurring after October 26, 2001, the penalty applies to all trades or businesses. This penalty does not apply to individuals.

4.26.16.6.3.5 (07-01-2008) BSA Pattern of Negligence Penalty Amount

1. If any trade or business engages in a pattern of negligent violations of any provision (including the FBAR requirements)] of the BSA, a civil penalty of not more than $50,000 may be imposed. This is in addition to the simple negligence $500 penalty. 31 USC 5321(a)(6)(B). The examiner is given discretion to determine the penalty amount up to the $50,000 ceiling.

2. There are no mitigation guidelines for this penalty. The pattern of negligence penalty should be asserted only in egregious cases.

4.26.16.6.4 (11-06-2015) Penalty for Nonwillful FBAR Violations



For violations occurring after October 22, 2004, a penalty, not to exceed $10,000 per violation, may be imposed on any person who violates or causes any violation of the FBAR filing and recordkeeping requirements. 31 USC 5321(a)(5)(B).

2. The penalty should not be imposed if:

a. The violation was due to reasonable cause, and b. The person files any delinquent FBARs and properly reports the previously unreported account.

Examiners have discretion in determining the penalty amount and should use the mitigation guidelines in making their determinations. See the discussion of the mitigation guidelines below. SeeExhibit 4.26.16-1. Examiners should take the facts and circumstances of each case into account when determining if a warning letter or penalties that are less than the mitigation guidelines are appropriate. The purpose of FBAR penalties is to promote compliance with the FBAR reporting and recordkeeping requirements.

3.

4.26.16.6.4.1 (11-06-2015) Penalty for Nonwillful Violations - Calculation

1. After May 12, 2015, in most cases, examiners will recommend one penalty per open year, regardless of the number of unreported foreign accounts. The penalty for each year is limited to $10,000. Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate.

2. For multiple years with nonwillful violations, examiners may determine that asserting nonwillful penalties for each year is not warranted. In those cases, examiners, with the group manager's approval after consultation with an Operating Division FBAR Coordinator, may assert a single penalty, not to exceed $10,000, for one year only.

3. For other cases, the facts and circumstances (considering the conduct of the person required to file and the aggregate balance of the unreported foreign financial accounts) may indicate that asserting a separate nonwillful penalty for each unreported foreign financial account, and for each year, is warranted. In those cases, examiners, with the group manager's approval after consultation with an Operating Division FBAR Coordinator, may assert a separate penalty for each account and for each year. The examiner's workpapers must support such a penalty determination and document the group manager's approval.

4. In no event will the total amount of the penalties for nonwillful violations exceed 50 percent of the highest aggregate balance of all unreported foreign financial accounts for the years under examination.

4.26.16.6.5 (11-06-2015) Penalty for Willful FBAR Violations

1. The penalty for willful FBAR violations may be imposed on any person who willfully violates or causes any violation of any provisions of 31 USC 5314 (the FBAR filing and recordkeeping requirements). 31 USC 5321(a)(5)(C).

2. The penalty applies to individuals as well as financial institutions and nonfinancial trades or businesses for all years.

3. For violations occurring after October 22, 2004, the statutory ceiling is the greater of $100,000 or 50% of the balance in the account at the time of the violation.


4.26.16 Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service 10/18/2018

4. There may be both a reporting and a recordkeeping violation regarding each account.

5. The date of a violation for failure to timely file an FBAR is the end of the day on June 30th of the year following the calendar year for which the accounts are being reported. This date is the last possible day for filing the FBAR so that the close of the day with no filed FBAR represents the first time that a violation occurred. The balance in the account at the close of June 30th is the amount to use in calculating the filing violation.

6. The date of a violation for failure to keep records is the date the examiner first requests records. The balance in the account at the close of the day that the records are first requested is the amount used in calculating the recordkeeping violation penalty. The date of the violation is tied to the date of the request, and not a later date, to assure the taxpayer is unable to manipulate the amount in the account after receiving a request for records. The balance in the account at the close of the day on which the records are first requested is the amount to use in calculating the penalty for failing to keep records as required by statute.

IRS developed guidelines for the exercise of the examiner's discretion in arriving at the amount of a penalty for a willful violation. See discussion of mitigation, below.

4.26.16.6.5.1 (11-06-2015) Willful FBAR Violations - Defining Willfulness

1. The test for willfulness is whether there was a voluntary, intentional violation of a known legal duty.

2. A finding of willfulness under the BSA must be supported by evidence of willfulness.

3. The burden of establishing willfulness is on the Service.

4. Willfulness is shown by the person's knowledge of the reporting requirements and the person's conscious choice not to comply with the requirements. In the FBAR situation, the person only need know that a reporting requirement exists. If a person has that knowledge, the only intent needed to constitute a willful violation of the requirement is a conscious choice not to file the FBAR.

Under the concept of "willful blindness," willfulness is attributed to a person who made a conscious effort to avoid learning about the FBAR reporting and recordkeeping requirements. Example: Willful blindness may be present when a person admits knowledge of, and fails to answer questions concerning, his interest in or signature or other authority over financial accounts at foreign banks on Schedule B of his Federal income tax return. This section of the income tax return refers taxpayers to the instructions for Schedule B, which provides guidance on their responsibilities for reporting foreign bank accounts and discusses the duty to file the FBAR. These resources indicate that the person could have learned of the filing and recordkeeping requirements quite easily. It is reasonable to assume that a person who has foreign bank accounts should read the information specified by the government in tax forms. The failure to act on this information and learn of the further reporting requirement, as suggested on Schedule B, may provide evidence of willful blindness on the part of the person. Note: The failure to learn of the filing requirements coupled with other factors, such as the efforts taken to conceal the existence of the accounts and the amounts involved, may lead to a conclusion that the violation was due to willful blindness. The mere fact that a person checked the wrong box, or no box, on

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a Schedule B is not sufficient, in itself, to establish that the FBAR violation was attributable to willful blindness.

6. The following examples illustrate situations in which willfulness may be present:

a. A person files the FBAR, but omits one of three foreign bank accounts. The person had previously closed the omitted account at the time of filing the FBAR. The person explains that the omission was due to unintentional oversight. During the examination, the person provides all information requested with respect to the omitted account. The information provided does not disclose anything suspicious about the account, and the person reported all income associated with the account on his tax return. The penalty for a willful violation should not apply absent other evidence that may indicate willfulness.

b. A person filed the FBAR in earlier years but failed to file the FBAR in subsequent years when required to do so. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with foreign bank accounts for the years that FBARs were not filed. A determination that the violation was willful would likely be appropriate in this case.

c. A person received a warning letter informing him of the FBAR filing requirement, but the person continues to fail to file the FBAR in subsequent years. When asked, the person does not provide a reasonable explanation for failing to file the FBAR. In addition, the person may have failed to report income associated with the foreign bank accounts. A determination that the violation was willful would likely be appropriate in this case.

4.26.16.6.5.2 (11-06-2015) Willful FBAR Violations - Evidence

1. Willfulness can rarely be proven by direct evidence, since it is a state of mind. It is usually established by drawing a reasonable inference from the available facts. The government may base a determination of willfulness on inference from conduct meant to conceal sources of income or other financial information. For FBAR purposes, this could include concealing signature authority, interests in various transactions, and interests in entities transferring cash to foreign banks.

2. Documents that may be helpful in establishing willfulness include:

a. Copies of statements for the foreign bank account. b. Notes of the examiner's interview with the foreign account holder/taxpayer about the foreign account. c. Correspondence with the account holder's tax return preparer that may address the FBAR filing

requirement. d. Documents showing criminal activity related to the non-filing of the FBAR (or non-compliance with

other BSA provisions). e. Promotional material (from a promoter or offshore bank). f. Statements for debit or credit cards from the offshore bank that, for example, reveal the account

holder used funds from the offshore account to cover everyday living expenses in a manner that conceals the source of the funds.

g. Copies of any FBARs filed previously by the account holder (or FinCEN Query printouts of FBARs). h. Copies of Information Document Requests with requested items that were not provided highlighted

along with explanations as to why the requested information was not provided. i. Copies of debit or credit card agreements and fee schedules with the foreign bank, which may show

a significantly higher cost than typically associated with cards from domestic banks.



j. Copies of any investment management or broker's agreement and fee schedules with the foreign bank, which may show significantly higher costs than costs associated with domestic investment management firms or brokers.

k. The written explanation of why the FBAR was not filed, if such a statement is provided. Otherwise, note in the workpapers whether there was an opportunity to provide such a statement.

I. Copies of any previous warning letters issued or certifications of prior FBAR penalty assessments. m. An explanation, in the workpapers, as to why the examiner believes the failure to file the FBAR was

willful.

3. Documents available in an FBAR case worked under a Related Statute Determination under Title 26 that may be helpful in establishing willfulness include:

a. Copies of documents from the administrative case file (including the Revenue Agent Report) for the income tax examination that show income related to funds in a foreign bank account was not reported.

b. A copy of the signed income tax return with Schedule B attached, showing whether or not the box pertaining to foreign accounts is checked or unchecked.

c. Copies of tax returns (or RTVUEs or BRTVUs) for at least three years prior to the opening of the offshore account and for all years after the account was opened, to show if a significant drop in reportable income occurred after the account was opened. (Review of the three years' returns prior to the opening of the account would give the examiner a better idea of what the taxpayer might have typically reported as income prior to opening the foreign account).

d. Copies of any prior Revenue Agent Reports that may show a history of noncompliance. e. Two sets of cash T accounts (a reconciliation of the taxpayer's sources and uses of funds) with one

set showing any unreported income in foreign accounts that was identified during the examination and the second set excluding the unreported income in foreign accounts.

f. Any documents that would support fraud (see IRM 4.10.6.2.2 for a list of items to consider in asserting the fraud penalty).

4.26.16.6.5.3 (11-06-2015) Penalty for Willful FBAR Violations - Calculation

For violations occurring after October 22, 2004, a penalty for a willful FBAR violation may be imposed up to the greater of $100,000 or 50% of the amount in the account at the time of the violation, 31 USC 5321(a)(5)(C). For cases involving willful violations over multiple years, examiners may recommend a penalty for each year for which the FBAR violation was willful.

2. After May 12, 2015, in most cases, the total penalty amount for all years under examination will be limited to 50 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. In such cases, the penalty for each year will be determined by allocating the total penalty amount to all years for which the FBAR violations were willful based upon the ratio of the highest aggregate balance for each year to the total of the highest aggregate balances for all years combined, subject to the maximum penalty limitation in 31 USC 5321(a)(5)(C) for each year. Note: Examiners should still use the mitigation guidelines and their discretion in each case to determine whether a lesser penalty amount is appropriate

3. Examiners may recommend a penalty that is higher or lower than 50 percent of the highest aggregate account balance of all unreported foreign financial accounts based on the facts and circumstances. In no



event will the total penalty amount exceed 100 percent of the highest aggregate balance of all unreported foreign financial accounts during the years under examination. The examiner's workpapers must support all willful penalty determinations and document the group manager's approval.

If an account is co-owned by more than one person, a penalty determination must be made separately for each co-owner. The penalty against each co-owner will be based on his her percentage of ownership of the highest balance in the account. If the examiner cannot determine each owner's percentage of ownership, the highest balance will be divided equally among each of the co-owners.

4.26.16.6.6 (11-06-2015) Mitigation

1. The statutory penalty computation provides a ceiling on the FBAR penalty. The actual amount of the penalty is left to the discretion of the examiner.

2. IRS has adopted mitigation guidelines to promote consistency by IRS employees in exercising this discretion for similarly situated persons. Exhibit 4.26.16-1.

4.26.16.6.6.1 (11-06-2015) Mitigation Threshold Conditions

1. For most FBAR cases, if IRS has determined that if a person meets four threshold conditions, then that person may be subject to less than the maximum FBAR penalty depending on the amounts in the accounts.

2. For violations occurring after October 22, 2004, the four threshold conditions are:

a. The person has no history of criminal tax or BSA convictions for the preceding 10 years, as well as no history of past FBAR penalty assessments.

b. No money passing through any of the foreign accounts associated with the person was from an illegal source or used to further a criminal purpose.

c. The person cooperated during the examination (i.e., IRS did not have to resort to a summons to obtain non-privileged information; the taxpayer responded to reasonable requests for documents, meetings, and interviews; and the taxpayer back-filed correct reports).

d. IRS did not sustain a civil fraud penalty against the person for an underpayment for the year in question due to the failure to report income related to any amount in a foreign account.

4.26.16.6.7 (11-06-2015) FBAR Penalties - Examiner Discretion

1. The examiner may determine that the facts and circumstances of a particular case do not justify asserting a penalty.

2. When a penalty is appropriate, IRS penalty mitigation guidelines aid the examiner in applying penalties in a uniform manner. The examiner may determine that a penalty under these guidelines is not appropriate or that a lesser penalty amount than the guidelines would otherwise provide is appropriate or that the penalty should be increased (up to the statutory maximum). The examiner must make such a determination with the written approval of the examiner's manager and document the decision in the workpapers.


4.26.16 Report of Foreign Bank and Financial Accounts (FBAR) | Internal Revenue Service 10/18/2018 3. Factors to consider when applying examiner discretion may include, but are not limited to, the following:

a. Whether compliance objectives would be achieved by issuance of a warning letter. b. Whether the person who committed the violation had been previously issued a warning letter or

assessed an FBAR penalty. c. The nature of the violation and the amounts involved. d. The cooperation of the taxpayer during the examination.

Given the magnitude of the maximum penalties permitted for each violation, the assertion of multiple penalties and the assertion of separate penalties for multiple violations with respect to a single FBAR, should be carefully considered and calculated to ensure the amount of the penalty is commensurate to the harm caused by the FBAR violation.

4.26.16.6.8 (11-06-2015) Managerial Involvement and Approval of FBAR Penalties

1. Managers must perform a meaningful review of the examiner's penalty determination prior to assessment.

2. The manager must verify that the penalties were fairly imposed and accurately computed; that the examiner did not improperly assert the penalties in the first instance; and that the conclusions regarding "reasonable cause" (or the lack thereof) were proper.

3. ) For BSA cases, written managerial approval must be documented on the Violations Summary Form -Title 31, workpaper 400-1.1.

For SB/SE examination cases, written managerial approval must be documented on the Penalty Approval Form, workpaper 300.

5. For LB&I cases, managerial approval must be documented on the penalty leadsheets.

For SB/SE campus cases, written managerial approval must be documented on Form 4700,Examination Workpapers.

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20.1.9.3 (03-21-2013) IRC 6038—Information Reporting With Respect to Foreign Corporations and Partnerships

1. IRC 6038(b) provides a monetary penalty for failure to furnish information with respect to certain foreign corporations and partnerships.

2. The filing requirements apply to both entities which are treated as associations taxable as corporations or as partnerships under Treas. Reg. 301.7701-3.

20.1.9.3.1 (04-22-2011) Reporting and Filing Requirements

1. Form 5471 Jnformation Return of U.S. Persons With Respect to Certain Foreign Corporations,and Form 8865,Return of U.S. Persons With Respect to Certain Foreign Partnerships, are used for reporting purposes.

