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Procedural Due Process and International Information Reporting

Posted on Jan. 11, 2021
[Editor's Note:

This article originally appeared in the January 11, 2021, issue of Tax Notes Federal.

]

Frank Agostino is the principal of and Phillip J. Colasanto and Inhyuk Yoo are associates at Agostino & Associates PC in Hackensack, New Jersey. They thank Robert Horwitz for his assistance in writing this article.

In this article, the authors explore the source of the IRS’s authority to assess and collect foreign information reporting penalties, and they examine whether taxpayers have a prepayment right to challenge the IRS’s position.

I. Introduction

The assessability and collectibility of the foreign information reporting penalties have been a continued area of interest for taxpayers and tax practitioners. In 2018 Erin Collins and Garrett Hahn published an article questioning whether the penalties are assessable,1 and Robert Horwitz wrote a follow-up article in 2019.2 Both articles explained the lack of assessment authority for foreign information reporting penalties. Although the code and Treasury regulations still provide no guidance on the method of assessment or the IRS’s ability to collect those exactions,3 the IRS continues to assert international information reporting penalties against noncompliant taxpayers. This article explores and updates the original work done by Collins, Hahn, and Horwitz.4

II. International Information Reports

Information gathering includes private reporting of information used to determine a tax liability.5 An international information report (IIR) is considered a tax return if it satisfies the requirements of the Beard test.6 That test is met if the IIR:

  1. contains sufficient data to calculate tax liability;

  2. purports to be a return;

  3. is an honest and reasonable attempt to satisfy the requirements of the tax law; and

  4. is executed by the taxpayer under penalties of perjury.7

As a general matter, the filing of an IIR that satisfies the Beard test begins the statute of limitations on assessment of the IIR-based penalties. That limitations period runs for three years.8

Other types of IIRs are not considered separate returns and are instead attached to returns. For example, Form 926, “Return by a U.S. Transferor of Property to a Foreign Corporation,” the filing of which is required by section 6038B, is filed as an attachment to the income tax return.9 The IRS contends that, under section 6501(c)(8), the statute of limitations on the entire income tax return does not start to run until a required IIR is filed.10 The method of assessment and the statute of limitations for assessing the penalty for failure to file these non-separate-return IIRs are unclear.

Table 1 shows how the Beard test would apply to the most frequently filed IIRs.

Table 1. Application of the Beard Test to IIRs

Form (Code Section)

Sufficient Data to Determine Tax? (Factor 1)

Purport to Be a Return? (Factor 2)

Honest and Reasonable Attempt? (Factor 3)

Executed Under Penalty of Perjury? (Factor 4)

Attached to Income Tax Return?

926 (section 6038B(c))

Yes, it provides the value of property transferred to a foreign corporation.

Yes, it states that it is a “Return by a U.S. Transferor of Property.”

Yes

No

Yes

1116 (section 6689)

Yes, it provides calculation of the foreign tax credit.

No, it does not state that it is a return.

Yes

No

Yes

1118 (section 6689)

Yes, it provides calculation of the FTC.

No, it does not state that it is a return.

Yes

No

Yes

3520 (section 6677)

Yes, it provides information regarding transactions with a foreign trust.

Yes, it states that it is an “Annual Return.”

Yes

Yes

No

3520-A (section 6677)

Yes, it provides information regarding distributions from foreign trusts.

Yes, it states that it is an “Annual Information Return.”

Yes

Yes

No

5074 (section 6688)

Yes, it provides information regarding income from Guam or the Northern Mariana Islands.

No, it does not state that it is a return.

Yes

No

Yes

5471 (sections 6038(c) and 6679)

Yes, it provides information regarding income of foreign corporations.

Yes, it states that it is an “Information Return of U.S. Persons.”

Yes

No

Yes

5472 (sections 6038A(d) and 6038C(c))

Yes, it provides information regarding transactions between foreign corporations.

Yes, it states that it is an “Information Return of a 25% Foreign-Owned U.S. Corporation.”

Yes

No

Yes

8833 (section 6712)

Yes, it provides information regarding treaty-based positions and why income is or is not includable.

No, it does not state that it is a return.

Yes

No

Yes

8854 (section 6039G(c))

Yes, it provides information to determine expatriation tax.

No, it does not state that it is a return.

Yes

Yes

Yes

8858 (section 6038(c))

Yes, it provides information regarding the income statement of foreign disregarded entities.

Yes, it states that it is an “Information Return of U.S. Persons.”

Yes

No

Yes

8865 (section 6038(b))

Yes, it provides information regarding the financial information of foreign partnerships.

Yes, it states that it is a “Return of U.S. Persons.”

Yes

Yes

Yes

8865 Schedule P (section 6679)

Yes, it provides information regarding changes of interest in foreign partnerships.

