NTA Collins: Let Taxpayers Challenge International Information Return Penalties

National Taxpayer Advocate (NTA) Erin Collins wrote in a May 21 blog post that taxpayers should be able to bring challenges to foreign information penalties before the Tax Court and that automatic penalty assessments discourage voluntary compliance.

Collins sought to dispel the myth that international information return penalties only affect wealthy taxpayers and large corporations when in fact, many average-income individuals and small businesses “face significant and potentially life-changing penalties, even when they voluntarily comply, for failing to meet obscure and complex foreign information reporting requirements.”

She said that oftentimes, taxpayers are not aware of their reporting requirements and lack professional help to meet their filing obligations. When missing information returns are filed late, an IRS system automatically applies penalties “without any review or action from IRS personnel,” Collins wrote.

In her Annual Report to Congress, Collins said the practice of automatically assessed penalties punishes “good-faith taxpayers” and fails to promote tax compliance when the IRS should instead focus more on education and outreach efforts.

“The IRS’s cavalier approach is unfair to taxpayers and inefficient for our tax system,” wrote Collins. “By systemically assessing penalties when taxpayers willingly come forward and file their late returns, the IRS discourages voluntary compliance. When taxpayers know that voluntarily filing is going to result in a crushing penalty that is going to be difficult and costly to challenge, how many taxpayers decide not to file and hope the IRS doesn’t find them?”

According to the NTA, 71% of individual Code Sec. 6038 penalties are assessed against those making under $400,000, while 83% of business Code Sec. 6038 and Code Sec. 6038A penalties are assessed against “small and midsize businesses.”

It would “be consistent with the Taxpayer Bill of Rights” if the IRS stopped systemically assessing such penalties, Collins argued. Congress, she recommended, should amend Code Sec. 6212 to let taxpayers dispute the penalties in Tax Court.

“Due to the tax expertise of its judges, Tax Court is often better equipped to consider tax controversies than other courts,” she added. “It is also more accessible to unrepresented taxpayers because it offers simplified, less formal procedures, particularly for disputes that do not exceed $50,000.”