2. Foreign Corporations—IRC 6038(a) and Treas. Reg. 1,6038-2(a) require a U.S. person to furnish information with respect to certain foreign corporations. The required information includes foreign corporation entity data, stock ownership data, financial statements, and intercompany transactions with related persons. Other provisions that must be considered include the following:

a. A taxpayer meets the requirement by providing the required information on a timely filed Form 5471. A Schedule M attached to Form 5471 is used to report related party transactions. The information is for the annual accounting period of the foreign corporation ending with or within the U.S. person's taxable year. Form 5471 is filed with the U.S. person's income tax return on or before the date required by law for the filing of that person's income tax return, including extensions. See Treas. Reg. 1.6038-2(i).

b. Regulations provide exceptions for attaching the Form 5471 to the related income tax return when the return is filed by another shareholder.

i) The taxpayer must provide a copy of the filed Form 5471 when requested. ii) The non-Form-5471-filer must attach a statement to his or her income tax return with the name and TIN of the person filing the Form 5471. If the required return was not filed timely by the other party, the penalty applies. No statement is required to be attached to tax returns for persons claiming the constructive ownership exception. See Treas. Reg. 1.6038-2(j)(2).

c. Rev. Proc. 92-70 provides for summary reporting of dormant corporations. By using the summary filing procedure, the filer agrees that it will provide any information required within 90 days of being asked to do so on audit. The monetary penalty or the foreign tax credit reduction (see IRM 20.1.9.4) can be imposed if the information is not provided within the 90 days. Rev. Proc. 92-70 applies in its entirety.

3. Foreign Partnerships—IRC 6038(a) and Treas. Reg. 1.6038-3(a) require a U.S. person to furnish information with respect to certain foreign partnerships. The required information includes foreign partnership entity data, ownership data, financial statements, and intercompany transactions with related persons. The information is furnished to the IRS as follows:

a. A taxpayer meets the requirement by providing the required information on a timely filed Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships.

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b. Schedule N, attached to Form 8865, is used to report related party transactions. The information is for the annual accounting period of the foreign partnership ending with or within the U.S. person's taxable year.

c. Form 8865 is filed with the U.S. person's income tax return on or before the date required by law for the filing of that person's income tax return, including extensions. See Treas. Reg. 1.6038-3(i).

4. Generally, examiners verify fact of filing of the required information return(s) by inspecting the original income tax return. When examiners believe that neither Form 5471 nor Form 8865 was filed timely, examiners should be sure to secure delinquent forms and attach copies to the related income tax return.

5. See IRC 6501 (c)(8) for statute of limitations on assessment.

20.1.9.3.2 (11-30-2015) Penalty Letters, Notice Letters, and Notices

1. Failure to File Form 5471—Reserved.

2. Failure to File Form 8865—Reserved.

3. CP Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:

a. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed onMFT 55 withPRN 623 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown aXExhibit 20.1.9-6,Sample CP 15 Notice.

b. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed onMFT 13 withPRN 623 is generated and sent to the taxpayer. A sample of a CP 215 notice for this penaltyis shown atExhibit 20.1.9-7,Sample CP 215 Notice.

20.1.9.3.3 (03-21-2013) Penalty Assertion

1. An initial penalty is asserted by field examiners on Form 8278 usingPR/V 623 when an examiner determines the taxpayer has not timely filed the required information or has not filed complete and accurate information.

2. Penalties may be systemically asserted during initial processing of a late-filed Form 5471 that is attached to a late-filed Form 1120 as follows:

a. IMF—IRM 21.8.1.25,Form 5471—Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

b. BMF—IRM 21.8.2.21 ,Form 5471—Information Return of U.S. Persons with Respect to Certain Foreign Corporations.

c. PRN 599 will be used to denote such systemic penalties.

3. Penalties may be systemically asserted during initial processing of a late-filed Form 5471 that is attached to a late-filed Form 1065, U.S. Return of Partnership Income, as follows:

a. Reserved. b. PRN 712 will be used to denote such systemic penalties.


20.1.9 International Penalties | Internal Revenue Service 10/18/2018 20.1.9.3.4 (04-22-2011) Penalty Computation

1. Initial Penalty—The initial penalty is $10,000 per failure to timely file complete and accurate information on each Form 5471 or Form 8865. The penalty is assessed for each form (of each foreign corporation or partnership) for each year that was not timely filed with complete and accurate information.

2. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted on Form 8278 usingPRA/ 619. Also note the following:

a. The maximum continuation penalty for IRC 6038(b) is $50,000 per required Form 5471 or Form 8865.

b. For assessments prior to July 2005, the total penalty amount including the continuation penalty was assessed using PRN 623.

3. The maximum total penalty under IRC 6038(b) is $60,000 per Form 5471 or Form 8865 required to be filed per year (an initial penalty maximum of $10,000 plus the continuation penalty maximum of $50,000 per return).

20.1.9.3.5 (07-08-2015) Reasonable Cause

1. Initial Penalties—To show that reasonable cause exists, the person required to report such information must be in compliance with all open reporting years (not on extension) and must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement. For failure to file Form 5471, the written statement must contain a declaration that it is made under the penalties of perjury. Additional information is available for the following:

a. Form 5471 see Treas. Reg. 1,6038-2(k)(3) b. Form 8865 see Treas. Reg. 1.6038-3(k)(4).

2. Continuation Penalty—There is no reasonable cause exception for this penalty.

PRN 599 and PRN 712 Penalties—The first-time abatement (FTA) penalty relief provisions (see IRM 20.1.1.3.6.1 (8), exception) generally do not apply to event-based filing requirements such as with Form 5471. However, if the related abatement on the Form 1120,L/.S. Corporation Income Tax Return, filing was made using FTA Penalty Reason Code (PRC) 018, then abate the PRN 599 penalty using PRC 018 as well. If the related abatement on the Form 1120 filing reflects a PRC of other than PRC 018, and the taxpayer had no similar penalties (PRNs 599, 623 or 712) in the three prior periods, abate the PRN 599 penalty using the same PRC as shown on the abatement of the Form 1120 filing penalty.

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20.1.9.10(04-22-2011) IRC 6039F(c)—Large Gifts From Foreign Persons

1. IRC 6039F provides reporting requirements for U.S. persons who receive large gifts from foreign persons.


1. U.S. persons who receive gifts from a foreign individual or foreign estate during the taxable year that in the aggregate exceed $10,000 must file Form 3520, Annual Return to Report Transactions With Foreign Trust and Receipt of Certain Foreign Gifts, and fill out Part IV of Form 3520. These gifts are reportable under IRC 6039F(a). See Notice 97-34.

2. The threshold for gifts (or bequests) received fromnonresident alien individuals and foreign estates is statutorily $10,000, but the amount was raised to $100,000 under Notice 97-34. Once that threshold is reached, reporting is only required with respect to each such gift that is in excess of $5,000. The threshold for gifts (or bequests) received from aforeign corporation or a foreign partnership was statutorily $10,000, but the amount is adjusted each year for inflation. The instructions for Form 3520 for any year will have the applicable dollar threshold for the filing requirement for that year. Failure to report gifts (or bequests) above the applicable dollar threshold for the relevant year is subject to penalties under IRC 6039F. Gifts from foreign trusts are reportable as distributions from a foreign trust under IRC 6048(c) and failure to report such distributions on Part III of the Form 3520 is subject to penalties under IRC 6677. Note: Form 3520 has four different parts that relate to different filing requirements for filing a Form 3520. The obligation to file a Form 3520 to report the receipt of a large gift (or bequest) from a foreign person by a U.S. person is reportable on Part IV of the form.

Form 3520 is required to be filed separately from the U.S. person's income tax return with the Ogden Campus. The due date for filing is the same as the due date for filing a U.S. person's income tax return, including extensions. In the case of a Form 3520 filed with respect to a U.S. decedent, Form 3520 is due on the date that Form 706,United States Estate (and Generation-Skipping) Tax Return, is due, including extensions, or would be due if the estate were required to file a return. A Form 3520 is filed once a year for all reportable gifts (and bequests) within the year with respect to each U.S. person. See Notice 97-34 and The instructions for Form 3520 for more specific information.

Filing Verification—Form 3520 is processed to Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust and for multiple foreign gifts (or bequests), the filing is further identified with a Report Plan Number. See IRM 21.8.2.18.3(10). The steps for filing verification are as follows:

a. Begin research with a BMFOLI. b. BRTVU is also available and includes all lines on the return including the foreign trust information

that the Form 3520 provides. c. If the U.S. person is an individual, the TIN will be the SSN + "V" (or "W" if an invalid SSN). d. If there is no record of this TIN, no returns have been filed.



5. Secured Returns—When an examiner secures a delinquent Form 3520, determine if it provides all of the required information and is accurate. If the Form 3520 is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520, perform the following actions:

a. Date stamp each Form 3520 with the date received. b. Write in redacross the top of the return—"Process as Original." c. Complete Form 13133,Expedite Processing Cycle, and check the delinquent return box as well as

the appropriate BMF or IMF box for "Do NOT Assess Failure to File Penalty." d. Attach completed Form 13133 to the delinquent return. e. Send the original delinquent Form 3520 (with Form 13133 attached) to the following:

Internal Revenue Service 1973 North Rulon White Blvd. Mail Stop 4091 Ogden, UT 84404



a. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed onMFT 55 withPRN 668 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown at Exhibit 20.1.9-6,Sample CP 15 Notice.

b. BMF—A CP 215, Notice of Penalty Charge, for penalties assessed onMFT 13 withPRN 668 is generated and sent to the taxpayer. A sample of a CP 215 notice (for a different penalty) is shown atExhibit 20.1.9-7,Sample CP 215 Notice.

20.1.9.10.3 (04-22-2011)

Penalty Assertion

1. The penalty is asserted onForm 8278using PRN 668when the examiner determines the following:

a. A U.S. person received a reportable gift (or bequest) from a foreign person. b. Has failed to timely file Form 3520. c. Has not shown that failure to file was due to reasonable cause.

2. Penalty Tax Adjustment—IRC 6039F(c)(1 )(A) states that the Secretary will determine the tax consequence of the receipt of such gift (or bequest) if the information is not filed timely. This adjustment is subject to deficiency procedures.

20.1.9.10.4 (03-21-2013) Penalty Computation

1. The penalty for failure to report a large gift (or bequest) from a foreign person on a timely, complete, and accurate Form 3520 is 5 percent of the amount of such foreign gift (or bequest) for each month for which

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the failure continues after the due date of the reporting U.S. person's income tax return (not to exceed 25% of such amount in the aggregate).


Before reasonable cause is considered, the examiner must ensure that the taxpayer did not receive similar gifts (or bequests) in any other open year (not on extension).

IRC 6039F(c)(2) provides that no penalty shall apply for failure to furnish the required information if the U.S. person shows that the failure is due to reasonable cause and not to willful neglect.



20.1.9.13 (07-08-2015) IRC 6677(a)—Failure to File Information with Respect to Certain Foreign Trusts—Form 3520

IRC 6677 provides that U.S. persons, who have an IRC 6048 filing obligation because they engaged in certain transactions with a foreign trust or are treated as owning a foreign trust, who fail to file a complete and accurate Form 3520,Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, or fail to ensure that a foreign trust has filed a Form 3520-A, Annual Return of Foreign Trust With a U.S. Owner, may be assessed penalties for such failures unless it is shown that such failure was due to reasonable cause and not to willful neglect. Notice 97-34 provides additional guidance on the filing requirements and penalties. See also IRM 20.1.9.14 for Form 3520-A.


1. Form 3520,Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, is required to be filed by a U.S. person for the following:

a. Report the creation of a foreign trust by a U.S. person during the tax year, b. Report certain transfers of money or other property to a foreign trust by a U.S. person, c. Identify U.S. persons who are treated as owners of a foreign trust during all or part of the tax year, d. Provide information about distributions received by a U.S. person from a foreign trust, e. Report the receipt of a loan from a foreign trust during the tax year, f. Report the receipt of uncompensated use of trust property from a foreign trust (applicable only after

March 18, 2010), or g. Provide information about certain gifts or bequests received from foreign persons (penalties related

to the failure to report the receipt of such gifts or bequests from foreign persons are imposed under IRC 6039F). SeelRM 20.1.9.10.

Note: A Form 3520 will generally report some but not necessarily all of these reportable events, as appropriate.

2. Form 3520must be timely, complete and accurate to be considered filed. IRC 6048 authorizes the Secretary to prescribe the information required to be reported. Notice 97-34 and the instructions for Form 3520 describe the information required to be reported.

U.S. Owners: Creation or Transfer—IRC 6048(a) generally provides that any U.S. person who creates a foreign trust and directly or indirectly transfers money or other property to a foreign trust (including a transfer by reason of death) must report such transfer. This reporting is done on Part I of Form 3520. Generally, a U.S. person who transfers property to a foreign trust is considered the owner of that portion of the foreign trust unless there is no possibility now or in the future of the trust having a U.S. beneficiary. IRC 679 and the regulations thereunder more specifically describe individuals who are considered owners of foreign trusts and describe exceptions to the general rule. Other things to consider are as follows:

a. U.S. persons who make transfers to Canadian Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs) are not required to report such transfers on Form 3520. See Notice 2003-75 and the instructions to Form 8891, U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans.

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b. Generally, foreign trusts described in IRC 402(b), IRC 404(a)(4), IRC 404A, or IRC 501(c)(3) are not reportable under these requirements. See IRC 6048(a)(3)(B)(ii) and Notice 97-34.

c. Transfers involving fair market value sales are also not reportable. See IRC 6048(a)(3)(B)(i), Notice 97-34, IRC 679, and the regulations thereunder for additional information.

IRC 6048(b) provides that if at any time during the taxable year a U.S. person is treated as the owner of any portion of a foreign trust under the grantor trust rules (IRC 671 through IRC 679), such person must submit certain information and must ensure that the trust files certain information. The U.S. person must report ownership of the trust for the current tax year on Part II of Form 3520 and, if available, must attach a copy of the owner's statement (from Form 3520-A) to Form 3520. Even if the U.S. owner is not required to complete and file the other parts of Form 3520 in a particular year, the U.S. owner must nevertheless complete and file Part II of Form 3520. In addition, the U.S. owner must ensure that the foreign trust files Form 3520-A annually. If the foreign trust fails to file Form 3520-A, the U.S. owner must complete and attach a substitute Form 3520-A to his or her Form 3520. See IRM 20.1.9.14.

Distributions: U.S. Beneficiaries—IRC 6048(c) generally requires a U.S. person who receives a distribution or is treated as receiving a distribution, directly or indirectly, from a foreign trust, to report on Form 3520 the name of the trust, the aggregate amount of distributions received from the trust during the taxable year and such other information as the Secretary may prescribe. Refer to Notice 97-34 and the instructions to Form 3520 for more information. Some examples of distributions to U.S. persons from a foreign trust that are reportab e or nonreportable are as follows: Description Reportable

Distributions to the grantor or owner of the foreign trust.

Yes

Distributions from non-grantor foreign trusts.

Yes

Yes Non-arm's length loans from a foreign trust or the uncompensated use of trust property.



Description Reportable

Indirect distributions. For example, distributions by use of a credit card, where the charges on that credit card are paid or otherwise satisfied by a foreign trust or guaranteed or secured by the assets of a foreign trust for the year in which the charge occurs.

Yes

Distributions reported as taxable compensation on the income tax return of the recipient.

No



Description Reportable

Distributions from Canadian Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs). See Notice 2003-75 and the instructions to Form 8891.

No

6. Form 3520 is required to be filed separately from the U.S. person's income tax return and must not be attached to the related income tax return. In addition:

a. Form 3520 is filed once a year with respect to each U.S. person and each foreign trust. A separate Form 3520 is required for each foreign trust.

b. Form 3520, filed by a U.S. owner, is required to have a copy of the owner's statement from Form 3520-A attached to the Form 3520.

c. Form 3520 is required to be filed by the due date of the income tax return of a U.S. person, including extensions.

d. A separate Form 3520 must be filed by each U.S. person. However, married individuals who file married filing joint may file one Form 3520.

7. Filing Verification—Form 3520 is on the Business Master File as MFT 68 under the TIN of the U.S. person who is responsible for filing the return. Because an individual can have a reporting requirement for more than one foreign trust, the filing is further identified with a plan number.

a. Begin research with a BMFOLI. BRTVU is also available and includes all lines on the return including the foreign trust information that the Form 3520 provides.

b. If the U.S. person is an individual, the TIN will be the SSN + "V" (or "W" if an invalid SSN). c. If there is "no record" of this TIN, then no returns have been filed.