Yes, Form 8865 states that it is a “Return of U.S. Persons,” although Schedule P does not specify.

Yes

Form 8865 contains a jurat; Schedule P does not have a separate jurat.

Yes

8898 (section 6688)

Yes, it provides information regarding where the taxpayer is a resident and what is U.S. taxable income.

No, it does not state that it is a return. Also, the jurat states that it is a form, whereas other jurats (that is, Form 8865) state that it is a return.

Yes

Yes

No

8938 (section 6038D(d))

Yes, it provides information regarding the tax items attributable to foreign financial assets.

No, it does not state that it is a return.

Yes

No

Yes

Subtitle F of the code contains two chapters that are relevant to IIRs and the penalties for not submitting them: chapters 61 and 68. Chapter 61, “Information and Returns,” includes sections 6001 to 6117 and provides statutory grounds for several international penalties. Chapter 68, “Additions to the Tax, Additional Amounts, and Assessable Penalties,” includes sections 6651 to 6751. Subchapter B of chapter 68, “Assessable Penalties,” addresses the penalties for failure to comply with some information reporting requirements under sections 6721 to 6725.

Understanding the grouping of the sections authorizing the IIR-based penalties in subtitle F is the first step in deciding whether an IIR-based penalty is summarily assessable or subject to another enforcement procedure. Because of the structure of title 26, the location of an IIR-based penalty within the code can inform the procedures for assessment and collection of the penalty.

III. Written Approval Requirement

Before discussing the assessability of specific penalties, it is important to note that the code provides that “no penalty under [title 26] shall be assessed unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination or such higher level official as the Secretary may designate.”11 There are a few exceptions to this requirement, but none of the IIR-based penalties are excluded.12 The IRS uses Form 8278, “Assessment and Abatement of Miscellaneous Civil Penalties,” to satisfy the approval requirement.13

After the assessment, the IRS sends the taxpayer a Notice CP15, “Notice of Penalty Charge,” which invites the taxpayer to file an administrative appeal.14 The notices required by sections 6320 and 6330 also advise taxpayers of their right to an independent review by the IRS Office of Appeals of the agency’s decision to file a notice of federal tax lien or its proposal to undertake a levy action (that is, the right to a collection due process hearing).15 If the taxpayer timely requests a CDP hearing, Appeals is tasked with determining whether the IRS complied with “any applicable law or administrative procedure” regarding the levy or lien.16 In Laidlaw’s Harley Davidson Sales, the Tax Court held that the duty of Appeals to determine whether the IRS complied with any applicable law and administrative procedure under section 6330(c)(1) includes verifying that written managerial approval was obtained under section 6751(b)(1).17 All communications after the Notice CP15 should request that the government demonstrate timely compliance with section 6751(b)(1).

IV. Assessment of IIR-Based Penalties

A. The General Assessment Authority

An assessment is the recording of the taxpayer’s liability.18 The IRS’s authority to assess a liability is prescribed in section 6201. Section 6201(a) provides:

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title, or accruing under any former internal revenue law, which have not been duly paid by stamp at the time and in the manner provided by law. [Emphasis added.]

Section 6203 explains that the assessment is made by recording the taxpayer’s liability in the office of the Treasury secretary under rules or regulations prescribed by the secretary.

In addition to assessing tax liabilities, the IRS also assesses other liabilities — including penalties, additional amounts, and additions to tax — in the same manner as tax.19 The code often uses the terms “additional amount,” “additions to the tax,” and “assessable penalties” and groups them together.20

B. Methods of Assessment

When assessing and collecting penalties, the code provides two alternative methods of assessment: deficiency assessments or summary assessments.21

1. Deficiency assessments.

Deficiency assessments are made under the procedures prescribed in sections 6211 through 6216, which are in subchapter B of chapter 63, titled “Deficiency Procedures in the Case of Income, Estate, Gift, and Certain Excise Taxes.” Under section 6211, a deficiency is defined as:

the amount by which the tax imposed by subtitle A or B, or chapter 41, 42, 43, or 44 exceeds the excess of (1) the sum of (A) the amount shown as the tax by the taxpayer upon his return . . . plus (B) the amounts previously assessed (or collected without assessment) as a deficiency, over (2) the amount of rebates . . . made.22

Under the deficiency procedures, the IRS is prohibited from assessing and collecting a liability from a taxpayer until it has been sent a valid statutory notice of deficiency and has been given 90 days (or 150 days, if applicable) within which to petition the Tax Court for a redetermination of the asserted deficiency.23 If a petition is filed with the Tax Court, the period of limitations for making an assessment is suspended until a final court decision is rendered and for 60 days thereafter.24

