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When Is FTA Applicable In Appeal Procedures On International Penalty Cases?

 
On December 7th of this year, the Internal Revenue Service (IRS) issued a memorandum from John E. Hinding, the Director of Specialized Examination Programs & Referrals. The memorandum was addressed to the IRS Independent Office of Appeals employees who focus on international penalties, providing updated guidance regarding the appeals procedures for first-time abatement in international penalty cases.

A tax lawyer reading the memorandum from John E. Hinding

What Is First Time Abatement?

A first-time abatement (FTA) is a type of administrative waiver that the IRS may grant to taxpayers who meet certain criteria in order to relieve them from the consequences of penalties for failing to file, failing to pay, or failing to deposit. The purpose of the FTA procedure is to reward taxpayers who have a history of tax compliance by granting them relief from the consequences of a one-time error.

Beyond domestic taxpayers, FTA penalty relief can also extend to international situations. The memorandum issued by the IRS earlier this month updates procedure for IRS appeals technical employees who are responsible for handling international appeals cases, enabling these employees to consider and recommend FTA relief for international penalty cases.

Changes To FTA Penalty Relief For International Penalty Cases

The memorandum establishes a procedural change to the Internal Revenue Manuals, also known as IRM, specifically IRM 8.11.5, Penalties Worked in Appeals, International Penalties. According to the IRM code, FTA waivers are generally not provided or applicable to international penalty cases. However, the memorandum issues an exception to this policy, now enabling IRS appeals technical employees the ability to consider or recommend FTA penalty relief on specific penalties for tax filers who meet certain criteria.

To qualify for an FTA penalty relief, international filers must have filed both of the following forms:

  • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations
  • Form 5472, Information Return of a Foreign-Owned Corporation

It’s worth noting that the updated policy guidance promotes consistency with other IRM codes, including IRM 20.1.9.3.5(3), Reasonable Cause, and IRM 20.1.9.5.5(3), Reasonable Cause.

Changes For IRS Appeals Employees

The memorandum will effectively change procedures for IRS employees who work with international appeals and international penalty cases. Per the instructions, the updated guidance regarding IRM 8.11.5, Penalties Worked in Appeals, International Penalties will be incorporated into Internal Revenue Manuals within two years. However, the updated guidelines are effective immediately. IRS appeals employees are required to update their existing procedures in order to comply with the newly established procedures for international penalty cases.

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