IRS Announces Unprecedented Waiver of Penalties for Certain International Information Reporting and Late Tax Returns: Short Window of Opportunity
On August 24, 2022, the IRS released Notice 2022-36, Penalty Relief for Certain Taxpayers Filing Returns for Taxable Years 2019 and 2020 (the “Notice”). The Notice waives certain failure-to-file penalties (FTF) and international information return (IIR) penalties for 2019 and 2020 returns. These must be filed no later than September 30, 2022. Plus, penalties for certain late-filed returns for S corporations and partnerships that failed to report required information on 2019 and 2020 returns can be abated.
Eligible penalties will be automatically waived, or if those penalties were previously assessed, they will be abated, with certain exceptions described at the end of this update. The Notice does not specify when refunds will be issued and leaves other questions unanswered.
The Notice provides an unprecedented and short-lived opportunity for eligible taxpayers to correct certain filing errors for 2019 and 2020 without penalty. The IRS has aggressively pursued late filing penalties, particularly for required IIRs related to foreign corporations and foreign trusts and foreign owned United States corporations, on Forms 5471 and 5472 (relating to ownership of, or transactions with, foreign corporations and US corporations with foreign ownership) and Forms 3520 and 3520A (relating to gifts and inheritances from foreign persons and ownership of, or transactions with foreign trusts). In recent years, the IRS has automatically issued penalty notices for late filings, regardless of whether the taxpayer has used one of the IRS’ specific programs to resolve these issues and the taxpayer’s explanation for the late filing.
Which returns are eligible for relief under the Notice?
The following returns are eligible for relief:
• Certain unfiled income tax returns and certain unfiled IIRs for tax years 2019 and 2020 that are filed on or before September 30, 2022;
• Late-filed returns for S corporations and partnerships for the years 2019 and 2020 that meet specific dates and specific filing requirements for these years; i.e., failed to report certain information as required.
Not all international information forms seem to fall within this penalty abatement program. For instance, IRS Forms 8854, 8833, 8938, 8621 & 926 and FinCEN Form 114 (“FBARs”)
What penalties are eligible for relief under the Notice?
The following penalties will be automatically abated, refunded, or credited without any need for taxpayers to request this relief.
1. Failure to file penalties, equaling 25% of the tax due for the following tax returns that were not filed for 2019 and 2020:
Tax Form Type of Form
1040, 1040-C, 1040-NR, 1040-NR-EZ, 1040 (PR), 1040-SR and 1040-SS U.S. Individual and Nonresident Income Tax Returns; and certain Self-Employment Returns
1041, 1041-N and 1041-QFT U.S. Income Tax Return for Estates and Trust
1120, 1120-C, 1120-F, 1120-FSC, 1120-H, 1120-L, 1120-ND, 1120-PC, 1120-POL, 1120-REIT, 1120-RIC and 1120-SF Corporate Income Tax Returns & Certain Life Insurance and Other Returns
1066 U.S. Real Estate Mortgage Investment Conduit (REMIC) Income Tax Return
990-PF Return of Private Foundation
990-T Exempt Organization Business Income Tax Return
2. Failure to timely file penalties for the following late filed tax returns for 2019 and 2020 that failed to report certain information as required:
Tax Form Type of Form
1065 U.S. Return of Partnership Income
1120-S U.S. Income Tax Return for an S-Corporation
3. “Systematically assessed” penalties when one of the following IIRs is attached to a late-filed U.S corporate return, Form 1120, or U.S. partnership return, Form 1065:
Tax Form Type of Form Penalty
Form 5471 Information Return of U.S. Persons With Respect to Certain Foreign Corporations $10,000 per form, which can increase depending upon IRS notifications to the taxpayer
Form 5472 Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business ($25,000 per form)
• Also applies to foreign-owned U.S. LLCs taxed as disregarded entities $25,000 per form, which can increase depending upon IRS notifications to the taxpayer
4. Penalties assessed by the IRS “campus assessment program” for the late filing of 2019 and 2020 forms 3520 and 3520-A:
Tax Form Type of Form Penalty
Form 3520 Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts 35% of the amount transferred to or distributed from a foreign trust (to/from a United States person);
25% of the amount received as a gift or inheritance from nonresident individuals or foreign estates, respectively
Form 3520-A Annual Information Return of a Foreign Trust With a U.S. Owner 5% of the gross value of the portion of the foreign trust’s assets treated as owned by a United States person
What penalties are not eligible for relief under the Notice?
The penalty relief does not apply to penalties: (i) not specifically listed in the Notice; (ii) imposed for fraud or fraudulent failure to file; or (iii) determined or settled in an accepted offer in compromise, closing agreement, or judicial proceeding.
For late-filed Forms 5471 and 5472, the relief specifically does not apply to (i) late Forms 5471 and 5472 attached to an amended (as opposed to an original but late-filed return, originally filed) Form 1120 or 1065, or to (ii) Forms 5471 or 5472 attached to returns other than Forms 1120 or 1065 (i.e., for individuals and trusts, Forms 1040, 1040NR and 1041).
The relief for IIR penalties also does not extend to a host of other international information forms, explained in more detail at the end of this advisory with an asterisk: IRS Forms 8854, 8833, 8938, 8621 & 926 or FinCEN Form 114 (Report of Foreign Bank and Financial Accounts – FBAR).
What steps need to be taken to obtain the penalty abatement relief under the Notice?
The relief from penalties depends upon the particular circumstances of each taxpayer. The answer might be different depending upon your particular circumstances. In some cases no specific action needs to be taken when the late tax return is filed. In other cases, specific affirmative steps need to be taken between now and September 30, 2022 to get the benefits of this unprecedented Notice.
What to do if you need further assistance?
The Notice provides an unprecedented and short-lived opportunity for eligible taxpayers to correct certain filing errors for 2019 and 2020 without penalty. Please contact a Shareholder of Chamberlain Hrdlicka’s International Tax Group if you have any questions regarding this update or for more information.
Summary of various IIRs – including those with an Asterisk not covered by the Notice
Form Title IRC
3520 Annual return to report transactions with foreign trusts and receipt of certain foreign gifts §6036F
3520-A Annual Information Return of a Foreign Trust with a U.S. Owner §6048(a)
5471 Information Return of U.S. Persons with Respect to Certain Foreign Corporations §6038
5472 Information Return of Foreign-Owned U.S. or Foreign Corporation Engaged in a U.S. Trade or Business §6038A
*8858 Information Return of U.S. Persons with Respect to Foreign Disregarded Entities and Foreign Branches §6038 & Treas Reg
*8865 Return of U.S. Person with Respect to Certain Foreign Partnerships §6038
*8621 Information Return by a Passive Shareholder of a Passive Foreign Investment Company or Qualified Electing Form §1298
*8854 Initial and Annual Expatriation Statement §877A
*8938 Statement of Specified Foreign Financial Assets §6038D
*926 Return of a US Transferor of Property to a Foreign Corporation § 367 & 6038B