Deficiency proceedings can include penalties, such as those for failure to file and failure to pay under section 6651, and a penalty for failure to pay estimated income tax under section 6654.25 The Internal Revenue Manual provides that some penalties for IIRs required by sections 6038(c), 6038B(c), 6039F(c), 6686, and 6688 are subject to the deficiency procedures.26

When the IRS issues a notice of deficiency, it explains the tax periods involved, how the deficiency was calculated, the options available to the taxpayer, and the last possible day to petition the Tax Court.27

In deficiency proceedings, assessment does not take place (that is, the liability is not recorded) until the deficiencies determined by the IRS are resolved (through litigation, the taxpayer’s failure to challenge the deficiency, or settlement by the parties).28

2. Summary assessments.

Not all liability determinations are subject to the deficiency procedures; some liabilities are summarily assessable.

The IRS makes summary assessments when a taxpayer files a return showing a tax liability.29 The taxpayer consents to the assessment of the amount shown on his or her return by its filing.30 For the penalties described in chapter 68, the code authorizes the IRS to summarily assess late-filing penalties, especially if the penalty can be calculated from the information voluntarily supplied on the tax return.31 If the IRS can summarily assess a penalty, it does not send a notice of deficiency to the taxpayer, and the taxpayer does not get the opportunity to appeal to the Tax Court to challenge the penalties before the assessment.

If an IIR-based penalty is summarily assessable, the Tax Court will not review it unless it is accompanied by a tax deficiency, because the penalty alone is not subject to deficiency procedures.32 If the IRS did not send a notice of deficiency including the penalty, a taxpayer may be able to dispute the IIR-based penalty (without paying it first) by requesting a CDP hearing and then requesting de novo review in the Tax Court.33 Prepayment judicial review is available only if the taxpayer “did not otherwise have an opportunity to dispute such tax liability.”34

Penalties subject to summary assessment procedures are primarily found in sections 6671 through 6725 (which are in chapter 68, subchapter B, titled “Assessable Penalties”). Thus, the IIR-based penalties in chapter 68 are collected like taxes (that is, upon notice and demand for payment).35

3. The IIR-based penalties in chapter 68 are summarily assessable.

Chapter 68 includes additional amounts, additions to the tax, and assessable penalties. Section 6671, in subchapter B of chapter 68, states:

The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.36 [Emphasis added.]

Section 6665, which is also in chapter 68, provides that “the additions to the tax, additional amounts, and penalties provided by this chapter shall be paid upon notice and demand and shall be assessed, collected, and paid in the same manner as taxes” and that any reference to tax “shall be deemed also to refer to the additions to the tax, additional amounts, and penalties provided by this chapter.”37 (Emphasis added.)

Instead of relying on these general provisions, sections 6677 and 6679 explicitly provide that deficiency procedures do not apply to the assessment or collection of any penalty imposed by those sections.38

Many of the IIR-based penalties are imposed by subchapter B of chapter 68, titled “Assessable Penalties.” Table 2 lists the summarily assessable chapter 68 IIR penalties.

Table 2. Chapter 68 Summarily Assessable IIR-Based Penalties

Form

Title

Code Section

Penalty

1116

“Foreign Tax Credit”

6689

Up to 25% of the deficiency (5% each month)

1118

“Foreign Tax Credit — Corporations”

6689

Up to 25% of the deficiency (5% each month)

3520

“Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts”

6677(a)

Greater of $10,000 or 35% of the gross reportable amount

3520-A

“Annual Information Return of Foreign Trust With a U.S. Owner”

6677(b)

Greater of $10,000 or 5% of the gross reportable amount

5074

“Allocation of Individual Income Tax to Guam or the Commonwealth of the Northern Mariana Islands (CNMI)”

6688

$1,000 for each failure

5471

“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”

6679

$10,000 (additional $10,000 for each 30-day period if failure continues 90 days or more after the notice, up to $50,000)

5471

Schedule O

“Organization or Reorganization of Foreign Corporation, and Acquisitions and Dispositions of Its Stock”

6679

$10,000 (additional $10,000 for each 30-day period if failure continues 90 days or more after the notice, up to $50,000)

8833

“Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b)”

6712

$1,000 ($10,000 for a C corporation) on each failure

8865 Schedule P

“Acquisitions, Dispositions, and Changes of Interests in a Foreign Partnership”

6679

$10,000 (additional $10,000 for each 30-day period if failure continues 90 days or more after the notice, up to $50,000)

8898

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

6688

$1,000 for each failure

4. The code makes some chapter 61 IIR-based penalties summarily assessable.

Some sections in chapter 61, which prescribe IIR-based penalties, include language cross-referencing a section in chapter 68 or authorizing summary assessment. For example, section 6039F, which provides for a penalty for failure to file Form 3520, “Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts,” states that the penalty shall be paid upon notice and demand and in the same manner as tax. These IIR-based penalties are also summarily assessable.

