Megan L. Brackney was quoted in a recent Tax Notes article entitled “What’s Reasonable for Late-Filed Foreign Information Returns?,” published on June 7, 2021. Brackney discusses the IRS’ practice of automatically assessing penalties on taxpayers who file late international information returns.
The article notes:
“It’s incredibly frustrating,” said Megan L. Brackney of Kostelanetz & Fink LLP. By applying a high standard for reasonable cause, the IRS has been assessing the highest possible penalty even on taxpayers who filed a foreign information return for the first time, quickly corrected the missed filing, had no tax due, and missed the filing deadline only because they relied on a professional preparer, she said. The process has also increased the length of time it takes, and the associated expenses, for taxpayers to reach a resolution with the IRS.
After an assessment of a penalty, taxpayers request abatement, which sometimes takes the IRS up to a year to deny. Then taxpayers generally file an appeal. The time involved is causing a backlog of cases, Brackney said. Taxpayers who would otherwise come into compliance now often reconsider and instead choose not to file missing information returns. “The IRS is losing out on an opportunity to get returns and voluntary compliance,” Brackney said.
It’s unclear why the IRS changed its approach. One possibility is that it lacks enough agents to handle reviews of reasonable cause statements, so the decision was made to halt reviews at the intake stage and defer them until the taxpayer moves on to Appeals. Another possibility is an IRS belief that taxpayers who should file Form 3520 are high-net-worth individuals who are sophisticated enough to know what they ought to do regarding foreign information returns. That’s not the case in many situations, however, Brackney said.
Another option for the IRS would be to create a program for late-filed foreign information returns that taxpayers could enter if they aren’t already under audit and have no tax due, Brackney suggested. The prior procedures for delinquent returns required reasonable cause for penalty abatement, but that wasn’t much of an inducement to taxpayers to come into compliance because the IRS can’t impose penalties when a taxpayer shows reasonable cause for failure to file anyhow. A program that would allow taxpayers to catch up on filing foreign information returns without penalties, or at least give them an opportunity to engage with the IRS on their reasonable cause arguments before the assessment of penalties, would be a big improvement, Brackney said.
Brackney said the streamlined procedures for reporting and paying both offshore and domestic taxes owed are an excellent example of how the IRS has enhanced voluntary compliance reasonably. “I would encourage the IRS to think about how well the streamlined procedures have worked and how many people who never filed before are filing,” she said.
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