IRS PENALTIES Avoidance and abatement June 2017
Today s presenters Patti Burquest Principal Washington National Tax Patti leads the firm s tax controversy team, with a focus on IRS examination and appeals. David Click Director Risk Management David teaches graduate courses on corporate tax, taxation of intellectual property and tax dispute resolution. 2
Agenda Topic Introduction to delinquency penalties Delinquency penalty avoidance Delinquency penalty abatement International information return penalties Late or incorrect information return penalties 3
INTRODUCTION TO DELINQUENCY PENALTIES
Delinquency penalties Type of penalty Failure to file or late filing Failure to pay or late payment Late deposit of tax Applies to o Income tax o Excise tax o Payroll tax o Information returns o With return o IRS notice o Income tax o Payroll tax o Withholding tax
Failure to file or late filing of income, withholding and excise tax returns* Penalty computation Computed on net amount due with the return as of the return due date without extension (RDD) Begins to accrue on the due date of the return (including extension) Payments after the RDD do not reduce the base on which the penalty is computed Section 6651(a)(1) Rate Penalty rate is 5 percent per month (or fraction) up to a 25 percent maximum Based on amount of tax due as of RDD Rate reduced to 4.5 percent per month (22.5 percent maximum) if late payment penalty applies at the same time Avoidance and abatement Avoid by filing a timely income tax return (including extensions of time) Reasonable cause for late filing is a defense First time abatement *Forms 1120, 1040, 1041, 1042, 720 6
Failure to file or late filing of partnership or S corporation returns Rate Penalty computation Applies a per partner or per shareholder monthly penalty $195 per partner or shareholder per month for up to 12 months Sections 6698 and 6699 Avoidance and abatement Reasonable cause Small partnership exception (Rev. Proc. 84-35) First time abatement (FTA) *Forms 1065 or 1120S 7
Late payment or failure to pay penalties General rules Applies to income tax, estate tax, gift tax, excise tax, payroll tax, and withholding tax returns and certain information returns Unpaid tax from return due date without extension Unpaid tax pursuant to IRS notice and demand for payment Within 21 calendar days of IRS notice Within 10 business days of IRS notice if the amount due is $100K or more Sections 6651(a)(2) and (a)(3) Rate 0.5 percent per month, increases to one percent per month if receive a levy notice, maximum 25 percent (a)(2) penalty runs from the return due date (without extension) until the date the tax is paid (a)(3) penalty runs from the 11 th or 22 nd day from the notice (whichever applies) until the balance is paid Avoidance and abatement Reasonable cause First time abatement 8
Late deposit penalties Penalty computation Applies to any taxpayer or return for which a tax deposit is required Applies to underpayments of any type of tax including employment, income, withholding. Underpayment means the excess of the amount of tax required to be deposited over the amount, if any, deposited on or before the due date of the deposit. Failure to use Electronic Federal Tax Payment System (EFTPS) (if required) is 10 percent of the required deposit Section 6656 Rate Sliding scale of penalties for late deposit based on days late Avoidance and abatement o o o 5 or less: 2 percent More than 5, less than 15: 5 percent More than 15: 10 percent 10 or more days after delinquency notice: 15 percent First time abatement Exceptions for first time deposit (payroll tax) Penalty recomputation 9
DELINQUENCY PENALTY AVOIDANCE
Pointers to avoid the late filing penalty Extension File early Confirm e-file Certified mail Estimate liability Corporations proper estimate and payment of liability Individuals proper estimate File return timely Even if can t pay Avoidance and abatement First time abatement Reasonable cause
Pointers to avoid the late payment penalty Pay by return due date Original due date without extension Payment after due date will stop accrual as of payment date Use required payment method EFTPS Check with voucher Same day wire Ensure sufficient funds in the account used Will avoid a bad check penalty Avoidance and abatement First time abatement Reasonable cause
Pointers to avoid the late deposit penalty Make sure payment is made by required date Bi-weekly or semi-monthly for certain employment taxes Next day deposit for employment taxes of $100K or more Use required payment method EFTPS Same day wire Qualifying exception? First time depositors of employment taxes Avoidance and abatement First time abatement Reasonable cause
DELINQUENCY PENALTY ABATEMENT
Delinquency abatement approaches Administrative waiver first time abate (FTA) First-time filer, or Clean compliance history for prior three years Can be requested by power of attorney (POA) Reasonable cause Taxpayer exercised ordinary business care and prudence and was unable to file or pay on time Facts and circumstances Events outside of the control of the taxpayer Reliance on a tax advisor? The failure is not due to willful neglect
Delinquency penalty abatement process: Reasonable cause Written response to notice outlining reasonable cause factors Generally, the IRS expects this statement to be signed under penalty of perjury Must set forth all facts and circumstances that show that the taxpayer acted reasonably, in good faith, and without willful neglect for its responsibilities Must demonstrate that the taxpayer exercised ordinary care and prudence Facts may show inadvertent failure despite reasonable attempts to comply with the law Information may include the taxpayer s history of good compliance Additional responses to denial of initial request for abatement may be required for a final resolution
Delinquency penalty abatement process IRS penalty letter received, then: Request for abatement (reasonable cause facts) Abatement Denial < 60 days Appeals conference Abatement Denial Request reconsideration Penalty Appeals Coordinator Abatement Denial 60 to 90 days Litigation > 60 days Case forwarded to Appeals