8. Secured Returns—When an examiner secures a delinquent Form 3520, determine whether it provides all of the required information and is accurate. If the Form 3520 is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520, perform the following actions:

a. Date stamp each Form 3520 with the date received. b. Write in redacross the top of the return—"Process as Original." c. Complete Form 13133,Expedite Processing Cycle, and check the delinquent return box as well as

the appropriate BMF or IMF box for "Do NOT Assess Failure to File Penalty."



d. Attach completed Form 13133 to the delinquent return. e. The original delinquent Form 3520 (with Form 13133 attached) must be sent to the following

address:



1. Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under the provisions of IRC 6677(a). This letter is five pages.

2. Letter 3943—This is the closingacceptance letter to be utilized after a taxpayer responds and the examiner determines that no penalties will be asserted.

3. Letter 3944—This is the closing no response letterto be utilized when a taxpayer either fails to respond tonotice letter(Letter 3804) or when a taxpayer does not provide a statement of reasonable cause for failing to file such returns.

4. Letter 3946—This is the closingreasonable cause rejected letter to be utilized after a taxpayer responds and the examiner determines that penalties will be asserted.


a. IMF—A CP 15, Notice of Penalty Charge, for penalties assessed onMFT 55 withPRN 659 is generated and sent to the taxpayer. A sample of a CP 15 notice (for a different penalty) is shown atExhibit 20.1.9-6,Sample CP 15 Notice.



1. An initial penalty is asserted by field examiners onForm 8278using PRN 659when the examiner determines that Form 3520 returns were required to be filed and were not timely filed or were not complete and accurate, and that the failure was not due to reasonable cause.

2. Penalties may be asserted by the campus for a late-filed Form 3520. Refer to IRM 21.8.2.18,Information Reporting Under IRC 6048. For additional information see the following:

a. IMF—IRM 21.8.1.24,Form 3520 and Form 3520-A. b. BMF—IRM 21.8.2.18,Information Reporting Under IRC 6048.



10/18/2018

1. Gross Reportable Amount—The gross reportable amount is defined in IRC 6677(c) as follows:

a. Contributions to the foreign trust: The gross value of the property involved in the event (determined as of the date of the event) in the case of a failure relating to IRC 6048(a),

b. The gross value of the portion of the trust's assets at the close of the year treated as owned by the U.S. person in the case of a failure relating to IRC 6048(b)(1), and

c. Distributions from the foreign trust: The gross amount of the distributions in the case of a failure relating to IRC 6048(c).

d. Inaccurate reporting: The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person transfers property worth $1,000,000 to a foreign trust, but reports only $400,000 of that amount, penalties may be imposed only on the unreported $600,000. See Notice 97-34.

e. Also, if the return is not filed and the Service assesses a penalty based on available information, additional assessments can be made if additional information is received.

20.1.9 International Penalties | Internal Revenue Service

Initial Penalty—Prior to 2010 under IRC 6677, the initial penalty for failure to timely file a complete and accurate Form 3520 was calculated based on the respective percentages below of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added and the initial penalty is equal to the greater of $10,000 or the following:

a. 35 percent of the gross reportable amount of any property transferred to a foreign trust for failure by a U.S. transferor to report the creation of, or transfer to, a foreign trust;

b. 35 percent of the gross reportable amount of the distributions received from a foreign trust for failure by a U.S. person to report receipt of the distribution; or

c. 5 percent of the gross reportable amount of the portion of the trust's assets treated as owned by a U.S. person for failure by the U.S. person to report the U.S. owner information (this penalty is imposed under IRC 6677(b) and is discussed further in IRM 20.1.9.14).

Note: In the case of a U.S. person treated as the owner of a foreign trust, penalties are assessed in the case of a failure to report such ownership pursuant to IRC 6048(b) on a Form 3520-A rather than on the Form 3520.

3. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted onForm 8278using PRN 702. Note: Prior to January 2013, PRN 619 was used for this continuation penalty.

4. The maximum penalty (both initial penalty and continuation penalty) for each failure to file Form 3520 is the gross reportable amount each year.

Example When Gross Reportable Amount CAN Be Determined—When the Service has evidence that the taxpayer formed a foreign trust and has specifics on the gross reportable amount, a notice letter can be issued, and if the taxpayer does not respond, the continuation penalty can be assessed. For example, IRS has information that a taxpayer created a foreign trust and transferred $1,000,000 (cash or property) to the foreign trust in the same year and has not filed Form 3520. The taxpayer was issued a notice letter and had not filed the return after 35 days following the expiration of the 90-day period:



a. Initial assessment after 125 days from the date of the notice letter:

1. PRN 659 for $350,000 (35% of $1,000,000) 2. PRN 702 for $20,000 3. Total assessment: $370,000 If noncompliance continues, additional assessments can be made every 30 days until a complete and accurate Form 3520 is received by the Service, or the penalty equals the gross reportable amount ($1,000,000 for this example):

b.

1. PRN 659 for $0.00 (zero) 2. PRN 702 for $10,000 for each 30-day period

c. If additional information is received that changes the Service's knowledge of the gross reportable amount, additional assessments can be made or the original assessments can be adjusted.

6. Example When Gross Reportable Amount CANNOT Be Determined—When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued, and if the taxpayer does not respond, the initial penalty can be assessed. For example, IRS has information that a taxpayer created a foreign trust and has not filed Form 3520. The taxpayer was issued a notice letter and did not respond:

a. Initial penalty assessment after no response to the notice letter will be made on Form 8278 with PRN 659 for $10,000 (the "greater of threshold amount).

b. If noncompliance continues, but the gross reportable amount continues to be undetermined, additional assessments (continuation penalties) can be made.

c. If additional information is received that changes the Service's knowledge of the gross reportable amount, additional assessments can be made or the original assessments can be adjusted. Note: At such time when the gross reportable amount with respect to any failure can be determined, the aggregate penalties imposed under this subsection, with respect to such failure, shall be reduced so not to exceed the gross reportable amount.

Non-Compliance Tax Adjustment—IRC 6048(c)(2) provides that any distribution from a foreign trust, whether from income or corpus, to a U.S. beneficiary will be treated as an accumulation distribution includible in the gross income of that U.S. beneficiary if adequate records are not provided to the Secretary to determine the proper treatment of the distribution. The interest charge under IRC 668 shall apply to the distribution treated as an accumulation distribution. In determining the interest amount under IRC 668, the applicable number of years will be equal to one half of the number of years that the trust has been in existence. This adjustment is subject to deficiency procedures.

8. Interest—The interest charge will be determined using the normal interest rate and method as described in IRC 6621, unless the period is prior to 1996, when a simple interest rate of 6% will be used. This interest is not deductible.


1. No reasonable cause should be considered until the taxpayer has filed the complete and accurate information required for all open years (not on extension).



IRC 6677 provides specific exclusions with respect to theinitial penaltyfor reasonable cause and Notice 97-34 provides additional information:

a. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the taxpayer (or other person) for disclosing the required information. See IRC 6677(d).

b. Refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause.

3. The fact that the trustee did not provide the taxpayer with a copy of the owner's statement of Form 3520-A is not reasonable cause. The taxpayer owner is also the person responsible for ensuring that the Form 3520-A is filed and that he or she receives a copy of the owner's statement.

20.1.9.14(04-22-2011) IRC 6677(a) and (b)—Foreign Trusts With U.S. Owners—Form 3520-A

1. The penalties for failure to file Form 3520-A are similar to the penalties for failure to file Form 3520 except that IRC 6677(b) changes the amount of the initial penalty to the greater of $10,000 or 5 percent of the gross reportable amount. The gross reportable amount is defined in IRC 6677(c)(2) as the gross value of the portion of the trust's assets at the close of the year treated as owned by the U.S. person.

If a foreign trust fails to file Form 3520-A, the penalties are imposed on the U.S. person who is treated as the owner of the foreign trust. The grantor trust rules are in IRC 671 through 679. The U.S. owner may be able to avoid penalties by attaching a substitute Form 3520-A to a timely filed Form 3520.


Form 3520-A,Annual Information Return of Foreign Trust With a U.S. Owner, is due by the 15th day of the third month after the end of the trust's tax year. Each U.S. person treated as an owner of a foreign trust under IRC 671 through IRC 679 is responsible for ensuring that the foreign trust files an annual return setting forth a full and complete accounting of all trust activities, trust operations, and other relevant information as the Secretary prescribes. See IRC 6048(b)(1). In addition, the U.S. owner is responsible for ensuring that the trust annually furnishes such information as the Secretary prescribes to U.S. owners and U.S. beneficiaries of the trust. See IRC 6048(b)(1)(B), Treas. Reg. 404.6048-1, and Notice 97-34.

IRC 6048 authorizes the Secretary to prescribe the information required to be reported. The instructions to Form 3520-A include all information required to be provided.

3. U.S. persons who are treated as owners of Canadian RRSPs or RRIFs do not need to ensure that the RRSP or RRIF files a Form 3520-A and do not need to file a substitute Form 3520-A.

Form 3520-A includes an owner's statement (Foreign Grantor Trust Owner Statement) for each U.S. person considered to be an owner of a portion of the foreign trust. The owner's statement is required to be provided to each U.S. owner of the foreign trust.

Form 3520-A includes a beneficiary's statement (Foreign Grantor Trust Beneficiary Statement) for any distributions made to U.S. persons. The beneficiary's statement is required to be provided to each U.S.



beneficiary.

6. U.S. Agent—A copy of the authorization of agent must be attached to the Form 3520-A and must be substantially identical to the format shown in the instructions. The U.S. agent has a binding contract with the foreign trust to act as the foreign trust's limited agent for purposes of applying IRC 7602, IRC 7603, and IRC 7604 with respect to a request by the IRS to examine records, produce testimony, or respond to a summons by the IRS for such records or testimony.

7. Trusts without U.S. agents must have the following attached to the Form 3520-A to be considered complete:

a. A summary of the terms of the trust including a summary of any oral or written agreements or understandings that the U.S. owner(s) has with the trustee whether or not legally enforceable.

b. Copy of any of the following that have not been previously provided: 1. All trust documents and instruments, 2. Any amendments to the trust agreement, 3. All letters of wishes prepared by the settlor, 4. Memorandum of wishes by trustee summarizing the settlor's wishes, and 5. Any other similar documents.

8. Filing Verification—Form 3520-A is processed to Master File with MFT 42 as a BMF account under the TIN of the foreign trust. There is a separate extension for this return. It will post as a TC 460 with a date. IF for the foreign trust... AND... THEN...

you have a the request BMFOLI BMFOLT shows a and BRTVU MFT 42, (the BRTVU

has all lines of the return transcribed).

TIN

you have a TIN and

there is no MFT

the return has not been filed. the 42

BMFOLI shows a MFT 42

posting,



IF for the foreign trust... AND... THEN...

research NAME for a TIN. If no TIN located include research in the case

you do nothave a TIN

file.

9. Secured Returns—When an examiner secures a delinquent Form 3520-A, determine if it provides all of the required information and is accurate. If the Form 3520-A is incomplete or inaccurate, the examiner must inform the taxpayer that the return is not considered filed until it is complete and accurate. For a complete and accurate Form 3520-A, perform the following actions:

a. Date stamp each Form 3520-A with the date received. b. Write in redacross the top of the return—"Process as Original." c. Complete Form 13133,Expedite Processing Cycle, and check the delinquent return box as well as

the appropriate BMF or IMF box for "Do NOT Assess Failure to File Penalty." d. Attached completed Form 13133 to the delinquent return. e. The original delinquent Form 3520-A (with Form 13133 attached) must be sent to the following

address:



1. Letter 3804—This is an opening notice letter required to be mailed to a taxpayer under the provisions of IRC 6677(a). This letter is five pages.

2. Letter 3943—This is the closingacceptance letter to be utilized after a taxpayer responds and the examiner determines that no penalties will be asserted.

3. Letter 3944—This is the closing no response letterto be utilized when a taxpayer either fails to respond toLetter 3804 or when a taxpayer does not provide a statement of reasonable cause for failing to file such returns.

4. Letter 3946—This is the closingreasonable cause rejected letter to be utilized after a taxpayer responds and the examiner determines that penalties will be asserted.

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CP Notices—Once a penalty is identified by the campus or a penalty case is closed by the field and the Form 8278 is processed, a CP notice is generated and sent to the taxpayer as follows:




1. An initial penalty is asserted by field examiners onForm 8278using PRN 660when the examiner determines that Form 3520-A returns were required to be filed and were not timely filed or were not complete and accurate, and that the failure was not due to reasonable cause.

2. Form 3520-A is considered incomplete in the following situations:

a. The U.S. owner or beneficiary is not timely provided with the required statements. b. A foreign trust without a U.S. agent does not provide all the required attachments, e.g., summary of

the terms of the trust, copies of trust documents or amendments to trust documents, and other required information (See IRM 20.1.9.14.1(7)).

c. The U.S. agent does not provide information with respect to the trust after a request in writing as required by the terms of the U.S. agent agreement. Reasonable cause does not apply to the penalty in situations relating to a failure to provide information when requested.

d. Form 3520-A does not contain substantially all of the required information on the return, e.g., amount of contributions and distributions, amount deemed as owned by each U.S. person, and balance sheet and income statement information.

3. Penalties may be asserted by the campus for a late-filed Form 3520-A. For more information see the following:

a. IMF—IRM 21.8.1.24,Form 3520 and Form 3520-A. b. BMF—IRM 21.8.2.18,Information Reporting Under IRC § 6048.


1. Initial Penalty—Prior to 2010, the initial penalty for failure to timely file a complete and accurate Form 3520-A was 5 percent of the gross reportable amount. There was no minimum penalty. Beginning with 2010, a minimum threshold was added and the initial penalty is the greater of $10,000 or 5 percent of the gross reportable amount at the close of the year treated as owned by the U.S. person. See IRC 6677(b) for the penalty and IRC 6677(c) for the meaning of "gross reportable amount." In addition:

a. The initial penalty is computed for failure to provide information or inaccurate reporting. The penalty applies only to the extent that the transaction is not reported or is reported inaccurately. Thus, if a U.S. person reports the value of the account as worth $400,000, but the correct value is $1,000,000 penalties may be imposed on the unreported $600,000. See Notice 97-34.

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b. If the return is not filed and the Service assesses a penalty based on available information adjustments or additional assessments can be made if additional information is received.

2. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted onForm 8278using PRN 703. Note: Prior to January 2013, PRN 619 was used for this continuation penalty.

3. The maximum penalty (both initial penalty and continuation penalty) for failure to file Form 3520-A is the gross value of the portion of the trust owned by the U.S. person.

4. When the Service has evidence that the taxpayer formed a foreign trust but does not have specifics on the gross reportable amount, a notice letter can be issued and if the taxpayer does not respond within 90 days after the day on which the notice was mailed, the continuation penalty can be assessed. Example: IRS has information that a taxpayer transferred $100,000 to a foreign trust described in IRC 679 in 2011. Therefore, the taxpayer has a requirement to ensure that the foreign trust files Form 3520-A for 2011 and for each year thereafter. Unless the taxpayer provides evidence to the contrary or causes the foreign trust to file the required Form 3520-A (or files a substitute Form 3520-A on behalf of the foreign trust), the gross value of the assets owned by the U.S. person is considered to be not less than the $100,000 transferred. The IRS issued a notice letter to the taxpayer for 2011 through 2013 and the required returns have not been filed. The taxpayer was issued a notice letter and had not filed the return after 35 days following the expiration of the 90-day period. The penalties are computed as follows:

a. Initial assessment after 125 days from the date of the notice letter for each year—2011, 2012, and 2013:

1. PRN 660 for $10,000 (greater of $10,000 or 5% of $100,000 gross reportable amount for returns required to be filed after December 31, 2009) 2. PRN 703 for $20,000 3. Total assessment: $30,000 for each of the 3 years or $180,000 If noncompliance continues, additional assessments of $10,000 can be made for each 30-day period can be made until the assessment amount for each year equals the gross reportable amount for each year—2011, 2012, and 2013—or until the required returns are filed or the amount of the total assessment for each year equals $100,000:

b.

