When Can Taxpayers Be Required to Pay IIR Penalties by the IRS?

 Posted on September 08, 2023 in Taxation Law

There are a variety of tax penalties that may apply when U.S. taxpayers fail to meet their legal requirements for filing tax returns, paying taxes, or reporting information to the IRS. Foreign tax compliance can be an especially tricky issue, since taxpayers who own foreign assets or receive income or gifts from foreign sources may not be aware of their reporting requirements. In some cases, failure to file the proper forms may result in international information return (IIR) penalties.

There is a common conception that IIR penalties are mostly limited to wealthy taxpayers who earn high incomes or own extensive assets. However, this is not the case, and according to the National Taxpayer Advocate, lower- and middle-income individuals and small-to-midsize businesses are more likely to be affected by these types of penalties. 

Low-income individuals, businesses with moderate resources, and immigrants who are unaware of their tax reporting requirements may be subject to large penalties if they fail to file the proper information returns. Unfortunately, these penalties may sometimes be assessed after taxpayers discover their errors and make a good-faith effort to comply with their reporting requirements. Taxpayers who are seeking to address issues related to foreign tax compliance should consider working with an attorney who can advise them of the proactive measures that may be taken to minimize penalties or receive penalty abatement.

IIR Penalties Related to Corporations, Partnerships, and Gifts

Some common situations in which IIR penalties may be assessed include:

• Section 6038 and 6038A - Internal Revenue Code Section 6038 requires U.S. taxpayers to report ownership of foreign corporations or partnerships, while Section 6038A requires reporting for domestic corporations with at least 25% foreign ownership. These reports are usually made using Form 5471 (Information Return of U.S. Persons With Respect To Certain Foreign Corporations). More than 70% of the individual taxpayers who are assessed penalties for failure to comply with Section 6038 or Section 6038A earn incomes of $400,000 or less. For these taxpayers, the average penalty is more than $40,000.

• Section 6039F - Internal Revenue Code Section 6039F requires U.S. taxpayers to report gifts or inheritances received from foreign individuals or entities if the aggregate amount they receive in a taxable year exceeds $10,000. These gifts are reported using Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts). Even if no taxes are due on the amount of gifts received, a penalty of up to 25% of the value of the gift may be assessed in these situations. 92% of the penalties for violations of Section 6039F are assessed against individual taxpayers, and 89% of these penalties are assessed against taxpayers with incomes of $400,000 or less. 

Abatement of IIR Penalties

Fortunately for taxpayers who are notified of IIR penalties, options for abatement are usually available. In fact, more than 50% of taxpayers are able to receive abatement for these penalties. However, abatement is granted at the discretion of the IRS, and taxpayers will need to take steps to request relief. In most cases, reasonable cause abatement will be available for taxpayers who can demonstrate that they had a valid reason for their failure to file the required forms, such as inability to obtain records, serious illnesses, deaths, or natural disasters. In some cases, first-time abatement may be available for taxpayers who have a history of complying with their tax requirements.

Contact Our San Jose Tax Penalty Abatement Lawyer

If you have received notice of a penalty from the IRS, or if you are concerned that penalties may be assessed if you make an effort to comply with your reporting requirements, John D. Teter Law Offices can help you understand the options available for seeking relief from these penalties. Our San Jose, CA tax law attorney can advise you on what forms of abatement you may qualify for, and we can help you address these issues with the IRS. To learn more about how we can assist in addressing IIR penalties or other tax-related concerns, contact us at 408-866-1810 to set up an appointment.