Table 3 lists the sections in chapter 61 that allow for summary assessment by either explicitly providing for it or by cross-referencing a provision in chapter 68.

Table 3. Chapter 61 Sections That Allow Summary Assessment

Code Section

Penalty Provision and Cross-References

6039F

Section 6039F(c)(1)(B):

Such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).

6043

Section 6043(d):

For provisions relating to penalties for failure to file — (1) a return under subsection (b), see section 6652(c), or (2) a return under subsection (c), see section 6652(1).

6046

Section 6046(f):

For provisions relating to penalties for violations of this section, see sections 6679 and 7203.

6046A

Section 6046A(e):

For provisions relating to penalties for violations of this section, see sections 6679 and 7203.

In summary, the summarily assessable penalties are (1) the penalties in chapter 68, (2) the chapter 61 penalties with a cross-reference to chapter 68, and (3) the chapter 61 penalties with specific authorization making them summarily assessable and payable upon notice and demand.

5. Some of the chapter 61 IIR-based penalties are not summarily assessable.

There are penalties in chapter 61 that do not fit into the description of summarily assessable penalties.39 For the list of the chapter 61 IIR-based penalties without a specific statutory basis allowing for summary assessment, see Table 4.

Table 4. Chapter 61 IIR-Based Penalties Without a Specific Statutory Basis for Summary Assessment

Form

Title

Code Section

Penalty

926

“Return by a U.S. Transferor of Property to a Foreign Corporation”

6038B(c)

10% of the fair market value of the property

5471

“Information Return of U.S. Persons With Respect to Certain Foreign Corporations”

6038(c)

Foreign taxes paid or deemed paid will be reduced by 10% (with an additional 5% reduction for each three-month period if the failure continues 90 days or more after the notice, but not to exceed the greater of $10,000 or the income of the foreign business entity for the relevant accounting period)

8854

“Initial and Annual Expatriation Statement”

6039G(c)

$10,000

8858

“Information Return of U.S. Persons With Respect to Foreign Disregarded Entities”

6038(c)

Foreign taxes paid or deemed paid will be reduced by 10% (with an additional 5% for each three-month period if the failure continues 90 days or more after the notice, but not to exceed the greater of $10,000 or the income of the foreign business entity for the relevant accounting period)

8865

“Return of U.S. Persons With Respect to Certain Foreign Partnerships”

6038(b)

$10,000 for each annual accounting period for which the failure exists (with an additional $10,000 for each 30-day period if the failure continues 90 days or more after the notice, but not to exceed $50,000)

8938

“Statement of Specified Foreign Financial Assets”

6038D(d)

$10,000 (with an additional $10,000 for each 30-day period if the failure continues 90 days or more after the notice, but not to exceed $50,000)

The question becomes: How is the IRS supposed to assess and collect those chapter 61 penalties?

a. The IRS contends that most chapter 61 penalties are summarily assessable.

The IRS contends that the penalties in chapter 61 — including those in sections 6038(b), 6038A(d), 6038B(c), 6038C(c), 6038D, 6039F, and 6039G — are not subject to deficiency proceeding, meaning they are summarily assessable penalties.40 However, the IRS provides no authority or explanation for that position,41 and it should therefore be reconsidered.

b. There is no statutory basis for treating the chapter 61 penalties as summarily assessable.

Except for the penalty under section 6038A, there is no statutory or regulatory basis for the IRS’s position that the chapter 61 penalties without a cross-reference to chapter 68 or specific assessment authority are summarily assessable.42 More importantly, chapter 61 lacks a provision like section 6671(a) or 6665(a), which are in chapter 68, that makes penalties summarily assessable.

This is crucial because the lack of a similar provision and the cross-references to section 68 in chapter 61 show a congressional intent to treat the penalties in the two chapters differently.43 Application of the rules of statutory construction compels the conclusion that Congress knows how to make a penalty summarily assessable and that it chose not to do so for the chapter 61 penalties.44

This background raises three questions. First, are the chapter 61 penalties subject to the deficiency procedures? Second, should the IRS’s method of assessing chapter 61 penalties be challenged in a CDP hearing or judicial proceeding? Finally, does the IRS have to commence a court proceeding if the taxpayer does not voluntarily satisfy the liability?

c. Are chapter 61 penalties ‘additional amounts’ for purposes of sections 6214 and 6215?

