How do we know that IRS Form 926 penalties are going to be a big deal with IRS international auditors? The IRS has told us so. As part of the International Audit revamp, the IRS now looks for issues it feels it can win on. Instead of "here's the taxpayer find the issues," the new IRS procedures says "here ate the issues, find the taxpayers."
The IRS has identified many of the issues it seeks to audit with something called "International Practice Units," or IPUs.
What is an IPU?
IPU's are the IRS's “Explanation of general international tax concepts," but they are not official laws. Convenient, really – this way the IRS can reference them when they need to, but don’t have to be held to them like actual law. They can interpret them as they see fit.
They were created to help the IRS target specific areas of audit to bring in the most revenue. They themselves say that they are more focused on international audits; but these IPU's will also affect multi-national corporations, and even expats.
IRS Form 926
This is an easy thing for the IRS to investigate. If someone filed a Form 5471, for example, they may also need to file a Form 926. Instead of auditing random taxpayers, they can focus on those that filed Form 5471 and check to see if the IRS Form 926 was filed.
IRS Form 926 is the“Filing Requirement for U. S. Transferors of Property to a Foreign Corporation." Transfers include, but are not limited to:
- A transfer by USP of property to a foreign corporation in exchange for the corporation’s stock, where USP, alone or together with others making contemporaneous transfers, controls the corporation immediately after the exchange.
- An exchange by USP of stock or securities of a domestic corporation for stock of a foreign corporation pursuant to a plan of reorganization.
- A transfer by a domestic corporation of its assets to a foreign corporation in a reorganization.
- Can be tangible or intangible property
In the IPU the IRS also includes a "Special Rule" on Transfers by a Partnership:
"If the transferor is a partnership (domestic or foreign), the domestic partners of the partnership, not the partnership, are required to comply with IRC § 6038B and file Form 926. Each domestic partner is treated as a transferor of its proportionate share of the property."
This is important as this means every partner needs to file Form 926!
Penalties for not filing a Form 926
The penalties for mis-filing, or failure to file Form 926:
- 10% of the fair market value of the transferred property , up to $100,000
- The period of limitations on assessment of tax for the taxable year which includes the date of the transfer remains open (forever).
This is yet another case where the difference between willful and non-willful means everything. For the penalties to be assessed, the IPU states:
"This penalty should not be asserted if the United States Person shows that the failure to comply was due to reasonable cause and not to willful neglect. The penalty is not limited to $100,000 if the failure to furnish the information was due to intentional disregard."
If you need to argue your case with the IRS, we highly recommend hiring professional representation. You need someone who has experience, and knows what to say (and what not to say) to the IRS. In the IPU penalty instructions, they say:
"Review the Factors of Reasonable Cause: Reasonable cause is typically evaluated in terms of whether the taxpayer exercised ordinary business care and prudence."
So if you seem to be filing your returns and other forms on time, the IRS says "Okay. This taxpayer seems well educated on how to do things correctly which means they are smart and know about Form 926 and chose not to file it".
Crazy? Yes. Impossible? No.
If you need help with a missing or incorrect Form 926
If you're concerned that you may have a tax or reporting issue, contact us. We can:
- Review your records to ensure they are accurate
- Amend any errors we find, and keep penalties to a minimum
- Get you into the appropriate disclosure program if necessary
- Set you up for future success
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