1. PRN 660 for $0.00 (zero) 2. PRN 703 for $10,000 for each 30-day period noncompliance continues until total penalties assessed for the year equals $100,000

c. If additional information is received that changes the gross value owned by the U.S. person, additional assessments can be made or the original assessments can be adjusted.


1. No reasonable cause should be considered until the taxpayer has filed the complete and accurate information required for all open years (not on extension).


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2. IRC 6677(d) provides specific exceptions with respect to the penalty for reasonable cause and Notice 97-34 provides additional information. In addition:

a. The U.S. owner is responsible for ensuring that Form 3520-A is filed timely and includes all required information. The failure of the trustee or agent to timely file complete and accurate returns or provide information when requested is not reasonable cause for this penalty.

b. A taxpayer will not have reasonable cause merely because a foreign country would impose a civil or criminal penalty on the taxpayer (or other person) for disclosing the required information. See IRC 6677(d).

c. Refusal on the part of a foreign trustee to provide information for any other reason, including difficulty in producing the required information or provisions in the trust instrument that prevent the disclosure of required information, will not be considered reasonable cause.


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20.1.9.22 (07-08-2015) IRC 6038D—Information With Respect to Specified Foreign Financial Assets

1. IRC 6038D was added by P.L. 111-147, the Hiring Incentives to Restore Employment (HIRE) Act, for any individual failing to disclose information with respect to specified foreign financial assets during any taxable year beginning after March 18, 2010. Caution: IRS Notice 2011-55 suspends the requirement for individuals to attach Form 8938, Statement of Specified Foreign Financial Assets, to income tax returns that are filed before the release of Form 8938 in December 2011. Therefore, no penalty under IRC 6038D can be asserted on individuals who file during, or before December 2011.


1. A complete and accurate Form 8938, Statement of Specified Foreign Financial Assets, attached to a timely filed tax return fulfills the reporting requirements.

2. The required information for such specified foreign financial assets include the following:

a. For all accounts and assets: i. The maximum value of each account or asset during the year, and ii. The foreign currency in which the account or asset is designated, the exchange rate used to convert the account or asset value into U.S. dollars, and the source of the exchange rate if other than the U.S. Treasury Financial Management Service.

b. In the case of any foreign deposit or custodial account: i. The account type, including account number, and account opening and closing dates, and ii. The name and address of the financial institution in which the account is maintained.

c. In the case of any stock of, or interest in, a foreign entity: i. A description of the stock or interest in the entity, including any identifying number, and acquisition and disposition dates, and ii. The name, address, and type of foreign entity.

d. In the case of all other specified foreign financial assets: i. A description of the asset, including any identifying number, and ii. The names and addresses of all issuers and counter-parties with respect to the asset.


1. Letter 4618—This is a notice letter required to be mailed to the taxpayer under the provisions of IRC 6038D(d).



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20.1.9.22.3(07-08-2015) Penalty Assertion

1. BMF taxpayers. BMF civil penalties are developed and then asserted using Form 8278 which, when closed and input, will create a MFT 13 module for the penalty. The initial penalty is distinguished from the continuation penalty by a unique PRN as follows:

a. Initial penalty. The initial penalty is asserted by field examiners on Form 8278 using PRN 700. b. Continuation penalty. The continuation penalty is asserted on a separate Form 8278 using PRN

710. c. Separate penalty case files for each type of penalty. Although the initial penalty and continuation

penalty fall under one Code section and appear adjacent to each other on Form 8278, separate case files must be maintained for each type of penalty. However, multiple year examinations of either penalty can be included in one penalty case file for the respective penalty.

d. Separate Form 8278 for each BMF penalty. These civil penalties are unique from income tax cases in that there is no examination report or agreement form for the taxpayer to sign. Therefore, the IRS relies on the Form 8278 in each penalty case file for information to verify that each assessment was properly approved and input. As a result, examiners must complete and include in the penalty case file a separate Form 8278 for each initial and continuation penalty as well as for each year to which each penalty may apply. For example, if an initial penalty will be asserted against three different years, the penalty case file must include three different Forms 8278—one for each year penalized.

e. Complete and attach Form 886-A,Explanation of Items, to each Form 8278 and include the following information that justifies assertion of the penalty for each year: 1. Name and TIN of the taxpayer required to file Form 8938, 2. Computation of penalty, 3. Date the notice letter (Letter 4618) was issued, 4. Any other significant correspondence, 5. Date Form 8938 was received (if received), and 6. Discussion of facts and law as necessary, including consideration of reasonable cause for not filing; pattern of filing information returns; or other related tax violations (e.g., understatement of income tax related to the failure to file Form 8938).

f. If a penalty investigation is started and the penalty is waived for reasonable cause or other reasons, document the reason(s) the penalty was waived in the workpapers.

g. Include a copy of the following with your workpapers: 1. The secured Form 8938 (if secured, with stamped received date) and all supporting statements, 2. The first page of the income tax return with a comment that you inspected the entire return and that Form 8938 was not attached, 3. Copy of notice letter (Letter 4618) with certified mail receipt, and 4. Copies of any relevant documents from the related income tax case file. Note: If Form 8938 has not been secured and the initial penalty case file will be closed separately, retain an extra copy of the above information that will later support assertion of the continuation penalty.

h. Keep each penalty case file separate from any related income tax cases. Identify each penalty case a s a "Related Taxpayer" on Form 3198,Special Handling Notice for Examination Case Processing.



i. Complete and attach Form 3198 to the outside of each penalty case. On page one in the "Special Features" section of the form, check the box for "Civil Penalties (Form 8278)."

j. In the "Other instructions" lines in the "Special Features" section of Form 3198, indicate the PRN and penalty amounts to be assessed. For example: "Assess PRN 700 for $10,000—See Form 8278 enclosed" for the initial penalty or "Assess PRN 710 for $30,000—See Form 8278 enclosed" for the continuation penalty. Note: Form 5344, Examination Closing Record, is not used for a penalty case file.

2. IMF taxpayers. IMF civil penalties are asserted differently depending on whether or not the taxpayers have filed a joint income tax return as follows:

a. Temporary Regulation 1.6038D-8T(b) provides that married specified individuals who file a joint annual return and fail to file a required Form 8938 that includes the information required with respect to any taxable year at the time and in the manner described are subject to penalties as if the married specified individuals are a single specified person. The liability of married specified individuals who file a joint annual return with respect to any penalties under this section is joint and several. Caution: IRS Notice 2011-55 suspends the requirement for individuals to attach Form 8938 to income tax returns that are filed before the release of Form 8938 in December 2011. Therefore, no penalty under IRC 6038D can be asserted on individuals who file during or before November 2011.

b. If taxpayers are married filing a joint return, the initial penalty and continuation penalty (if applicable) are developed and then asserted using Form 3870,Request for Adjustment, on the MFT 30 module (for which taxpayers have joint liability). See IRM 20.1.9.22.3.1,Asserting Penalty on MFT 30 Joint Return Module.

Note: Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, is not used to asser t penalties to the MFT 30 module.

c. For all other taxpayers, the penalties are developed and asserted using Form 8278 which, when closed and input, will create a MFT 55 module for the civil penalties. See IRM 20.1.9.22.3.2,Asserting Penalty on MFT 55 Modules.

Note: Form 3870 is not used to assert penalties to the MFT 55 individual (or "several") module.

d. Separate penalty case files for each type of penalty. Although the initial penalty and continuation penalty fall under one Code section and appear adjacent to each other on Form 8278, separate case files must be maintained for each type of penalty. However, multiple year examinations of either penalty can be included in one penalty case file of the respective penalty.

e. Separate assessment document for each penalty. These penalties are unique from income tax cases in that there is no examination report or agreement form for the taxpayer to sign. Therefore, the IRS relies on the assessment document(s) in each penalty case file for information to verify that each assessment was properly input. As a result, examiners must complete and include in the penalty case file a separate assessment documents for each initial and continuation penalty as well as for each year to which each penalty may apply. For example, if an initial penalty was asserted against three different years, the penalty case file must include three different assessment documents—one for each year penalized.

20.1.9.22.3.1 (07-08-2015) Asserting Penalty on MFT 30 Joint Return Module

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1. In order to assert the penalty as a joint liability of both spouses, Form 3870 is the assessment document required. Form 3870 will direct the input of the penalty to MFT 30 as well as identify the PRN to be applied to any initial or continuation penalty.


2. Initial Penalty. The examiner will prepare the case file as follows:

a. Complete a separate Form 3870 for each year that penalties will be assessed. You are encouraged to use the fillable job aid for the initial penalty athttps://organization.ds.irsnet.gov/sites/SBSEfeMySBSE/ServicewidePenalties/General Documents/Form 3870 Initial Penalty Job Aid-IRC6038D.pdf and complete the following: 1. Enter information in all fillable spaces in Blocks 1 , 2 , 3 , 5 and 10 of the job aid, 2. Enter the amount of penalty on line 29 of the job aid in the block for "Item Adjustment," 3. The examiner must sign line 13 on Part 1 and on Part 3and enter telephone number, fax number and date (if manually signed), and 4. The supervisor must sign line 14 on Part 1 and on Part 3and enter date (if manually signed).

Caution: If job aid is not used, additional information shown on the job aid in Blocks 3, 4, 7, 11 as well as on line 29 must be entered on a clean Form 3870 if desired.

b. Place "Part 1—Copy for Adjustments Branch" and "Part 2—For Processing as Form 3177" of each Form 3870 as the very first documents inside the penalty case file.

c. The next items in the case file will be to complete and attach Form 886-A to each "Part 3—Copy for Originator" of each Form 3870 and include the following information that justifies assertion of the penalty for each year: 1. Name and TINs of the joint taxpayers required to file Form 8938, 2. Computation of penalty, 3. Date the notice letter (Letter 4618) was issued, 4. Any other significant correspondence, 5. Date Form 8938 was received (if received), and 6. Discussion of facts and law as necessary, including consideration of reasonable cause for not filing; pattern of filing information returns; or other related tax violations (e.g., understatement of income tax related to the failure to file Form 8938).

d. If an initial penalty investigation is started and the penalty is waived for reasonable cause or other reasons, document the reason(s) the penalty was waived in the workpapers.

e. Include a copy of the following with your workpapers: 1. The secured Form 8938 (if secured, with stamped received date) and all supporting statements, 2. The first page of the income tax return with a comment that you inspected the entire return and that Form 8938 was not attached, 3. Copy of notice letter (Letter 4618) with certified mail receipt, and 4. Copies of any relevant documents from the related income tax case file. Reminder: If Form 8938 has not been secured and the initial penalty case file will be closed separately, retain an extra copy of the above information that will later support assertion of the continuation penalty.

f. Keep the penalty case file separate from any related income tax cases. Identify the penalty case as a "Related Taxpayer" on Form 3198,Special Handling Notice for Examination Case Processing.

g. Complete and attach Form 3198 to the outside of the penalty case and be sure that: 1. On page one in the "Special Features" section of the form, the box for "Civil Penalties (Form 8278)" is checked, and 2. "(Form 8278)" is crossed out using red ink or red marker and replaced with"(Form 3870)."

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h. In the "Other instructions" lines in the "Special Features" section of Form 3198, indicate the PRN and penalty amounts to be assessed. For example: "Assess PRN 700 for $10,000—See Request for Adjustment Form 3870 enclosed." Note: Form 5344, Examination Closing Record, is not used for a penalty case file.

3. Continuation Penalty. The examiner will prepare the case file as follows:

a. Complete a separate Form 3870 for each year that penalties will be assessed. You are encouraged to use the tillable job aid for the initial penalty at https://organization.ds.irsnet.gov/sites/SBSEfeMySBSE/ServicewidePenalties/General Documents/Form 3870 Continuation Penalty Job Aid-IRC6038D.pdf and complete the following: 1. Enter information in all tillable spaces in Blocks 1, 2, 3, 5 and 10 of the job aid, 2. Enter the amount of penalty on line 29 of the job aid in the block for "Item Adjustment." 3. Theexaminer must sign line 13 on Part 1 and on Part 3and enter telephone number, fax number and date (if manually signed). 4. Thesupervisor must sign line 14 on Part 1 and on Part 3and enter date (if manually signed).

Caution: If a job aid is not used, additional information shown on the job aid in Blocks 3, 4, 7, 11 as well as on line 29 must be entered on a clean Form 3870.

b. Place "Part 1—Copy for Adjustments Branch" and "Part 2—For Processing as Form 3177" of each Form 3870 as the very first documents inside the penalty case file.

c. The next items in the case file will be to complete and attach Form 886-A to each "Part 3—Copy for Originator" of each Form 3870 and include the following information that justifies assertion of the penalty for each year: 1. Name and TINs of the joint taxpayers required to file Form 8938, 2. Computation of penalty, 3. Date the notice letter (Letter 4618) was issued, 4. Any other significant correspondence, 5. Date Form 8938 was received (if received), and 6. Discussion of facts and law as necessary, including consideration of reasonable cause for not filing; pattern of filing information returns; or other related tax violations (e.g., understatement of income tax related to the failure to file Form 8938).

d. If a continuation penalty investigation is started and the penalty is waived for reasonable cause or other reasons, document the reason(s) the penalty was waived in the workpapers.

e. Include a copy of the following with your workpapers: 1. The secured Form 8938 (if secured, with stamped received date) and all supporting statements, 2. The first page of the income tax return with a comment that you inspected the entire return and that Form 8938 was not attached, 3. Copy of notice letter (Letter 4618) with certified mail receipt, and 4. Copies of any relevant documents from the related income tax case file.

f. Keep the continuation penalty case file separate from any related income tax or initial penalty cases. Identify the penalty case as a "Related Taxpayer" on Form 3198.

g. Complete and attach Form 3198 to the outside of the penalty case and be sure that: 1. On page one in the "Special Features" section of the form, the box for "Civil Penalties (Form 8278)" is checked, and 2. "(Form 8278)" is crossed out using red ink or red marker and replaced with"(Form 3870)."

h. In the "Other instructions" lines in the "Special Features" section of Form 3198, indicate the PRN and penalty amounts to be assessed. For example: "Assess PRN 710 for $30,000—See Request for



Adjustment Form 3870 enclosed." Note: Form 5344, Examination Closing Record, is not used for a penalty case file.

20.1.9.22.3.2 (07-08-2015) Asserting Penalty on MFT 55 Modules

1. To otherwise assert the penalty (on individuals not filing a joint return), Form 8278 is the assessment document required. Once the penalty case is closed and upon input of Form 8278, an MFT 55 module will be created and the penalty identified by the PRN designated on Form 8278.

