Will First Time Abatement Apply to International Form Penalties

Will First-Time Abatement Apply to International Form Penalties?

First-Time Abatement (FTA) For International Penalty Cases

A common question that our international tax law specialist attorneys receive is about the application of the first-time penalty abatement (FTA) to international penalty cases. For example, in an all too familiar situation, a taxpayer will reach out to our firm to let us know that they did not file Form 3520 to report the receipt of a foreign gift. Several rabbit holes later, the taxpayer is scared, overwhelmed, and concerned that they will be hit with the automatically assessed 25% penalty for undisclosed foreign gifts. Further research may then lead them to learn about the first-time penalty abatement procedure — and the question becomes whether the first-time penalty abatement applies to international penalty cases.

First-Time Penalty Abatement Does Not Apply

Unfortunately, the first-time penalty abatement does not apply to international information reporting cases. In other words, if a taxpayer fails to timely report their FBAR, Form 8938 (FATCA), Form 3520/3520-A, or any other international information reporting form, they cannot fall back on the first-time penalty abatement to eliminate any penalties that may be issued.

As provided by the Internal Revenue Service:

Penalties Eligible for First-Time Abatement

Penalties eligible for First Time Abate include:

• • Failure to File – when the penalty is applied to:

    • Tax returns – IRC 6651(a)(1) 

    • Partnership returns – IRC 6698(a)(1)

    • S Corporation returns – IRC 6699(a)(1)

  • Failure to Pay – when the tax

    • Shown on the return is not paid by the due date – IRC 6651(a)(2)

    • Required to be shown on a return, but was not, and that tax was not paid by the date stated in the notice or demand for payment under IRC 6651(a)(3)

  • Failure to Deposit – when the tax

    • Was not deposited in the correct amount, within the prescribed time period, and/or in the required manner – IRC 6656

IRM 1.1.3.3.2.1 (03-29-2023): First Time Abate (FTA)

As provided by the IRM:

1. 1. 1. The above items are not all inclusive.

         • Examples of some returns where penalty relief under the FTA waiver is NOT applicable include:

         • Form 706, U.S. Estate Tax Return

         • Form 709, United States Gift (and Generation-Skipping Transfer) Tax Return

         • Form 990, Return of Organization Exempt From Income Tax

         • Forms 1099 series information returns

         • Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business

         • Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

         • Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner

         • Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations (See IRM 20.1.9 for exception.)

         • Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (See IRM 20.1.9 for exception.)

First-time non-filing is a Factor in Penalty Relief

It should be noted, that if a person is penalized for failing to report an international information form to the IRS and it is the first time they are required to follow the form then that factor may be a consideration in the totality of circumstances to determine whether or not the penalty may be abated. This is different than the actual first-time penalty abatement procedure though.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure. 

Contact our firm today for assistance.