The Internal Revenue Service has made progress in its ability to correctly assess penalties on U.S. taxpayers who are late in filing information returns on their involvement in foreign corporations, but it often abated the penalties when it didn’t need to, according to a new government report.
The report, from the Treasury Inspector General for Tax Administration, focused on the requirement for a U.S. citizen or resident alien to furnish information on any involvement with certain foreign business entities on a Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Certain U.S. citizens and residents who are officers, directors or shareholders in certain foreign corporations file this form and schedules to satisfy the reporting requirements of Sections 6038 and 6046 of the Tax Code, and the related regulations. The law and regulations provide for a monetary penalty of $10,000 for each Form 5471 that is filed after the due date of the associated income tax return, including any extensions.
TIGTA conducted its review to determine whether the IRS has improved its penalty-setting process to promote filing compliance for entities with the Form 5471 information reporting requirements. The report noted that the IRS has developed a strategy to help meet the challenges of international tax administration, leading to more enforcement efforts targeted on international information reporting requirements and increased assessments of related penalties.
Overall, TIGTA found that the IRS’s controls ensured that systemic penalties for late-filed Forms 5471 were properly assessed and that the majority of the taxpayers who were sampled filed their Forms 5471 the following year on a timely basis.
However, the IRS still has room for improvement in its controls to ensure the proper abatement of penalties on late-filed Forms 5471 when taxpayers provide a reasonable cause for the abatement and in cases where the IRS should not have abated the penalties. In a sample of 93 cases examined by TIGTA, penalties should not have been abated in 40 cases. TIGTA found that the total incorrect abatements for these 40 cases amounted to $1.75 million, or roughly $31 million in incorrect abatements when projected to the rest of the population.
In addition, the IRS did not properly process eight automatic filing extensions, which led to $6.4 million in unnecessary late-filed Form 5471 penalty assessments ultimately being abated. When projected to the population, there was approximately $11.6 million in incorrect penalty assessments.
“One of the major management challenges facing the IRS is accelerating globalization,” said TIGTA Inspector General J. Russell George in a statement. “The increased use of late-filed penalties could be an effective tool to help improve compliance with international information return filing requirements.”
To remedy the problems, TIGTA recommended that the IRS conduct a study to determine if the automated late-filed Form 5471 penalty-setting process should be expanded, and the agency should provide refresher training to employees and their managers on the importance of documenting penalty abatement request decisions. The IRS should also require managers to review all late-filed Form 5471 penalty abatements and ensure that filing extension requests that were received with a payment are properly coded and timely processed, TIGTA suggested.
In response to the report, IRS officials agreed with all of TIGTA’s recommendations. IRS officials said they have taken steps to implement two corrective actions and plan to take the remaining actions in the future.
“We have already taken actions to expand systemic penalty assessments to other types of income tax forms and international information reporting returns, and we will continue to evaluate whether further expansion of our program of systemic penalty assessments is appropriate,” wrote Paul D. DeNard, acting commissioner of the IRS’s Large Business and International Division, in response to the report. “We will enhance controls on abatement of systemic penalties on late filed Forms 5471 to ensure they are processed correctly and timely. We will also improve the abatement request process, including documentation of abatement-request decisions, and we will deliver refresher training to employees.”
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