2. Initial Penalty and Continuation Penalty. The examiner will prepare the respective penalty case files as follows:

a. Complete a separate Form 8278 for each initial penalty and continuation penalty as well as separate forms for each year that the respective penalties will be assessed.

b. Complete the appropriate line item that can be found in Section 9H of Form 8278. c. Complete and attach Form 886-A,Explanation of Items, to each Form 8278 and include the following

information that justifies assertion of the penalty for each year: 1. Name and TIN of the taxpayer required to file Form 8938, 2. Computation of penalty, 3. Date the notice letter (Letter 4618) was issued, 4. Any other significant correspondence, 5. Date Form 8938 was received (if received), and 6. Discussion of facts and law as necessary, including consideration of reasonable cause for not filing; pattern of filing information returns; or other related tax violations (e.g., understatement of income tax related to the failure to file Form 8938).

d. If a penalty investigation is started and the penalty is waived for reasonable cause or other reasons, document the reason(s) the penalty was waived in the workpapers.

e. Include a copy of the following in each set of workpapers for the initial penalty and continuation penalty (if applicable): 1. The secured Form 8938 (if secured, with stamped received date) and all supporting statements, 2. The first page of the income tax return with a comment that you inspected the entire return and that Form 8938 was not attached, 3. Copy of notice letter (Letter 4618) with certified mail receipt, and 4. Copies of any relevant documents from the related income tax case file. Reminder: If Form 8938 has not been secured and the initial penalty case file will be closed separately, retain an extra copy of the above information that will later support assertion of the continuation penalty.

f. Keep each penalty case file separate from any related cases. Identify each penalty case as a "Related Taxpayer" on Form 3198,Special Handling Notice for Examination Case Processing.

g. Complete and attach Form 3198 to the outside of each penalty case. On page one in the "Special Features" section of the form, check the box for "Civil Penalties (Form 8278)."

h. In the "Other instructions" lines in the "Special Features" section of Form 3198, indicate the PRN and penalty amounts to be assessed. For example: "Assess PRN 700 for $10,000—See Form 8278 enclosed" for the initial penalty or "Assess PRN 710 for $30,000—See Form 8278 enclosed" for the continuation penalty. Note: Form 5344, Examination Closing Record, is not used for a penalty case file.


20.1.9 International Penalties | Internal Revenue Service 10/18/2018 20.1.9.22.3.3 (07-08-2015) For Cases Submitted to Appeals

1. Examiners need to be sure to include the following in each initial penalty and continuation penalty case file:

a. Form 4665,Report Transmittal, and b. Taxpayer's written request for appeal of penalties.

Caution: Comments on Form 4665, must be in compliance with Rev. Proc. 2012-18, which provides, "The transmittal memorandum or any similar document that the originating function uses to transmit the administrative file (transmittal) should not include statements or comments intended to influence Appeals' decision-making process. This includes recommendations concerning what Appeals should consider and how Appeals should resolve the case." For additional information regarding Rev. Proc. 2012-18 visit http://mysbse.web.irs.gov/exam/tip/exparte/default.aspx.


1. Initial Penalty—The initial penalty is $10,000 for each taxable year with respect to which such failure occurs.

2. Continuation Penalty—If any failure continues more than 90 days after the day on which the notice of such failure was mailed to the taxpayer (90-day period), additional penalties will apply. The continuation penalty is $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of the 90-day period. These additional penalties are also asserted onForm 8278using PRN 710. The maximum continuation penalty is limited to $50,000 per failure.


1. No reasonable cause should be considered until the taxpayer has filed all open years (not on extension).

2. IRC 6038D(g) provides that no penalty shall apply if the individual shows that the failure is due to reasonable cause and not to willful neglect.

3. An individual will not have reasonable cause merely because a foreign jurisdiction would impose a civil or criminal penalty on any person for disclosing the required information.


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Documenfclndiana Rolling Mills Co. v. Commissioner, 1 3 B.T.A. 1 1 4 1

Indiana Rolling Mills Co. v. Commissioner, 13 B.T.A. 1141

Copy Citation

United States Board of Tax Appeals

October 18, 1928, Promulgated

Docket No. 12259.

Reporter

1 3 B.T.A. 1 1 4 1 * | 1928 BTA LEXIS 3103 **

INDIANA ROLLING MILLS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Core Terms

sworn, limitations, vice president, fiscal year, credits, assistant treasurer, gross income, deductions,

provisions, taxpayer, notice, audit

Syllabus

[**l'j Limitations. - Petitioner filed its income and profits-tax return on September 15, 1919, for the fiscal year ended June 30, 1919. This return was sworn to by the petitioner's vice president and secretary, and was not a false or fraudulent return. No waiver or consent in writing was executed by the Commissioner and the petitioner extending the statutory period for assessment and collection. The deficiency notice was mailed to the petitioner on January 4, 1926. Held, that said return was in substantial compliance with the statute, and constituted the return required by law. Held, further, that assessment and collection of the proposed deficiency are barred by the statute of limitations.

Counsel: Frank J. Albus, Esq., Frank C. Olive, Esq., and George S. Olive, C.P.A., for the petitioner.

J. L. Backstrom, Esq., for the respondent.

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Opinion by: TRAMMELL

10/18/2018

Opinion

[ * 1 1 4 1 ] This is a proceeding for the redetermination of a deficiency in income and profits taxes for the fiscal year ended June 30, 1919, in the amount of $4,625.02. The sole issue is whether assessment of said deficiency is barred by limitations.

FINDINGS OF FACT.

The petitioner is an Indiana [**2] corporation, with its principal office at New Castle. On September 15, 1919, it filed with the collector [ * 1 1 4 2 ] of internal revenue for the sixth district of Indiana, at Indianapolis, a corporation income and profits-tax return on Form 1120-A, for the fiscal year ended June 30, 1919, showing a total tax due of $16,192.62. This return was sworn to, under date of September 11, 1919, by the vice president and secretary of the petitioner, and specifically stated the items of its gross income and the allowable deductions and credits. The amount of tax shown on said return was paid by the petitioner in four quarterly installments, the last installment having been paid on June 15, 1920.

Said return was not a false or fraudulent return within the meaning of the law. No waiver or consent in writing extending the statutory period for assessment and collection was ever executed by the Commissioner and the petitioner with respect to its tax liability for said fiscal year ended June 30, 1919. The notice of deficiency was mailed to the petitioner under date of January 4, 1926, said date appearing on the face of said notice.

In 1923 the respondent caused said return of the petitioner [**3] to be audited, and as a result thereof, determined an overassessment of $3,218.83, which amount was credited by the collector on December 1, 1923, on account of supplemental tax of the petitioner for the fiscal year ended June 30, 1918. As the result of a second audit of said return, the respondent on January 4, 1926, determined the deficiency involved herein.

OPINION.

TRAMMELL: The petitioner filed its income and profits-tax return on September 15, 1919, for the fiscal year ended June 30, 1919. This return was sworn to by the petitioner's vice president and secretary, and was not a false or fraudulent return with intent to evade tax. No waiver or consent in writing was executed by the Commissioner and petitioner extending the period for assessment and collection. The deficiency notice was mailed to the petitioner on January 4, 1926.

The sole issue raised by the pleadings is whether, under these facts, assessment of said deficiency so determined by the respondent is barred by limitations. There is no controversy with respect to the facts, which have been agreed to by the parties.

The material provisions of the Revenue Act of 1918 relating to the making of returns by [**4] corporations are as follows:

SEC. 239. That every corporation subject to taxation under this title and every personal service corporation shall make a return, stating specifically the items of its gross income and the deductions and credits allowed by this title. The return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer.

The [ * 1 1 4 3 ] statute of limitations applicable to this case is set forth in section 277(a)(2) of the Revenue Act of 1924 as follows:

* # #

(2) The amount of income, excess-profits, and war-profits taxes imposed by the * * * Revenue Act of 1918 * * * shall be assessed within five years after the return was filed, and no proceeding in court for the collection of such taxes shall be begun after the expiration of such period.

In the notice of deficiency, which the respondent sent to the petitioner under date of January 4, 1926, it was stated:

The five-year period provided in Section 277(a)(2) of the Revenue Act of 1924, within which assessment of the tax for 1919 may be made has expired, however, Section 278(c) provides that where both the Commissioner and the taxpayer have consented [**5] in writing to the assessment of tax after the time set forth in Section 277(a)(2), the tax may be assessed at any time prior to the expiration of the period agreed upon. If you agree to the assessment of the tax, it will be necessary for you to sign and return to this office the enclosed waiver form; if you do not desire to sign the waiver but are willing to pay the tax, you may make voluntary payment to the collector of internal revenue for your district.

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The petitioner declined to sign the "waiver form" or to make voluntary payment of the tax, as suggested by the respondent, and this proceeding results.

The respondent now contends that assessment of the deficiency is not barred by limitations, because the document filed by the petitioner as its return was sworn to by its vice president and secretary instead of by its vice president and treasurer or assistant treasurer, as provided in the statute, and therefore not being the return required by law, the statutory period of limitations has never commenced to run.

The purported return was filed by the petitioner with the collector of internal revenue at Indianapolis on September 15, 1919, and the amount of tax shown was thereafter [**6] duly paid. In 1923, or approximately four years after the filing of the document, the respondent caused an audit thereof to be made and determined the petitioner's tax liability for the fiscal year ended June 30, 1919, at an amount $3 ,218.83 less than that shown on said return. A certificate of over-assessment was duly issued and said amount credited on account of supplemental tax of the petitioner for the fiscal year ended in 1918. Some two years later the respondent caused said alleged return to be audited again, and, as a result of such second audit, determined the deficiency involved herein on January 4, 1926, more than six years after the filing of said document with the collector.

So far as disclosed, the respondent never at any time prior to the hearing of this appeal made objection to the form or manner in which said document was executed, nor ever at any time requested the petitioner to file a return verified by the affidavit of its treasurer or assistant treasurer.

[ * 1 1 4 4 ] Thus, the concrete question presented here is whether a return sworn to by the vice president and secretary of a corporation substantially complies with the requirements of section 239 of [**7] the Revenue Act of 1918, respecting the form and manner of making the return, so as to start the running of the statute of limitations contained in section 277(a)(2) of the Revenue Act of 1924. This in turn involves a consideration of the rules of statutory construction.

The statute provides that every corporation subject to taxation shall make a return, stating specifically the items of its gross income and the allowable deductions and credits, and further provides that the return shall be sworn to by the president, vice president, or other principal officer and by the treasurer or assistant treasurer.

10/18/2018

What is the essence of the thing required to be done by this statute? It is, we think, the making of an honest return by the corporation, wherein are set forth specifically the items of its gross income and the allowable deductions and credits, in order that the Commissioner may determine the correct amount of its tax liability. If such required information is fairly and honestly given in a return sworn to by officers of the corporation who are familiar with its affairs, this in our opinion constitutes a substantial compliance with the provisions of the statute.

The prime [**8] object of the legislative intention was manifestly to require that the specified information be furnished under oath by the corporate officers, and where such information is fairly and honestly given in a return sworn to by the vice president and secretary of the corporation the legislative purpose is achieved in no less degree than if the return had been sworn to by the vice president and treasurer or assistant treasurer.

A general rule of statutory construction is that those provisions which do not relate to the essence of the thing to be done, and as to which compliance is a matter of convenience rather than substance, are directory; while those provisions which relate to the essence of the thing to be done, that is, to matters of substance, are mandatory. 25 R.C.L. 767.

The fact that the statute provides that the return "shall" be sworn to by certain officers of the corporation named does not necessarily require the construction that this provision is mandatory. In West Wisconsin R. Co. v. Foley, 94 U.S. 100, the court said:

"Shall" ought undoubtedly to be construed as meaning "must," for the purpose of sustaining or enforcing an existing right; but [**9] it need not be for creating a new one.

In Mabel Elevator Co., 2 B.T.A. 517, we said:

There can be no doubt that such limitations are placed on assessments for the purpose of assuring the taxpayer, who has made an honest return, that after [ * 1 1 4 5 ] such period his tax liability will not be reopened; otherwise the business of the country would always have before it the threat of additional taxes against the income of years long past whenever a new theory for interpreting the tax law or for the application of accounting principles occurred to the taxing authorities. If the limitation can be avoided on the plea that the return filed was not such a return as is required by law, although filed in good faith, there is no such assurance for the taxpayer and the limitation becomes of doubtful value at least. If the statute requires any interpretation great weight must be given to the purpose which it was obviously intended to accomplish.

Again, in Colmer-Green Lumber Co., 12 B.T.A. 256, we said:

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The period of limitation prescribed by the statute is one of repose and it should not lightly be construed to permit the respondent to reopen cases [**10] upon the ground that the return filed in good faith was not the return required by the statute.

In F. 4. Hail Co., 3 B.T.A. 1172, a consolidated return was filed for the taxpayer and an associated company, sworn to by the individual who was the treasurer of both companies. The Commissioner contended that separate returns should have been filed, and that the consolidated return filed was not the return required by law; hence, the statute of limitations did not apply. Since it appeared that the consolidated return specifically stated the items of gross income and the items of deductions of the taxpayer, we held that it constituted a substantial compliance with the provisions of section 239 of the 1918 Act, supra, respecting the making of returns, and was sufficient to start the running of the statute of limitations embodied in section 277(a)(2) of the 1924 Act, supra.

Under the theory contended for by the respondent in this case, if a corporation had no treasurer or assistant treasurer, or if such office was vacant through resignation, death or otherwise at the time of making its tax return, such facts would operate to place the corporation beyond the [**11] purview of the statute of limitations, and would deny to it the right of any benefit thereunder. We are not persuaded that this was the intention of Congress.

The good faith of the petitioner in making the return involved herein is not questioned by the respondent, and said return specifically stated the items of its gross income and the allowable deductions and credits. It is our opinion, therefore, that said document constituted the return required by law. More than five years having elapsed subsequent to the filing of said return and prior to the mailing of the deficiency notice, it follows that assessment and collection of the proposed deficiency are barred by limitation.

10/18/2018

Reviewed by the Board.

Judgment of no deficiency will be entered.

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Field Service Advisory | Administrative Materials | Westlaw 10/18/2018

1997 WL 33381431 (IRS FSA)

Internal Revenue Sendee (I.R.S.)

IRS FSA Field Service Advisory

February 14,1997

CC:INTL:(INTL * * *

BR4:RWBracken To: District Counsel, Hous ton CC:MSR:HOU

(Attn: J o h n F. Eiman)

From: Ass is tant Chief Counsel (International) CC:INTL

Re: *** (Coordination Case - CCDM (35)3(19)0)

DISCLOSURE LIMITATIONS

FIELD SERVICE ADVICE CONSTITUTES RETURN INFORMATION SUBJECT TO SECTION 6103. FIELD SERVICE ADVICE CONTAINS CONFIDENTIAL INFORMATION SUBJECT TO ATTORNEY-CLIENT AND DELIBERATIVE PROCESS PRIVILEGES AND IF PREPARED IN CONTEMPLATION OF LITIGATION, IS SUBJECT TO THE ATTORNEY WORK PRODUCT PRIVILEGE. ACCORDINGLY, THE EXAMINATION, APPEALS, OR COUNSEL RECIPIENT OF THIS DOCUMENT MAY PROVIDE IT ONLY TO THOSE PERSONS WHOSE OFFICIAL TAX ADMINISTRATION DUTIES WITH RESPECT TO THIS CASE REQUIRE SUCH DISCLOSURE. IN NO EVENT MAY THIS DOCUMENT BE PROVIDED TO EXAMINATION, APPEALS, OR COUNSEL, OR OTHER PERSONS BEYOND THOSE SPECIFICALLY STATED IN THIS STATEMENT. FIELD SERVICE ADVICE MAY NOT BE DISCLOSED TO TAXPAYERS OR THEIR REPRESENTATIVES.

This memorandum is in response to your request for Formal Field Service Advice dated November 13,1996 with respect to whether the petitioner has substantially complied with the requirements of Internal Revenue Code § 6038(a) for tax year *** and, as a result, can avoid imposition of the penalty pursuant to § 6038(c). See C C D M ( 35 )3 (19)3 (4 ) .

ISSUE

Whether the petitioner "substantially complied" with the information reporting requirements of Code § 6038(a) as provided pursuant to the "reasonable cause" exception set forth in Regulation § i.6038-2(k)(3). UIL No. 6038.03-00.