If IIR-based penalties in chapter 61 are not summarily assessable, the first question is whether they can be litigated in a deficiency proceeding brought under section 6214. Stated another way, are the chapter 61 penalties “additional amounts” or “additions to tax” under section 6214?45 As noted earlier, the IRS maintains that the penalties provided in sections 6038(b), 6038A(d), 6038B(c), 6038C(c), 6038D, 6039E, 6039F, and 6039G are not subject to deficiency proceedings.46

We disagree. Section 6214(a) provides:

Except as provided by section 7463, the Tax Court shall have jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency, notice of which has been mailed to the taxpayer, and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing. [Emphasis added.]

The Tax Court may have jurisdiction to redetermine the chapter 61 penalties under 6214 if the IRS’s determination of the penalty is a claim for an additional amount under section 6214(a). Thus, it may be reasonable to argue that chapter 61 penalties are additional amounts and therefore subject to deficiency proceedings.

Although the code uses the term “additional amount” 22 times, as shown in Table 5, the term is not defined in the code.

Table 5. Use of Term ‘Additional Amount’ in the Code

Code Sections Referencing ‘Additional Amount’

Definition

63(c)(3)

None

456(d)(1) and (2)

None

666(b) and (c)

Cross-references to section 661(a)(2), which refers to “any other amounts properly paid or credited or required to be distributed for such taxable year.”

965(i)(5)

None

6214(a)

None

6221(a)

None

6226(c)(1)

None

6233(a)(1)(B), (a)(3), (b)(1)(B), and (b)(3)

None

6234(b)(1) and (c)

None

6321

None

6324A(a)

None

6404(g)(1)(A) and (2)(A)-(E)

None

6423(d)(2)

“The term ‘tax’ includes a tax and an exaction denominated a ‘tax,’ and any penalty, addition to tax, additional amount, or interest applicable to any such tax.”

6501(c)(7)

None

6601(e)(2)(A)

None

6602

None

6751(c)

None

7122(b)(2) and (3)

None

7447(i)(3)(D)

None

7491(c)

None

7508(a) and (e)(1)

None

7508A(a)(2)

None

Because the term is undefined, taxpayers and tax practitioners may continue to argue that the term “additional amount” in section 6214(a) includes those penalties from chapter 61 that are not summarily assessable.

That argument is logical because the chapter 61 penalties, like the other Form 1040-based penalties, inextricably depend on the Tax Court’s redetermination of the taxpayer’s income tax deficiency. There are numerous examples of this interdependency:

  1. the IIRs in chapter 61 must be filed with an income tax return and cannot be filed separately;47

  2. the due date for the forms required by chapter 61 are automatically extended with the income tax return, and a separate extension request need not be filed;48

  3. the statute of limitations for chapter 61 penalties specifically extends “the time for assessment of any tax . . . with respect to any tax return . . . or period,” which can extend the statute of limitations for the income tax return and tax period indefinitely;49

  4. the information required on the chapter 61-based IIRs can affect items that must be included on the income tax return;50

  5. chapter 68 provides for an increased accuracy-related penalty under section 6662(j) if the understatement is attributable to an asset that was not reported as required by sections 6038, 6038B, 6038D, 6046A, or 6048; and

  6. under section 6214, “jurisdiction is year specific.”51

However, the Tax Court will probably not agree to take jurisdiction over chapter 61 penalties. In Smith, the court observed that it has never exercised jurisdiction over a penalty that was unrelated to a deficiency, “even absent Congress’ explicitly circumscribing our jurisdiction.”52 In Pen Coal, the Tax Court observed:

In light of the similarity between the language used in section 6214(a) and the various provisions included under Chapter 68, we concluded that the term “additional amount” as used in section 6214(a) was meant to refer to one of the assessable civil penalties described in Chapter 68.53

Despite the Tax Court’s hesitance regarding jurisdiction, taxpayers and tax practitioners should make the argument that the Tax Court maintains jurisdiction over these penalties.

d. If chapter 61 penalties are not additional amounts, judicial proceedings under section 7402 may be necessary to quantify and enforce a chapter 61 penalty.

If chapter 61 penalties are not assessable, either summarily or through deficiency procedures, then, as with proceedings under sections 3505 and 6332, the IRS may need to collect these penalties in a civil action brought under section 7402.54

Section 6303(a) states: “Where it is not otherwise provided by this title, the Secretary shall, as soon as practicable, and within 60 days, after an assessment of a tax was made under section 6203, give notice to each person liable for the unpaid tax, stating the amount and demanding payment thereof.” (Emphasis added.) That is, without an assessment, the IRS cannot take any administrative action to collect an asserted liability. Section 6321 provides that absent a notice of demand under section 6303, the federal tax lien does not spring into existence. And absent a federal tax lien, the IRS cannot pursue administrative collection actions.55

