Is First-Time Abatement Applicable In International Penalty Cases?

The Internal Revenue Service (IRS) issued a memorandum from John E. Hinding, the Director of Specialized Examination Programs & Referrals, regarding penalty abatements for Forms 5471 and 5472. The memo was addressed to IRS Independent Office of Appeals employees focusing on international penalties and provides updated guidance regarding the appeals procedures for first-time abatement in international penalty cases.

The memorandum updates procedures for IRS appeals technical employees responsible for handling international appeals cases, enabling these employees to consider and recommend FTA relief for international penalty cases.

A first-time abatement (FTA) is a particular type of administrative waiver that the IRS may grant to taxpayers who meet specific criteria to relieve them from the consequences of penalties for failing to file, pay, or deposit. The FTA procedure aims to reward taxpayers with 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.

Changes To FTA Penalty Relief For Forms 5471 and 5471

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, enabling IRS appeals technical employees 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 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

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

Forms 5471 and 5472 should be filed with a persuasive reasonable cause statement. Compelling legal advocacy will be very important. Contact our office to discuss this further.

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