Treasury Inspector General for Tax Administration
December 2, 2013
TIGTA - 2013-53
Contact: David Barnes
WASHINGTON – The Internal Revenue Service (IRS) has made improvements in systemically assessing penalties on U.S. taxpayers who are late in fulfilling their tax reporting requirements regarding their involvement in certain foreign corporations, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).
However, the IRS must make improvements in its controls to ensure the proper abatement of penalties when taxpayers provide a reasonable cause for the abatement.
The law requires a U.S. citizen or resident alien to furnish information with respect to certain foreign business entities. Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is used to comply with the law and regulations.
TIGTA conducted its review to determine whether the IRS has improved its penalty-setting process to promote filing compliance for entities with a Form 5471 information reporting requirement.
Overall, TIGTA found IRS controls ensured that systemic penalties for late-filed Forms 5471 were properly assessed and that the majority of the taxpayers sampled timely filed their Forms 5471 the following year.
However, controls are insufficient to ensure the proper abatement of systemically assessed penalties on late-filed Forms 5471. Specifically, in a statistically valid sample of 93 cases, penalties should not have been abated in 40 cases. Total incorrect abatements for these 40 cases amounted to $1.75 million, which equates to approximately $31 million in incorrect abatements when projected to the population.
In addition, the IRS did not properly process eight automatic filing extensions, which led to $6.4 million in unnecessary late-filed Form 5471 penalty assessments ultimately being abated. When projected to the population, there was approximately $11.6 million in incorrect penalty assessments.
“One of the major management challenges facing the IRS is accelerating globalization,” said J. Russell George, Treasury Inspector General for Tax Administration. “The increased use of late-filed penalties could be an effective tool to help improve compliance with international information return filing requirements.”
TIGTA recommended that the IRS: 1) conduct a study to determine if the automated late-filed Form 5471 penalty-setting process should be expanded; 2) provide refresher training to employees and their managers on the importance of documenting penalty abatement request decisions; 3) require managers to review all late-filed Form 5471 penalty abatements; and 4) ensure that filing extension requests received with a payment are properly coded and timely processed.
In their response, IRS officials agreed with all of TIGTA’s recommendations. IRS officials stated that they have taken steps to implement two corrective actions and plan to take remaining corrective actions in the future.
Read the report.
Note: The difference between the date TIGTA issues an audit report to the Internal Revenue Service and the date TIGTA publicly releases the report is due to TIGTA's internal review process to ensure that public release is in compliance with Federal confidentiality laws.
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