Without using the administrative collection actions, the government must bring civil actions to recover taxes, fines, and penalties.56 As with penalties in chapter 61, the code creates exactions not subject to either summary assessment or the deficiency proceedings. They include the exactions in sections 3505, 6332(d), and 7405. Those exactions are not collected by normal administrative assessment and collection.57 The IRS acknowledges that if the person liable for these exactions does not voluntarily pay them, the government should collect the liability by court proceeding.58

Again, the IRS contends that the penalties in chapter 61 are summarily assessable. It sends taxpayers that do not voluntarily pay these amounts the notices required by sections 6320 and 6330, which allow for the taxpayer to request a CDP hearing. If a taxpayer timely files for a CDP hearing, Appeals must determine whether the IRS complied with “any applicable law or administrative procedure” regarding the levy and lien.59 One issue that taxpayers should raise is the IRS’s ability to summarily assess or collect chapter 61 penalties without first suing under section 7402.

V. Statutes of Limitation

The next question is what statute of limitations applies to the assessment of IIR-based penalties.

A. Chapter 68 Penalties

Every statute of limitations analysis begins with section 6501(a), which is the general statute of limitations for tax returns. It provides:

Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this Chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit). [Emphasis added.]

Section 6671(a) provides:

The penalties and liabilities provided by this subchapter shall be paid upon Notice and Demand by the Secretary, and shall be assessed and collected in the same manner as taxes. Except as otherwise provided, any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this Subchapter. [Emphasis added.]

Section 6671 suggests that chapter 68 penalties are considered tax. Thus, under section 6501, the statute of limitations to assess a chapter 68 IIR penalty, which is considered a tax, does not start until the IIR is filed, if the IIR is treated as a separate return under the Beard test.

It is less clear whether section 6501(a) would apply to the chapter 68 IIR penalties that are not treated as separate returns but rather are filed as attachments to an income tax return. There is no available guidance on whether IIRs are subject to the judicial substantial compliance doctrine, other than the IRS’s contention that the statute of limitations for assessing and collecting IIR penalties ends three years after a substantially complete IIR is filed.60

Importantly, not everyone agrees that the section 6501 statute of limitations applies to chapter 68 penalties. The IRS sometimes asserts that there is no statute of limitations for the assessment of chapter 68 penalties.61 Specifically, it argues that a statute of limitations for the assessment of a tax or penalty does not exist unless Congress explicitly provides it.62 The IRM provides: “Penalties that are not considered taxes generally have no statute of limitation for assessment. Penalties related to returns are generally treated as taxes and governed by the statute of limitation for assessment.”63

As for collection, the 10-year statute of limitations on collections in section 6502(a) applies.64

B. Chapter 61 Penalties

There is no code section that addresses the statute of limitations to assess or enforce the chapter 61 penalties. Chapter 61 lacks a provision like section 6671(a) or 6665(a) in chapter 68 that causes the IIR-based penalties to be considered tax and therefore subject to the section 6501 statute of limitations.

If chapter 61 penalties are treated as additional amounts under section 6214(a), as discussed earlier, they may be subject to deficiency procedures and section 6501.

However, if chapter 61 penalties are not treated as additional amounts, they would neither be considered tax nor be subject to deficiency procedures, and there may be no statute of limitations to enforce. In that case, an alternative argument would be that the five-year catchall statute of limitations under 28 U.S.C. section 2462 can apply. There is no case law or official guidance on this issue.

1. The IRS sometimes contends there is no statute of limitations for chapter 61 penalties.

As noted, the IRM provides that “penalties that are not considered taxes generally have no statute of limitation for assessment.”65 There is no statutory basis for that contention.66

2. The statute of limitations under section 6501(c)(8) may apply to chapter 61 penalties.

As noted earlier, every statute of limitations analysis begins with section 6501, which is the general statute of limitations for tax returns. Section 6501(c)(8) provides:

In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section. [Emphasis added.]

As explained, chapter 61 penalties for failure to file IIRs may be treated as additional amounts under section 6214(a). In that case, they may be considered tax and be subject to deficiency procedures. Then, section 6501(c)(8) may apply, and the statute of limitations to assess the chapter 61 IIR penalties may be three years from the date the IIR was filed.

3. Alternatively, the five-year statute of limitations under 28 U.S.C. section 2462 may apply to chapter 61 penalties.

If chapter 61 penalties are like penalties under sections 350567 and 6332, they are not assessed and collected like the underlying taxes. To enforce nonassessable penalties in the code, the IRS may need to bring a judicial action to enforce the penalty liability.68 If that is the case, the catchall statute of limitations under 28 U.S.C. section 2462 may apply.

