When It Comes To Penalties: Some Penalties Are ”Assessable” And Some Are Not And Why It Matters

April 17, 2023 - Participants include:

Virginia La Torre Jeker - @VLJeker

John Richardson - @Expatriationlaw

Prologue - Some Penalties are "assessable" and some are not

An excerpt from the 2023 Taxpayer Advocate Report included a discussion of "assessable" penalties which included:

 

"These “assessable” penalties are generally those that are due and payable upon notice and demand. Unlike penalties subject to deficiency procedures, assessable penalties carry no rights to a 30-day letter, agreement form, or notice requirements prior to assessment. Internal Revenue Manual 20.1. 9.1."

https://www.taxpayeradvocate.irs.gov/wp-content/uploads/2023/01/ARC22_PurpleBook_03_ImproveAssmtCollect_11.pdf

Not all penalties are the same! Notably this excerpt makes a distinction between "assessable" penalties and penalties "subject to deficiency" procedures.

Generally, "assessable" penalties are payable because they are assessed and cannot be challenged without first paying the penalty and then using the judicial process to seek a refund.

Penalties "subject to deficiency procedures" can be challenged in tax court before they are paid. Although no taxpayer likes ANY penalty clearly penalties that are NOT "assessable" afford the taxpayer with more options for response.

Chapter 61 - Form 5471, Form 5472, Form 8938, Form 926 Form Penalties

These are significant penalties for taxpayers generally and especially for U.S. citizens living outside the United States. On April 3, 2023 in the Fahry case, the Tax Court ruled that Form 5471 penalties were NOT "assessable" penalties and that therefore the IRS had no jurisdiction to treat them as "assessable". (Practically speaking, this means that the U.S. would be required to embark on a separate legal proceeding to collect those penalties. This would also give the taxpayer the opportunity to defend against the penalty.)

The Taxpayer Advocate Blog of April 17, 2023

On April 17, 2023 the Taxpayer Advocate in a blog post discussing the Farhy case noted that ...

 

 

 

Since 2020, I have repeatedly recommended a legislative change under which Congress would make foreign information return penalties and assessable penalties subject to deficiency procedures for the benefit of both the IRS and taxpayers. This change would provide taxpayers with a more efficient, less costly, and more equitable regime governing the initial imposition of these penalties, as well as the mechanisms by which they can be challenged by taxpayers.

Continuing the Taxpayer Advocate notes that ...

This blog specifically addresses information reporting penalties in Chapter 61, Subchapter A, Part III, Subpart A (hereafter referred to as Chapter 61 for brevity’s sake).

Taxpayers who receive foreign gifts or control certain foreign corporations and partnerships and fail to file required information returns are subject to penalties under IRC §§ 6038 and 6039 (which are in Chapter 61 of the IRC). IRC § 6038 is one of several code sections that require similar filings and provide for similar penalties for taxpayers with various types of foreign corporations, partnerships, assets, and accounts. These Chapter 61 penalties are peculiar in that each section specifically imposes the penalties but provides no authority to assess and collect the penalties. I raised this concern in my 2020 Annual Report to Congress and recommended that the IRS take steps to protect the government fisc and also taxpayer rights by maximizing taxpayers’ access to administrative and judicial review.

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The Great Question Post Fahry is how to determine whether an penalty is an "assessable" penalty or a penalty "subject to deficiency procedures"

In this podcast, Virginia La Torre Jeker and John Richardson discuss:

1. How to determine whether a penalty is "assessable" or "subject to deficiency procedures"

2. That 5471 and 8938 penalties (affecting Americans abroad) are NOT "assessable" penalties

3. Why many 3520 penalties are "assessable" penalties

4. How taxpayers can take advantage of the Tax Court decision in Fahry which ruled that Form 5471 penalties are NOT assessable (there is a window of opportunity)

5. The absolute importance of reading and considering the language in the Internal Revenue Code!

Although this podcast is a bit technical, it is of great practical utility.