Reasonable cause for delinquency Failure to file or pay Evaluate events surrounding the delinquency what, how, when and where questions should be considered Were there facts beyond the taxpayer s control that prevented timely compliance? e.g., a weather-related event prevented timely mailing or a failed electronic transmission occurred and was not immediately discovered How did those events prevent timely compliance? e.g., the weather caused road closures affecting mail service What remedial efforts were made to prevent the re-occurrence of the delinquency? Did the taxpayer provide for payment of the tax but was prevented from paying or would suffer undue hardship if paid? Reg. section 301.6651(c)
Reasonable cause for delinquency (cont.) Delinquent tax deposit penalties can be abated if the failure is inadvertent Example The taxpayer timely mailed a check to the IRS rather than using electronic funds transfer (EFT), and the taxpayer has not used EFT before Reg. section 1.301-6656-1 Delinquent or incorrect information return penalties can be abated for reasonable cause Exception for incorrect information returns for dividends and interest, which can be waived for due diligence Reg. section 1.301-6723-1(d)
INTERNATIONAL INFORMATION RETURN PENALTIES 2017 update
Delinquency penalties for common international information returns Form IRC section Due date Penalty 5471 Information regarding certain foreign corporations 6038 6679 With income tax return (report on calendar year) $10K+. Max penalty $60K. Reduced FTC. Also section 6662(j) 5472 25 percent foreign owned U.S. corporation or foreign corporation engaged in USTB 6038A With income tax return (report on calendar year) $10K+. Max penalty of $60K 8865 Information with respect to certain foreign partnerships 6038B 6046A With income tax return (report on calendar year) or separate by due date $10K+. Max penalty of $60K. Reduced FTC 926 U.S. transfer of property to a foreign corporation 6038B 6046 With income tax return for year of transfer 10 percent of value of property transferred (max of $100K for nonwillful late filing). Also section 6662(j) 8858 Information regarding Foreign Disregarded Entity (FDE) 6038 With income tax return or Form 5471 10K+. Max penalty of 60K. Reduced Foreign Tax Credit 8938 Statement of foreign financial assets (FFA) 6038D With Form1040/1040NR (unless specified FFAs reported on other info return) $10K+. Max penalty of $60K. 3520-A Foreign trust with U.S. owner 6048(b) 6677 2 ½ months after trust s year end Greater of $10K or 5 percent of gross value of trust assets treated as owned. Also section 6662(j) 3520 Transactions with foreign trusts or receipt of certain foreign gifts 6048 6677 Same due date as Form 1040 or 706 Greater of $10K or 35 percent of gross value of assets transferred/received or 5 percent of trust assets treated as owned
Avoiding penalties with late filing procedures IRS delinquent international information return filing procedures Have not filed one or more required international information returns Have reasonable cause for not timely filing the information returns Are not under a civil examination or a criminal investigation by the IRS Have not already been contacted by the IRS about the delinquent information returns, and Statement that entity is not engaged in tax evasion
Reasonable cause relief: Forms 5471 and 5472 Reasonable cause relief is available Facts and circumstances will drive the determination Did the taxpayer act in a reasonable and prudent manner in managing its filing responsibilities? Did something happen beyond the taxpayer s control that caused the late filing? U.S. v. Boyle, 469 U.S. 241 (1985) Timely filing is taxpayer s responsibility. Decision trees IRM 21.8.2-1 (Form 5471) and IRM 21.8.2-2 (Form 5472)
First time abatement relief? FTA is not applicable; however, if late filing penalty for late Form 1120 is abated using FTA options exist: IRS may use the same abatement code to abate penalty for late filed Forms 5471 and 5472 See IRM 20.1.9.3.5 (3) for Form 5471 See IRM 20.1.9.5.5 (3) for Form 5472
LATE OR INCORRECT INFORMATION RETURN PENALTIES 1099, W-2, 5498, etc.
Late information returns Penalty Failure to file and failure to furnish information returns Penalty avoidance and relief Meet filing deadlines Furnish W-2s and 1099- MISC by January 31 File W-2s and 1099- MISC by January 31 Internal procedures using experienced personnel or Outsource to 3 rd party IRC section 6721 and 6722 References IRS Guide to Information Returns Penalty amount $250 per failure (maximum of $3,000,000) or $500 per failure for intentional failure Indexed for inflation Lower penalties for corrections on or before August 1 Procedure Reasonable cause for the failure Procedures followed Event beyond control No willful neglect Reliance on qualified 3 rd party
Incorrect information returns Penalty Filing or furnishing incorrect information returns IRC section 6721 and 6722 Penalty amount $250 per failure (maximum of $3,000,000) or $500 per failure for intentional failure Indexed for inflation Lower penalties for corrections on or before August 1 Penalty avoidance and relief Avoidance through obtaining a correct W-9 from the payee Solicitation letter B Notice Policies and procedures Back-up withholding References IRS Notices CP2100 CP2100A IRS Publication 1281 Procedure Annual solicitation letters (with W-9) Foreign payee W-8BEN Send B Notice (with W-9) to payee within 15 business days of the notice Begin back-up withholding no later than 30 business days from notice Send additional B Notices Provide copies to IRS of B Notices sent
Mismatch between W-2s and Forms 941 Penalty Failure to timely file W-2s with Social Security Administration (SSA) IRC section 6721 Penalty amount $250 per failure (maximum of $3,000,000) or $500 per failure for intentional failure Indexed for inflation 10 percent of the amount shown on the return Penalty avoidance and relief Ensure timely transmission of W-2s to SSA Respond to any mismatch notices from SSA Cure filing defects through SSA website (Business Services Online) References www.ssa.gov Employer Services Liaison Officers by region Procedure Were all W-2s transmitted to SSA? Contact SSA Employer Services Liaison Officers for information and assistance on mismatches and unfiled W-2s File missing W-2s through SSA s website or on paper
Contact your presenters Patti Burquest Principal patti.burquest@rsmus.com 202.370.8236 David Click Director david.click@rsmus.com 303.298.6444 29
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