That statute of limitations is applicable to the code through section 6533(1), which provides: “For period of limitation in respect of civil actions for fines, penalties, and forfeitures, see section 2462 of Title 28 of the United States Code.” A judicial action brought by the IRS to collect international penalties meets this language. Section 2462 of title 28 states:

Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon. [Emphasis added.]

If chapter 61 penalties are not assessed and collected like a tax, the liability for them accrues on the first day the taxpayer is required to provide the information (that is, the due date of the return to which the IIR must be attached).

For example, forms 926, 5471, and 8938 must be attached to and filed with the taxpayer’s income tax return. If sections 6533(1) and 2462 provide the applicable statute of limitations, the IRS would have five years from the date the forms are due (that is, the filing date of the applicable income tax return) to sue to collect the IIR-based penalty.69

4. Alternatively, the four-year statute of limitations under 28 U.S.C. section 1658 applies to the penalty under section 6038D.

Another potential statute of limitations for assessing international penalties can be found in 28 U.S.C. section 1658(a), which provides:

Except as otherwise provided by law, a civil action arising under an Act of Congress enacted after the date of the enactment of this section may not be commenced later than 4 years after the cause of action accrues.

That statute was enacted December 1, 1990.70 Although the most frequently imposed international penalties are under sections that were added to the code before the enactment of 28 U.S.C. section 1658, some penalties were enacted afterward (for example, section 6038D, which imposes a penalty for failure to file Form 8938). As a result, if a suit under section 7402 is needed to collect the penalty, 28 U.S.C. section 1658 may require the IRS to start that suit within the four-year statute of limitations.

VI. Conclusion

The code gives the IRS authority to assert penalties for failure to comply with international information reporting requirements. It is unclear on the mode and method of collecting those exactions. For the penalties in chapter 61, the code does not specify (1) when several mandatory statutory conditions precedent to assessment apply, (2) the permissible method of assessment, (3) whether chapter 61-based assessments can be collected by notice and demand, or (4) the statutes of limitation for assessment and collection. Until more guidance is available, taxpayers should challenge procedures that purport to deny them their prepayment right to challenge the IRS’s position and be heard.

FOOTNOTES

1 Collins and Hahn, “Foreign Information Reporting Penalties: Assessable or Not?” Tax Notes, July 9, 2018, p. 211.

2 Horwitz, “Can the IRS Assess or Collect Foreign Information Reporting Penalties?” Tax Notes, Jan. 21, 2019, p. 301.

3 See Frank Agostino and Phillip J. Colasanto, “The IRS’s Illegal Assessment of International Penalties,” Tax Notes, Apr. 8, 2019, p. 261.

4 Like the earlier articles, this one focuses on procedural due process requirements. It does not discuss the reasonable-cause-based defenses to the international information report (IIR) penalties.

5 See, e.g., sections 6001-6096.

6 Beard v. Commissioner, 82 T.C. 766, 777 (1984).

7 Table 1 evaluates whether the many different IRS forms used to satisfy the foreign information reporting requirements are returns under the Beard test.

9 See Table 1.

10 See IRS LB&I Concept Unit, supra note 8, at 19.

11 Section 6751(b)(1).

12 Section 6751(b)(2); see Internal Revenue Manual sections 20.1.7.3.1 and 20.1.1.2.3.

13 IRM section 20.1.9.2(20).

14 See IRM exhibits 20.1.9-6 and 20.1.9-7.

15 Sections 6320(a)(3) and 6330(a)(3).

16 Section 6330(c)(1).

17 Laidlaw’s Harley Davidson Sales Inc. v. Commissioner, 154 T.C. 68, 77 (2020).

18 Section 6203.

19 Sections 6665(a) and 6671(a).

20 See, e.g., sections in chapter 68. See also section 6751(c) (“For purposes of this section, the term ‘penalty’ includes any addition to tax or any additional amount.”).

21 See generally Agostino and Colasanto, supra note 3, at 263-268.

22 Section 6211(a).

23 Section 6213(a).

24 Section 6503(a)(1).

25 Section 6665(b).

26 IRM Exhibit 20.1.9-4.

27 See generally IRM section 4.8.9.8.

28 Section 6213(a).

29 Sections 6201(a)(1) and 6213(b)(4).

30 Section 6201(a)(1).

31 Section 6665.

32 Smith v. Commissioner, 133 T.C. 424, 428-430 (2009).

33 Williams v. Commissioner, 131 T.C. 54, 58 (2008).

34 Section 6330(c)(2)(B).

35 See, e.g., sections 6665 and 6671.

36 Section 6671(a).

37 Section 6665(a)(1) and (2).

38 Sections 6677(e) and 6679(b).

39 For instance, sections 6038B (penalty for failure to file Form 926), 6038 (penalty for failure to file Form 5471), and 6038D (penalty for failure to file Form 8938) are found in chapter 61.