CONCLUSION

As the policy reasons for the enactment of Code § 6038 make apparent, Congress joined the benefits of the foreign tax credit with the obligation to provide specific, accurate and timely information about the foreign subsidiary's operations. The primary policy reason for enacting § 6038 was to ease the burden on tax administration by requiring taxpayers to provide information not otherwise readily available about the operations of their foreign subsidiaries. Thus, U.S. taxpayers who control foreign corporations are required to provide specific, accurate and timely information regarding those foreign corporations. The required information includes the purchases and sales between the foreign corporations and related third parties as well as information with respect to the foreign corporations' earnings and profits.

In this case, *** was obligated, but failed, to provide such information with respect to several of its foreign subsidiaries. To avoid the resulting penalties from such a default, *** must substantiate sufficient facts which demonstrate that its lapse of information resulted from reasonable cause or, that it substantially complied with the information reporting requirements of § 6038(a) and the related regulations. Determining whether

has established that it substantially complied with the information reporting requirements of § 6038(a) (1) is a question of fact. We are uncertain as to whether the facts alleged by ***, even when taken as true, are

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sufficient to constitute reasonable cause or to find that *** substantially complied with the information reporting requirements. In developing this case for trial, we recommend that the focus be placed upon those amounts which *** grossly understated, either by omission or in relationship to the corrected amount. Because the facts indicate that the erroneous or omitted information, in certain instances, may have significantly distorted the true financial and economic picture of ***s foreign subsidiaries, *** has failed to establish either the existence of reasonable cause for its failure or that it substantially complied with the information reporting requirements.

Because the issue in this case is one of first impression and because the facts as presented do not establish a complete picture of the extent of the burden placed upon tax administration when a taxpayer erroneously reports the required information, Special Counsel Christopher Faiferlick and Attorney-adviser Roger Bracken are planning to travel to Houston to assist Mr. Eiman in reviewing the files, interviewing the International Examiner and gathering any other additional evidence relevant to the § 6038(c) penalty asserted against ***.

FACTS

The petitioner, *** is a large multinational *** manufacturer based in Houston, with subsidiaries operating manufacturing plants located in *** foreign countries on *** continents. For several years *** has filed

forms 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, with its form 1120, U.S. Corporate Income Tax Return. Following the examination of ***s income tax return for including the forms 5471, the agent recommended the assessment of penalties totalling $ *** pursuant to Code §§ 6038(b) and 6038(c). Specifically, the agent recommended assessment of *** penalties at $ each, pursuant to Code § 6038(b), for a total of $ ***1 The remainder of the penalty, assessed pursuant to Code § 6038(c), in the amount of $ ***, reduced the foreign tax credits which *** claimed under Code §§ 901, 902, and 960 to offset its income tax.2

- * * *

* * *

* * *

As the agent notes in the International Examiners report (IE report), the information contained on form 5471 serves as the starting point for an audit because it discloses the history, status, and activities of a controlled foreign corporation (CFC) and identifies the transactions the foreign corporation had with related parties. Accordingly, inasmuch as the penalties are based upon the taxpayer's failure to supply the requisite information, pursuant to Code § 6038(a)(1) and Treas. Reg. §§ 1.6038-2(1) and l.6038-2(g), we set forth below the particular information omissions or errors on which the agent relied for the assertion of the penalties. We have also set forth ***'s defenses, to the extent such were contained in its "Offer in Compromise," to the application of these penalties. Additionally, to the extent such facts are relevant, we have also outlined ***'s information reporting errors contained on its forms 5471 for prior years.

Submiss ion o f Informat ion with respect to ***s Foreign Subsidiaries o n Forms for 1001

As discussed below, the forms 5471 filed by *** for *** reflect a consistent pattern established in prior years. For those years, ***'s forms 5471 reported incomplete and/or inaccurate information with respect to some of its CFCs. Included with its *** corporate income tax return, (form 1120), *** submitted a form 5471 for each of its *** foreign corporations.3 On ***, the International Examiner requested corrected form 5471 information for ***. On ***, *** disclosed that the information reported on the forms 5471 for *** of its foreign subsidiaries was understated, by $ *** or more in each instance. In particular, the incorrect information concerned the respective foreign subsidiary's actual sales to and/or purchases from *** and/or other related companies. In addition, the IE report notes that forms 5471 for four CFCs, including one of the

CFCs referred to above, had significant inconsistencies with the earnings and profits, potentially affecting a major element in the calculation of ***'s § 902 foreign tax credits.4

* * *

# * *

With respect to the erroneous related party purchases of ***'s CFCs, the IE report refers to transactions with the following *** CFCs; ***. While *** and *** overstated their related party purchases, the remaining CFCs understated their purchases as follows:

*** * * *

With respect to erroneously reported related party sales of ***s CFC, ***'s related sales were understated by $ *** and the related party sales of *** and *** were overstated by $ *** and $ *** respectively. See the International Examiner's report (IE report) regarding these errors for *** attached as Exhibit D of the submission. Because the IE report disclosed no other errors or omissions other than as specified above, we have assumed for purposes of this advice that, except as otherwise noted, the remaining information

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contained on each respective form 5471 for ***'s foreign subsidiaries was completely and accurately reported as required under § 6038(a)(1) and the related regulations.

Although none of the forms 5471 for *** or prior years were sent as exhibits, we have reviewed a blank copy of the form 5471 in effect for *** and the accompanying schedules. As indicated by the IE report, the forms 5471 filed by *** are *** pages in length. The form 5471 elicits all of the information specified by Code § 6038(a)(1) and Treas. Reg. §§ 1.6038-2(0 and :i . 6038-2©, as well as information required by other sections of the Code.5

***'s Pos i t i on Regarding Appl icat ion o f t h e Code § 6o5t8fb') and fe l Penalt ies

As with the penalties asserted pursuant to Code § 6038(b) against it for prior years, *** opposes the assertion of any penalty under either Code §§ 6038(b) or 6038(c). Submitted as an "Offer in Compromise," 6

contends that the application of a penalty under either Code § 6038(b) or § 6038(c) is unwarranted because 1) *** substantially complied with the information reporting requirements of Code § 6038(a)(1) and 2) assertion of these penalties is not equitable considering the position stated by the Service in its news release, IR-90-58(INT). Exhibit E, Offer in Compromise. The "offer in compromise," submitted under penalty of perjury apparently by an officer of *** with authority to do so, alleges facts which *** contends contributed to the inaccuracies in its reporting. Among the factual difficulties cited by *** in support of its opposition to the penalties are the breadth and complexity of the information requested by form 5471; the language and distance barriers imposed upon the domestic corporation in dealing with its foreign subsidiaries; differences in currencies and accounting practices; and the misapplication of an international business management computer report. The news release, dated *** states that the Philadelphia Service Center will send written notification to taxpayers who filed incomplete, (and/or untimely), returns and specify what information is required "to avoid being penalized." The news release advises taxpayers to "send the missing information promptly or establish reasonable cause [for] failing to do so."

* * *

The news release then sets out four common examples of noncompliance including failing to provide financial statements. Seemingly implied by the tenor of the news release is that no penalty will be asserted unless and until the Philadelphia Service Center sends written notice of the nature and extent of the information deficiency.7 Because the continuing nature of the errors or omission contained on the forms 5471 *** has filed tends to cast doubt on the factual basis supporting ***'s allegation that it substantially complied with the reporting requirements, we set forth below a brief history of errors and omitted information on the forms 5471 previously filed by ***.

I n f o r m a t i o n S u b m i s s i o n s in Pr ior Years wi th resnec t to Foreign Subs idiar ies - His tory o f » * *

Fil ing F o r m s 5471

During the *** preceding examination cycles ***, the International Examiner discovered that the petitioner's forms 5471 contained several errors which hampered the examiner's ability to review some of the substantive areas during the course of the examination. According to the IE report, ***'s inaccurate forms precluded a review of substantive areas including transfer pricing, Subpart F income, dividends, and foreign tax credits. As a result, the International Examiner recommended that penalties under section 6038(1)) be imposed on the petitioner for both audit cycles.

I n f o r m a t i o n S u b m i s s i o n f o r t h e * * * tax years

With respect to tax years *** and *** filed with its corporate income tax return, *** separate forms 5471 for one for each of its *** subsidiary CFCs and *** separate forms 5471 for *** one for each of its

subsidiary CFCs. Exhibit A, IE report form 886-A for *** According to the IE report, some of the information contained on most of the forms 5471 for each of the *** years was deficient and/or inaccurate in some respect. For tax year *** the agent found that *** of the *** forms 5471 filed contained inaccurate or incomplete information required to be provided. With regard to tax year *** the agent found that *** of the

forms 5471 filed for that year contained similar deficiencies. As a consequence, the agent recommended that penalties in the respective total amounts of $ *** at be assessed against *** for *** pursuant to Code §

* * * * * *

* * *

6038(b).

According to the IE report, the agent found ***'s information reporting deficiencies were concentrated in four of the schedules submitted with each form 5471. Those four schedules are 1) schedule C, entitled Earnings and Profits, which, in addition to calculating the earnings and profits of the CFC, among other

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things, also reflects, on a gross basis, the related party sales during the year; 2) schedule D, entitled Cost of Goods Sold and/or Operations; 3) schedule G which reports loans between the CFC and related parties; and 4) schedule M, which reports the transactions between the CFC and related parties.8 The majority of errors in ***'s form 5471 preparation were concentrated on schedule G, the loans between specific CFC's and related corporations. According to the IE report, *** reported that *** of its CFCs had intercompany loans during *** while *** reported that *** of its CFCs had loans with related parties during *** Although initially

apparently represented to the agent that no intercompany loans existed for its CFCs and that the amounts shown on schedule G were accounts payable and/or receivable, the agent discovered loans from two

* * *

of its CFCs.

Similarly, the agent found the information provided by *** relating to intercompany transactions to be inaccurate. By way of example, the IE report refers to ***'s inability to reconcile the amounts reflected as accounts payable for a CFC subsidiary, *** with the "related customer" sales shown on its schedule E, Earnings and Profits, and ***'s intercompany sales reported on schedule M. While providing examples of the types of required information which the agent discovered to be inaccurate or omitted from schedules included on forms 5471, the IE report, however, does not identify for each CFC all of the errors made by in completing the forms 5471. As a result, the identity of the CFCs for which the penalties were recommended for *** is not discernable from the IE report, nor are the specific information deficiencies disclosed for each respective CFC. Moreover, the IE report did not specify whether the errors and/or omissions occurred on the forms 5471 for tax year *** or both years. Finally, the IE report did not indicate what, if any, significance ***'s errors or omissions may have had to tax administration nor whether or not any tax consequences, current or prospective, resulted from correction of the respective errors or omissions.

* * *

Following the agent's application of the penalties set forth above, the issue of ***'s liability for the penalties for tax years *** was referred to an appeals conferee for independent review. *** contended that it was not liable for the penalty for either year because it had substantially complied with the reporting requirements of Code § 6038 and the related regulations and, in any event, had reasonable cause for any information which was omitted from its forms 5471. In recommending that the penalties for both years be abated, the appellate conferee found from a review of all of the forms 5471 that they were substantially complete. Additionally, the appellate conferee noted, after discussions with the agent, that no tax consequences resulted from the omitted information. For those reasons, the conferee recommended the abatement of the penalty for both tax years. Exhibit C is a copy of the Houston Appeals Office supporting statement.

Informat ion Submiss ion for the * * * tax years

For tax periods *** the IE report explains that penalties of $ *** and $ *** were recommended, pursuant to Code § 6038(b). As was the case with the other tax years, the agent cited as the primary reason for the assertion of these penalties ***'s failure to accurately report purchases and/or sales between each respective foreign subsidiaiy and *** and/or other related parties. Exhibit B. According to the IE report, only those subsidiaries with underreported purchases and/or sales exceeding $ *** were considered for the penalty. In particular, the agent reported that ***'s foreign subsidiaries operating in *** and *** underreported by at least $ *** on schedule M either purchases from and/or sales to a related party for *** For *** the agent reported that *** understated by at least $ *** the purchases from and/or sales to related parties and the same foreign subsidiaries operating in the same countries identified for *** plus those operating in *** and

Moreover, while the agent noted that it had no effect on the penalties for either year, some of the same subsidiaries inaccurately reported loans to or from *** or related parties on schedule F, the subsidiaiy's balance sheet, and on schedule G, the statement of loans to or from related parties. Finally, the agent states that *** has habitually not complied with its obligations with regard to claiming foreign tax credit under Code § 902. The agent, however, failed to specify what, if any, information was erroneously reported and/or omitted from form 5471 which had an effect on ***'s foreign tax credit.

* * *

DISCUSSION

Since i960, United States taxpayers which have control over a foreign corporation are required to provide certain specific information with respect to each such foreign corporation. Congress provided a penalty to enforce that requirement. Code § 6038(c). Since 1982, to insure that such U.S. taxpayers provide the requisite information, Congress provided a second separate penalty which also could be applied for failure to provide such information. Code § 6038(b). To the extent that a taxpayer fails to provide the specified information, it may avoid application of the penalties if it can demonstrate that the failure was attributable to "reasonable cause" or, in the case of errors or omissions in the information submitted on the returns, that the

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information supplied "substantially complied" with the information reporting requirements. After a brief review of the history of § 6038 and the information reporting requirements, we review each of the penalties and the applicable defenses and discuss the appropriateness of the penalties in issue in this case.

History o f Code § 605*8

As originally enacted in i960, Code § 6038 requires that U.S. persons, (including corporations), provide certain information regarding foreign corporations which it controls. In enacting Code § 6038, Congress specified the type of information which the U.S. person was required to provide about its foreign corporate subsidiary which has remained substantially unchanged to date. To the extent that the U.S. corporation failed to provide the requisite information, Congress provided a penalty in the form of a reduction in the foreign tax credits available to the U.S. taxpayer. On the other hand, Congress also provided taxpayers who failed to supply the requisite information with a defense to the penalty if the failure was attributable to "reasonable cause." Subject to a ceiling equal to the greater of $10,000 or the income derived by the foreign subsidiary with respect to which the failure occurs, this penalty is increasing in amount, limited only by three things; 1) the length of time after notice until the taxpayer provided the requisite information; 2) the ceiling limit described above; and/or 3) the taxpayer's ability to demonstrate that it had "reasonable cause" for at least some portion of the time during which the failure occurred. See Code § 6038(c)(1), 6038(c)(2) and 6038(c)(3)(B). In 1982, Congress added an additional penalty, noting difficulties in the application of the reduction in foreign tax credits.

When Congress amended § 6038 in 1982, a second penalty, in the form of a flat dollar amount, was added. This second penalty, calculated as a specified dollar amount per violation or continuation thereof, also is triggered by the failure to provided the specified information. This "dollar penalty" is subject to an overall limitation for each subsidiary, the total amount of which offsets a portion of the reduction in the foreign tax credit occasioned by the original penalty under § 6038(e). Following enactment of the "dollar penalty," Congress specified that the "reasonable cause" remained available to taxpayers in defending against the application of either penalty.

Informat ion Renorting Requirements o f U.S. Persons

United States persons with control over any foreign corporation are required to provide certain specific information with respect to the foreign corporation. Code § 6038(a)(1). U.S. corporations, like *** must file a return containing the following information:

(A) the name, the principal place of business, and the nature of business of such foreign corporation, and the country under whose laws incorporated;

(B) the post-1986 undistributed earnings (as defined in section 902(c)) of such foreign corporation,

(C) a balance sheet for such foreign corporation listing assets, liabilities, and capital;

(D) transactions between such foreign corporation and—

(i) such person,

(ii) any other corporation which such person controls, and

(iii) any United States person owning, at the time the transaction takes place, 10 percent or more of the value of any class of stock outstanding of such foreign corporation;

(E) a description of the various classes of stock outstanding, and a list showing the name and address of, and number of shares held by, each United States person who is a shareholder of record owning at any time during the annual accounting period 5 percent or more in value of any class of stock outstanding of such foreign corporation, and

(F) such information as the Secretary may require for purposes of carrying out the provisions of section 453C [Currently repealed].