40 IRM Exhibit 20.1.9-4.

41 Id.

42 Reg. section 1.6038A-4(a)(1) provides that “a penalty of $25,000 shall be assessed for each taxable year with respect to which such failure occurs,” which seems like valid assessment authority under section 6203.

43 Russello v. United States, 464 U.S. 16, 23 (1983) (“Where Congress includes particular language in one section of a statute but omits it in another section of the same Act, it is generally presumed that Congress acts intentionally and purposely in the disparate inclusion or exclusion” (quoting United States v. Bo, 472 F.2d 720, 722 (5th Cir. 1972)).).

44 Id.; see also Hardt v. Reliance Standard Life Insurance Co., 560 U.S. 242, 252 (2010) (comparing the limit on awarding attorney fees under 29 U.S.C. section 1132(1) and (2)).

45 See Agostino and Colasanto, supra note 3, at 266-268.

46 For the complete chart, see IRM Exhibit 20.1.9-4 (describing international penalties subject to or not subject to deficiency proceedings).

47 For example, forms 5471 and 8858 are attached to tax return and cannot be filed separately. For more details, see Table 1.

48 For example, Form 8858 is due when the taxpayer’s income tax return or information return is due, including extensions. See Instructions for Form 8858, at 2.

49 Section 6501(c)(8).

50 For instance, section 6038 allows for the reduction of the foreign tax credit, which can then create an underpayment of tax; and section 6038B requires that the taxpayer “recognize gain as if the contributed property had been sold for such value at the time of such contribution,” which may lead to an increase in taxable income.

51 Jennings v. Commissioner, T.C. Memo. 1997-433, at *4 (citing Commissioner v. Sunnen, 333 U.S. 591, 598 (1948)); see also Russell v. United States, 678 F.2d 782, 784 (9th Cir. 1982) (citation omitted) (“We held that, because all issues relating to a tax liability for a particular year are a single cause of action, the Tax Court acquired jurisdiction over all the issues relating to Russell’s 1965 tax liability.”).

52 Smith, 133 T.C. at 429.

53 Pen Coal Corp. v. Commissioner, 107 T.C. 249, 256 (1996) (citing Bregin v. Commissioner, 74 T.C. 1097, 1102-1103 (1980)).

54 Horwitz, supra note 2, at 304.

55 Section 6320(a).

56 Sections 7401 to 7410.

57 See, e.g., Jersey Shore State Bank v. United States, 479 U.S. 442, 447 (1987).

58 See IRM section 25.3.5.1(2).

59 Section 6330(c)(1).

60 See IRS LB&I Concept Unit, supra note 8, at 20. However, the IRS in this source appears to focus on chapter 61 IIR penalties, not chapter 68 IIR penalties.

61 Sage v. United States, 908 F.2d 18 (5th Cir. 1990); see also Emanuel v. United States, 705 F. Supp. 434 (N.D. Ill. 1989).

62 United States v. Weintraub, 613 F.2d 612, 619 (6th Cir. 1979) (“While the general rule . . . is that the sovereign is exempt from the operation of statute of limitations, an exception to that general rule exists when the sovereign (through the legislature) expressly imposes a limitations period upon itself.”).

63 IRM section 20.1.9.1.1(3).

64 United States v. Updike, 281 U.S. 489 (1930).

65 IRM section 20.1.9.1.1(3).

66 Collins and Hahn, supra note 1, at 212.

67 Section 3505, like many of the international penalties in chapter 61, does not provide assessment authority for third-party liabilities. See Jersey Shore State Bank, 479 U.S. 442.

68 See IRM section 25.3.5.1(2); see also Horwitz, supra note 2, at 304.

69 Cases rejecting the applicability of 28 U.S.C. section 2462 to tax penalties have dealt with assessable penalties like those in sections 6700 and 6701. Those cases held that 28 U.S.C. section 2462 applies only to adversarial adjudication, whether administrative or judicial, and that an assessment of a penalty (or tax) is an ex parte act, which merely determines the amount of the penalty and officially records the liability. As explained earlier, unlike the penalties under sections 6700 and 6701, the penalties in chapter 61 are not summarily assessable. Capozzi v. United States, 980 F.2d 872 (2d Cir. 1992); Groves v. United States, No. 1:16-cv-02485 (N.D. Ill. 2017), aff’d, 941 F.3d 315 (7th Cir. 2019). As with the penalties under sections 3505 and 6332, assessment of the chapter 61 penalties is a condition precedent to a suit to enforce the penalty. 3M Co. v. Browner, 17 F.3d 1453 (D.C. Cir. 1994).

70 P.L. 101-650, Title III, section 313(a) (Dec. 1, 1990).

END FOOTNOTES

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