Code § 6038(a)(1). The U.S. corporation may also be required to furnish other information which is similar or related in nature to that specified by § 6038(a)(1) or which the Secretary determines to be appropriate to carry out the provisions of Code § 6038. Id.

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The regulations contain specific, detailed information which the U.S. taxpayer must supply about each foreign corporation it controls. That information, submitted on form 5471, is to be filed with the taxpayer's corporate income tax return. Treas. Reg. §§ 1.6038-2(0 and i.6o38-2(g). Included among the information which the U.S. corporation must provide about each of its foreign corporations on the form 5471 are:

(1) The name, address, and employer identification number, if any, of the corporation;

(2) The principal place of business of the corporation;

(3) The date of incorporation and the country under whose laws incorporated;

(4) The name and address of the foreign corporation's statutory or resident agent in the country of incorporation;

(5) The name, address, and identifying number of any branch office or agent of the foreign corporation located in the United States;

(6) The name and address of the person (or persons) having custody of the books of account and records of the foreign corporation, and the location of such books and records if different from such address;

(7) The nature of the corporation's business and the principal places where conducted;

(8) As regards the outstanding stock of the corporation—

(i) A description of each class of the corporation's stock, and

(ii) The number of shares of each class outstanding at the beginning and end of the annual accounting period;

(9) A list showing the name, address, and identifying number of, and the number of shares of each class of the corporation's stock held by, each United States person who is a shareholder owning at any time during the annual accounting period 5 percent or more in value of any class of the corporation's outstanding stock;

(10) For the annual accounting period, the amount of the corporation's:

(i) Current earnings and profits;

(ii) Foreign income, war profits, and excess profits taxes paid or accrued;

(iii) Distributions out of current earnings and profits for the period;

(iv) Distributions other than those described in paragraph (f)(io)(iii) of this section and the source thereof; and

(11) A summary showing the total amount of each of the following types of transactions of the corporation, which took place during the annual accounting period, with the person required to file this return, any other corporation controlled by that person, or any United States person owning at the time of the transaction 10 percent or more in value of any class of stock outstanding of the foreign corporation, or of any corporation controlling that foreign corporation:

(i) Sales and purchases of stock in trade;

(ii) Purchases of tangible property other than stock in trade;

(iii) Sales and purchases of patents, inventions, models, or designs (whether or not patented), copyrights, trademarks, secret formulas or processes, or any other similar property rights;

(iv) Compensation paid and compensation received for the rendition of technical, managerial, engineering, construction, scientific, or like services;

(v) Commissions paid and commissions received;

(vi) Rents and royalties paid and rents and royalties received;

(vii) Amount loaned and amounts borrowed (except open accounts resulting from sales and purchases reported unde r other items listed in this paragraph (f)(ll) that arise and are collected in full in the ordinary course of business);

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(viii) Dividends paid and dividends received;

(ix) Interest paid and interest received; and

(x) Premiums received for insurance or reinsurance.

Treas. Reg. § 1.6038-2(0.9 Additionally, the U.S. corporate shareholder must provide financial statements, including an income statement, a balance sheet, and an analysis of changes in the subsidiaries surplus accounts, for each foreign corporation. Treas. Reg. § 1.6038-2®. The financial statements must be prepared in accordance with generally accepted accounting principals. Treas. Reg. § i.6038-2(g). As discussed below, the taxpayer who fails to provide any portion of this information may be liable for two separate penalties under § 6038.

Two Applicable Penalt ies Under § 6 0 3 8

The Congressional purpose in originally enacting § 6038 was to curb abuses of the tax system occurring because the Treasury and the Internal Revenue Service lacked the ability to obtain the information necessary to evaluate a domestic corporation's interests in and transactions with its foreign subsidiaries while, at the same time, claiming tax credits from such subsidiaries. See. 106 Cong. Rec. 11416, 86th Cong. 2d Sess. (i960) (remarks of Senator Gore). To obtain the information and to enforce that requirement, Congress provided an increasing sanction for failure to provide that information in the form of a reduction in the foreign tax credit to which the domestic corporate taxpayer would be entitled. Code § 6038(c). In 1982, however, Congress amended § 6038 to add an additional penalty in the form of a dollar amount. Congress added the dollar penalty because they found the foreign tax credit penalty little used despite concern about inadequate reporting. Additionally Congress also recognized the complexity of and the potentially harsh impact which could result from assessing that foreign tax credit penalty. Joint Committee on Taxation, 97th Cong., 2d Sess. (1982), General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), H.R. 4169, 250. To assuage these concerns, Congress enacted a simpler penalty which could be applied in appropriate circumstances while maintaining the ability to apply the foreign tax credit reduction penalty.

Foreign Tax Credit Reduction Penalty

The current foreign tax credit reduction penalty, substantially the same as originally enacted, mandates a reduction of ten percent of the foreign tax credit, paid or deemed paid under Code §§ 901, 902 and 960, which is available to offset the taxpayer's regular income tax liability. Code § 6038(c)(1). If, after notification of the information deficiency, a taxpayer fails to supply the requisite information, the penalty increases by an additional five percent for each 90 day period the information remains outstanding, beginning the day after the date of notification. Code § 6038(c)(1). The statute provides that:

(1) In General — If a United States person fails to furnish, within the time prescribed under paragraph (2) of subsection (a), any information with respect to any foreign corporation required under paragraph (1) of subsection (a), then —

(A) in applying section 901 * * * for the taxable year, the amount of taxes (other than taxes reduced under subparagraph (B)) paid or deemed paid (other than those deemed paid under section 904(c)) to any foreign country or possession of the United States for the taxable year shall be reduced by 10 percent, and

(B) in applying sections 902 * * * and 960 (relating to special rules for foreign tax credit) * * * for any taxable year, the amount of taxes paid or deemed paid by each foreign corporation with respect to which such person is required to furnish information during the annual accounting period or periods with respect to which such information is required under paragraph (2) of subsection (a) shall be reduced by 10 percent.

Code § 6038(c)(1) (emphasis supplied.)10 Moreover, after notification by the District Director of the information deficiencies, the foreign tax credit penalty is increased by five percent for each 90 day period, (or fraction thereof), the information remains outstanding after notification. Id. and Treas. Reg. § 1.6038-2(10 (2)(i).

The credit reduction penalty applies to all of the foreign tax credit paid or deemed paid by the domestic corporation, and is determined without regard to whether the source of the deemed paid credit is a subsidiary for which the information was not supplied. Despite the extensive list of information set forth above, required by § 6038(a) and the related regulations, a literal reading of the statute leads to the

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conclusion that the penalty applies when any information, regardless of its significance, is omitted or erroneously reported. The statute provides no discretion in the assertion of the penalty, unless the taxpayer demonstrates that the failure was attributable to reasonable cause. Moreover, to the extent that the taxpayer can establish reasonable cause, the extension of the time to supply the information continues only for as long as the established reasonable cause existed.

Congress did, however, provide a limitation on the amount of the penalty. The foreign tax credit reduction penalty is limited to the greater of $10,000 or the income derived from the foreign subsidiaiy for which the information was not supplied. Code § 6038(c)(2) and Treas. Reg. § i.6o38-2(k)(2)(v). Finally, to the extent that the dollar penalty is asserted under § 6038(b), the foreign tax credit reduction penalty is reduced by the amount of the dollar penalty asserted. Code § 6038(c)(3) and Treas. Reg. § i.6038-2(k)(2)(vi).

Dollar Penalty

In 1982, Congress recognized that the foreign tax credit reduction penalty had been under utilized despite complaints of inadequate reporting of information about controlled foreign corporations. General Explanation of the Revenue Provisions of the Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA), prepared by the Joint Committee on Taxation for H.R. 4169, 97th Cong., 2d Sess., P.L. 97-248 (1982), 250. Congress further noted that application of the foreign tax credit penalty could, in certain circumstances, have harsh consequences because "a taxpayer could incur a substantial penalty for minor [reporting] failure." Id. and S. Rep. 97-494, 97th Cong. 2d Sess. 299 (1982). On the other hand, Congress also realized that a penalty which is capable only of reducing the foreign tax credit of a corporation is ineffective in circumstances where no foreign taxes have been paid (or are deeded to have been paid). Id. As a consequence, Congress amended Code § 6038 to include a "fixed-dollar penalty" for failure to supply the information required by § 6038(a) (i)-

If any person fails to furnish timely any information with respect to its CFC, then "such person shall pay a penalty of $1,000 for each annual accounting period with respect to which such failure exists." Code § 6038(b)(1) and Treas. Reg. § :i.6o38-2(k)(i). Similar to the foreign tax credit reduction penalty, this penalty increases by $1,000 for each period of 30 days (or fraction thereof), the information remains outstanding, beginning 90 days after notification of the information deficiency. Code § 6038(b)(2) and Treas. Reg. § i.6038-2(k)(ii). The total dollar penalty under § 6038(b) is limited to $25,000 for each tax year. Id. In addition to this limitation and, as is the case with the foreign tax credit reduction penalty, reasonable cause, discussed below, is also a limited defense to the application of the dollar penalty. Code § 6038(c)(4)(B) and Treas. Reg. § i.6038-a(k)(3)(i).

Reasonable Cause and Substantially Complied

Since its inception, Code § 6038 has contained a "reasonable cause" relief provision. In enacting the legislation in i960, Congress provided a safety valve for those taxpayers who can demonstrate that their failure to supply the required information was attributable to "reasonable cause". Under Code § 6038(c)(4) (B) and Treas. Reg. § 1.6038-2(10(3), the time period during which the taxpayer must furnish the information is treated as suspended during the time period for which the taxpayer establishes reasonable cause for failing to provide the information. Code § 6038(c)(4)(B) and Treas. Reg. § i.6038-2(k)(3)(i). For purposes of determining the amount of either the dollar penalty or the foreign tax credit reduction penalty, the time period for "furnishing the information or the beginning of the 90 day period after mailing the notice by the district director under paragraph (k)(i)(ii) and (k)(2)(iv)(A) of this section, shall be treated as being not earlier than the last day on which reasonable cause existed for failure to furnish the information." Treas. Reg. § i.6o38-2(k)(3)(i). To establish that reasonable cause existed,

the person required to report such information must make an affirmative showing of all facts alleged as reasonable cause for such failure in a written statement containing a declaration that it is made under the penalties of peijury. The statement must be filed with the district director for the district or the director of the service center where the return is required to be filed. The district director or the director of the sendee center shall determine whether the failure to furnish information was due to reasonable cause, and if so, the period of time for which such reasonable cause existed."

* * *

Treas. Reg. § i.6038-2(k)(3)(ii).

Included within the circumstances under which the application of either or both of these penalties may arise, is the timely filing an information return which omits and/or erroneously states the required information. In

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those circumstances the regulations provide an additional means of relief for the taxpayer.

In the case of a return that has been filed as required by this section except for an omission of, or error with respect to, some of the information required, if the person who filed the return establishes to the satisfaction of the district director or the director of the service center that the person has substantially complied with this section, then the omission or error shall not constitute a failure under this section.

Treas. Reg. § 1.6038-2(k)(3)(ii.) (Emphasis supplied).

Neither the phrase "reasonable cause" nor the phrase "substantially complied" are defined in the Code. While "reasonable cause" is provided as a defense to the imposition of several other penalties, (see, e.g. Code §§ 6651(a), (Failure to file tax return), 6652, (Failure to file certain information returns) and 6679, (Failure to file returns including foreign corporations), none of those statutory provision contain a definition of that phrase. See, U. S. v. Bovle. 469 U.S. 241, 246 (1984). Under Code § 665:1, the statute provides that taxpayers may avoid the penalty for failing to file their tax return on time if they can demonstrate that the failure was attributable to reasonable cause and not due to willful neglect. Code § 6651(a). As the Supreme Court pointed

the term "reasonable cause" is not defined in the Code, but the relevant Treasury Regulation calls « * * * out, on the taxpayer to demonstrate that he exercised 'ordinary business care and prudence' but nevertheless was 'unable to file the return within the prescribed time.' 26 C.F.R. § 30i.665i(c)(i)(i984)." IT. S. v. Bovle. 469 U.S. at 246 (1984'Xcitations omitted). See also Treas. Reg. §§ 301.6724-1(3X2) and 301.6724-1 (g)(defining reasonable cause as applied to penalties under Code §§ 6721-6723). "Thus, the Service's correlation of 'reasonable cause' with 'ordinary business care and prudence' is consistent with Congress' intent, and over 40 years of case law as well. That interpretation merits deference." U. S. v. Bovle. 469 U.S. at 246 n. 4 (citations omitted).

In U. S. v. Bovle. the Court was asked to decide whether the reliance on the erroneous advice of an attorney concerning the filing due date for an estate tax return constituted "reasonable cause" warranting a waiver of the failure to file penalty under § 6651. The Court held that reliance upon the agent's advice did not equate to reasonable cause because ascertaining the deadline for the return filing required no special training or effort. IT. S. v. Bovle. 469 U.S. at 252. Courts generally adhere to the maxim of statutory construction that similar terms appearing in different sections of a statute should receive the same interpretation. U.S. v. Nordbrock. 38 F. 3d 440 (9th Cir. 1994) and Firestone v. Howerton. 671F. 2d 317, 320 n. 6 (9th Cir. 1982). We see no reason to apply a different standard to define reasonable cause under Code § 6038. Accordingly, we next consider whether, under the facts of this case, exercised ordinary business care and prudence and, therefore, substantially complied with the requirements of § 6038(a), despite its failure to supply, accurately and completely, all of the required information.

has established facts sufficient to demonstrate that it * * *

W h e t h e r *** H a s Es tab l i shed that It Substant ia l ly Compl ied wi th t h e Report ing R e q u i r e m e n t s i s a Factual D e t e r m i n a t i o n

While the failure to supply any of the information required by Code § 6038(a)(1) and the related regulations is all that is necessary to impose the penalty, by permitting the taxpayer to demonstrate that the failure was attributable to reasonable cause, the Service may exercise discretion in imposing the penalties. The Service exercises that discretion by determining whether, under the facts of each case, the taxpayer has demonstrated that the deficiencies resulted from reasonable cause. The § 6038(c) penalty may be asserted regardless of whether or not an increase in income tax results from the reporting failure under § 6038(a) and regardless of whether or not foreign taxes which may be reduced under § 6038 are available to the U.S. taxpayer. Treas. Reg. § 1.6038-2(^(4). Because the information reporting requirement and, hence, the application of the penalty under § 6038(c), is imposed with respect to each individual CFC, the determination of whether the taxpayer has established substantial compliance with the reporting requirements is also measured with respect to each significant reporting requirement for each CFC. The issue in this case is whether *** has established "reasonable cause", (that is, that it exercised "ordinary business care and prudence"), but, nevertheless, failed to include some of the information required by Code §

6038(a)(1) and Treas. Reg. §§ 1.6038-2(1) and i.6o38-2(g).

alleges that it substantially complied with the information filing requirements and, to the extent that it omitted or reported some information incorrectly, such errors were minor relative to the amount of information supplied and, in any event, corrected information was supplied with minimal delay.11 On its face, ***s position that it substantially complied with the information reporting requirement arguably appears to have some merit. *** apparently filed a separate form 5471 for each of its *** foreign subsidiaries, reporting much of the required information for each such foreign subsidiary on a timely basis with its

* * *

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corporate income tax return. Each information return consisted of *** pages containing detailed financial information with respect to the financial condition, corporate stock structure, shareholders and results of operations of each subsidiary. With some notable exceptions, the information submitted for each subsidiary by *** was accurate and/or was uncontested by the examining agent. The agent determined that, with the exceptions specified below *** submitted most of the information required by Code § 6038(a)(1) and the related regulations.

reported, either erroneously or by omission, specific information concerning *** of its *** foreign subsidiaries for *** Of the *** information returns reporting erroneous information, the agent found inaccuracies in the stated purchases from and/or sales to *** of the CFCs and related third parties, (recorded incorrectly on schedule M), and unspecified "significant inconsistencies" in the reported earnings and profits of *** of the CFCs,12 (including *** identified as having reported erroneous purchases or sales).13 With respect to the CFC-related party purchases, *** erroneously reported related third party purchases for *** of its CFCs by at least $ *** Specifically, *** significantly understated *** of its CFCs related party purchases, including *** whose related party purchases were understated by more than $ *** also made significant errors in reporting the related party sales of *** of its foreign subsidiaries, one of which was understated by nearly $ ***14 The agent even indicated that the corrected related third party purchases and/or sales amounts were submitted within *** days of his request to

* * *

* * *

Even though the majority of the reported information may have been reported accurately and completely, a taxpayer, nevertheless, may not have substantially complied with the reporting requirements if significant pieces of required information were inaccurately reported or omitted. This is particularly true where the majority of the information reported accurately represents routine information that may change infrequently, if at all. In this case, *** failed to accurately report major transactions with related parties. It is difficult to see how *** could have "substantially complied" with the respective information reporting requirements in those instances in which it reported either "zero" or a relatively small amount for these activities. Substantial compliance is measured on the basis of each significant item of information specified in § 6038(a)(1) and Treas. Reg. §§ 1,6038-2© and i.6o38-2(g), for each CFC. Consequently, *** cannot maintain that it substantially complied where it reported either "zero" or a relatively small amount from these activities when, in fact, such activities actually accounted for several million dollars.

We expect that *** will argue that § 6038(a) requires the use of an aggregate approach in determining substantial compliance and reasonable cause. Under that approach, a taxpayer could supply two-thirds of the required information and claim that it substantially complied with the reporting requirements. Such a test must be rejected. Using that approach, taxpayers could effectively disregard one-third of the reporting requirements they consider to be detrimental, a result Congress never intended. It is more appropriate to apply the reasonable cause - substantial compliance exception on a significant item by significant item basis for each CFC. When the regulations were amended in 1985 to conform the regulations to changes made to § 6038, the preamble stated that "substantially complied" was included because "[t]he Service anticipates that the broad range of estimates * * * for reporting transactions will prevent most inadvertent errors from causing a technical violation if the reporting corporation has made a reasonable effort to comply."15 Treas. Reg. § 1.6038-2, T.D. 8040,1985-2 C.B. 291. Other than the wording in the preamble described above, there is no other public guidance on substantial compliance under § 6038 and these regulations. For the reasons set forth above, however, the aggregate approach is not appropriate for deciding whether the taxpayer has substantially complied with the reporting requirements of § 6038(a)(1) and the related regulations.16 The failure to report all of the requisite information is a per se violation of the mandatory reporting requirements imposed by § 6038(c), because the inaccurate and/or omitted information increases the burden on tax administration to thereafter obtain such information. Only if substantial compliance or reasonable cause is established, can a taxpayer avoid the penalty. We note that *** has historically failed to accurately complete forms 5471, repeatedly supplying information containing the same type of errors as are in issue here.

***'s contention that the errors were attributable to an "unintentional misapplication of international business report" is not persuasive in light of its history of erroneous reporting. For each of the preceding tax years, *** erroneously reported purchases and/or sales of its foreign subsidiaries and was notified of its errors by the Service and penalized.17 Because *** was previously advised of those errors during prior examinations, it arguably may not now rely on the faulty business reports to establish reasonable cause. Similarly, the distance, language, currency, and accounting practice and systems arguments are equally unconvincing, since, most corporations required to file the information reports are similarly situated. Finding reasonable cause under such circumstances would excuse virtually every taxpayer from all reporting obligations under § 6038, a consequence certainly not contemplated by Congress when it provided for reasonable cause. Further, such arguments fail to demonstrate that *** exercised ordinary business care and

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* * *


prudence in completing the 5471, particularly where such errors project inaccurately the financial and/or economic condition of ***s foreign subsidiaries.

***s argument that it is entitled to rely on news release, IR-90-58 (INT) is equally misplaced. *** contends that application of the penalties under § 6038 is inequitable in its case because, it alleges, the "minor errors" reflected on its 5471 are less flagrant than the "most blatant forms of noncompliance" represented in the news release. We disagree.

More importantly, however, the facts of this case are distinguishable from the circumstances outlined by the examples set forth in the news release. While the news release states that the penalties may be avoided by promptly supplying the missing information after notification by the Philadelphia Service Center, the examples provided by the news release also make it clear that the type of errors considered are those which are apparent from the face of the return. Unlike conspicuous errors which may be detected by a service center employee's review of the filed returns, ***s errors were not readily detectable by a reviewing service center employee. That *** supplied erroneous information could only be detected when it was questioned by the International Examiner, verified by *** and corrected.

Further, although the statute mandates the penalty for any failure to provide the required information, by outlining the most common examples of noncompliance, the news release also implies that the purpose of granting limited relief is to eliminate any misunderstandings which may exist concerning the types of information which meet the standards of information required under § 6038 and the related regulations. Thus, to the extent that a taxpayer in the past may have believed, erroneously, that offering to supply the required information upon request substantially complied with the § 6038 requirements, the news release dispels that erroneous notion. *** may not claim such reliance here, however, because, over the preceding

tax years, *** has repeatedly reported errors of the same type as are in issue here and the Service has repeatedly corrected such errors and applied the penalty under § 6038(b). Accordingly, because of the consistency, magnitude and persistence of its errors over the preceding years, ***s reliance upon the relief described in the news release is neither justified nor reasonable. The issue is whether these errors are truly "minor discrepancies" as *** contends or are significant for other reasons. Based upon the magnitude of the errors in the information submitted by *** and because such errors appear to significantly distort the financial and/or economic picture of ***'s foreign subsidiaries, ***s errors are significantly more than the "minor discrepancies" it contends.18 Accordingly, *** has not demonstrated, as it must, that it substantially complied with the reporting requirements of § 6038(a) and, therefore, is not entitled to relief under § 6038(c)(4)(B) and Tresis. Reg. § i.6o38-2(k)(3)(i).

* * *

Cynthia J. Mattson

Section 6no(j)(3) of the Internal Revenue CodeThis document may not be used or cited as precedent..

Footnotes

We assume that the § 6038(b) penalties for *** were assessed on or before the issuance date of the notice of deficiency containing the § 6038(c) penalty in issue here. Since the notice of deficiency for *** does not appear to include an adjustment for the § 6038(b) penalties and because ***' s petition does not request a redetermination of those penalties, we farther assume that those penalties are not in issue before the Tax Court.

1

You have not requested our views with respect to the penalties assessed against *** for tax years and *** The agent recommended the assertion of penalties, assessed pursuant to Code §

6038(b), in the total amounts of $ *** and $ *** for tax years *** and *** respectively, against The penalties for *** consist of *** separate penalties of $ *** each for information errors

and/or omissions reported on forms 5471 which *** filed for *** of its CFCs. Similarly, the penalties for *** consist of *** separate penalties of $ *** each for information errors and/or omissions reported on forms 5471 which *** filed for *** of its CFCs. Because of the similarity between these penalties with the § 6038(c) penalty with regard to the circumstances under which they are assessed and related defenses, some of the conclusions set forth herein may apply to the penalties assessed under § 6038(b).

* * *

* * *

Although not stated in the referral or in the IE report, based upon statements in exhibits to the IE report and ***'s Offer in Compromise, it appears to us that *** filed a form 5471 for each of its *** separate foreign subsidiaries.



Without specifying the nature of the discrepancies in the statements of earnings and profits for each of the four respective foreign subsidiaries, the IE report merely refers to an attached schedule. Aside from a separate report indicating a proposed adjustment to ***'s foreign tax credit, the IE report failed to identify the "significant inconsistencies" or errors in each of the offending subsidiary's earnings and profits. Even though adverse tax consequences are not required for these penalties, we were unable to determine whether these "inconsistencies" had any impact, either currently or prospectively, on the tax liability of ***. Further, from a tax administration perspective, we were unable to determine the amount of additional time required to correct the inaccurate and/or incomplete earnings and profits statements.

4

Moreover, it appears that the errors in the respective statements of the foreign subsidiaries' earnings and profits, to the extent the agent found any, occurred on form 1118, the form on which the taxpayer calculated its foreign tax credit. At that, the adjustments which were made to ***'s foreign tax credit increased, rather that decreased, the amount *** claimed against its income tax liability. Finally, the agent did not identify the relationship, if any, between the earnings and profits inconsistencies reported on the forms 5471 and the information reported on the 1118. Because the question of whether *** "substantially complied" with the information reporting requirements of Code § 6038(a)(1) may be influenced by and, possibly, turn on that relationship, additional facts must be developed.

Among the information required by other Code sections, schedule N of form 5471 requires information regarding officers, directors and shareholders of a foreign personal holding company, pursuant to Code § 6035, and schedule O elicits information regarding the formation or reorganization of a foreign corporation pursuant to Code § 6046. Because you have not requested our views with regard to the assertion of penalties pursuant to either of those sections, we have not evaluated the appropriateness of such penalties. We have, however, indicated the difficulties of relying on such information deficiencies for the assertion of penalties under § 6038.

5

By its Offer in Compromise, *** offers to pay no portion of either the § 6038(c) penalty or the § 6038(b) penalties, for both of the reasons set forth above and, allegedly, because the statute of limitations expired prior to the assessment of the penalties. We have not rendered an opinion regarding the validity of ***'s affirmative defense of statute of limitations bar as to either penalty, because *** has not amended its petition pursuant to Rule 41 of the Rules of Practice and Procedure of the United States Tax Court (Tax Court Rule). See also. Tax Court Rule 39. This could be the subject of a separate Field Service Advice.

6

See the discussion of basis on which ***'s reliance on the news release is misplaced beginning at page 20, infra.

7

Additionally, one of the examples of the type of incomplete information submitted on the forms 5471 cited in the IE report concerned ***s failure to complete schedule O, which concerns the formation or reorganization of a CFC. The agent's IE report noted that schedule O was not completed for two newly formed CFCs and one CFC which reorganized at some time during the audit cycle. As with the examples of other inaccuracies discussed below, the IE report does not specify which forms 5471 reporting information about which CFC contained this omission nor does it specify the tax years in issue. Finally, as discussed below, because the requirement for providing this information is grounded in a statutory provision other than Code § 6038 and since the application of the penalties for failure to provide this information derives from other statutory provisions, (Code §§ 6035, 6046 and 6679), then, to the extent that a penalty was asserted, pursuant to §§ 6038(b), 6038(c) or both, based exclusively on such an omission, it appears such penalty was erroneous.

8

Following the 1982 amendments to Code § 6038, the corresponding amendments to the related Treasury Regulations were made effective for annual accounting periods of the foreign corporations ending after September 3,1982. Treas. Reg. § 1.6038-2, T.D. 8040,1985-2 C.B. 291.

9

Note that the regulations provide that the foreign tax credits under Code §§ 901, 902 and 960 may be reduced where any required information is not supplied. Treas. Reg. § l.6038-2(k)(2)(ii) and i.6o38-2(k)(a)(iii). To the extent that the regulation suggests that application of the penalty

10

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is discretionary, it appears that the authority for such a suggestion derives from consideration of the merits of the taxpayer's reasonable cause defense. Such an interpretation is consistent with the statute which mandates the penalty for any errors or omissions in supplying the required information, while providing for circumstances waiving some or all of the penalty where reasonable cause is established.

***'s Offer in Compromise appears to meet the procedural requirements for demonstrating reasonable cause by setting forth an affirmative statement of the facts allegedly supporting reasonable cause, executed, (presumably by an authorized officer), under penalties of perjury, and filed with the district director. See Treas. Reg. § i.6o38-2(k)(3)(ii).

11

Based upon the review of the IE's report, we were unable to determine to what extent ***s erroneously reported information increased, in any significant manner, the burden on tax administration, even though no increase in income tax resulted. For example, while we anticipated that the significant differences in the subsidiary's earnings and profits would result in a reduction in the foreign tax credit available to *** was apparently entitled to additional foreign tax credit after the examination. Similarly, while we anticipated that correction of ***'s erroneously reported related party purchase and sales information would have consequences on other schedules, (such as, Subpart F income, and statement of earnings and profits), included in for 5471, that does not appear to be the case here. A tax effect, however, is not a condition to imposing the penalty. See. Treas. Reg. § 1.6038-2(10(4).

12

The agent also notes that the reported related party loans for some unspecified CFCs contained "significant differences" from the corrected loans. Based upon the corrected loan amounts, the agent nevertheless concludes that no adjustment results because few loans were between and the CFC's. After reviewing the exhibits relating to the related party loans referred to in the IE's report, we were unable to determine for which of the CFCs *** had erroneously reported the loans.

33

* * *

Conceivably, the purchases or sales inaccurately stated on the CFCs' schedule M were also erroneously reflected on other portions of the form 5471 which may have tax consequences for this tax year or future years. Unexplained by the IE report, however, is precisely the effect such errors had on other schedules to the form 5471. For example, we could not determine whether the correction of the related party purchase and/or sales had any effect on the amounts reported on the respective CFC's income statement, schedule C. Similarly, we could not determine whether the amounts reported on the offending CFCs' balance sheets, schedule F, were accurately stated, despite the purchase and sale inaccuracies. With respect to the respective CFCs' current and accumulated earnings and profits, schedules H and J , respectively, we could not determine whether the correction of the CFCs' related party purchases and sales changed in any meaningful way the respective subsidiary's statement of earnings and profits, either current or accumulated. Further, we could not determine what effect, if any, the erroneously reported related party purchases and/or sales had on schedule I, the Subpart F foreign base company sales income of the CFCs. Finally, while the IE report alludes to "determining the proper royalty base and the CFC royalty for § 482 purposes", it does not establish that any change to royalty income occurred as the result of the corrected purchases or sales.

14

It appears to us that in circumstances where a taxpayer has made an effort to comply with the reporting requirements, but, nonetheless, has erroneously reported information detrimental to it, such an event should not cause a "technical violation" subjecting the corporation to the § 6038(c) sanction. Thus, where *** overstated the related party purchases of its *** and CFC's and overstated the related party sales of its *** and *** CFCs, under those circumstances, it appears that *** made a reasonable effort to comply with the information reporting requirements of § 6038(a)(1) and the related regulations and that information should not trigger application of the § 6038(c) penalty.

15

* * *

We will follow up on substantial compliance under other Code sections and advise accordingly. 16

We were unable to determine from ***'s Offer in Compromise, whether the international business reports, now alleged to be responsible for the erroneously reported relate party purchases and sales, were previously employed in preparing the forms 5471 or prior years which were also erroneous. We were also unable to determine from the IE reports the extent to which the recurring errors in reporting related party purchases and/or sales for tax year *** occurred

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17


i n t h e p r i o r y e a r s a m o n g t h e s a m e f o r e i g n subs id i a r i e s . Accord ing ly , w e r e c o m m e n d t h a t f a c t s

a d d r e s s i n g t h e s e i s s u e s b e fu l ly d e v e l o p e d i n p r e p a r a t i o n f o r t r i a l .

1.8 * * *

1997 W L 3 3 3 8 1 4 3 1 ( IRS FSA)

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