Finding Relief from IRS Penalties: Possible Procedural Defenses for Form 3520

When the IRS assesses penalties, taxpayers often wonder if there’s a way to avoid paying. The IRS allows for appeals, reconsiderations, and administrative hearings to determine if a penalty was correctly assessed. One common defense is that the taxpayer had “Reasonable Cause” for their noncompliance.

Another defense involves disputing the mechanics of the assessment. In Laidlaw’s Harley Davidson Sales, Inc. v. Commissioner, the IRS assessed a penalty under Section 6707 for failing to disclose participation in a reportable transaction. The taxpayer argued that the penalty was improperly assessed because the required supervisory approval was obtained after the initial notice was sent. The Tax Court initially agreed with the taxpayer, ruling that the IRS had not followed its own procedures. However, on appeal, the Ninth Circuit reversed this decision. The court held that the supervisory approval, although obtained after the initial notice, was still valid because it was given before the case was transferred to the Office of Appeals, where the supervisor retained discretion to approve or withhold the penalty.

This case highlights the importance of procedural compliance in IRS penalty assessments. Taxpayers facing penalties should consider both substantive defenses and procedural challenges. Going forward, taxpayers should be vigilant about the procedural aspects for their cases, ensuring that all IRS actions comply with the required protocols. This includes verifying that supervisory approvals are obtained at the correct stages of the assessment process. Additionally, taxpayers should consider requesting documents through a Freedom of Information Act request to confirm compliance with procedural requirements.

Hiring experienced tax attorneys can be crucial in navigating these complexities and ensuring all procedural requirements are met, thereby increasing the chances of a favorable outcome. This case serves as a reminder that even minor lapses in protocol can be significant, and understanding the nuances of the tax code can provide valuable defenses against IRS penalties. Tax attorneys can help identify potential procedural errors and leverage them in the taxpayer’s favor. They can also assist in gathering necessary documentation and presenting a well-organized case that highlights any procedural missteps by the IRS.

Furthermore, taxpayers filing forms such as Form 3520 and Form 3520-A, which are subject to international penalties, should be aware that the IRS requires supervisory approval for any assessed penalties, and the recent Laidlaw case underscores the necessity of obtaining such approval before the supervisor loses discretion, potentially impacting the timing and validity of penalty assessments. By understanding the procedural requirements and being prepared to challenge any lapses, taxpayers can better protect themselves from unwarranted penalties. This proactive approach, combined with expert legal guidance, can significantly enhance the likelihood of a favorable resolution in disputes with the IRS.

Disclaimer: Hone Maxwell LLP articles and blogs are not intended as legal advice. Additional facts, facts specific to your situation or future developments may affect subjects contained herein. Seek the advice of an attorney before acting or relying upon any information herein.

Latest Post


12 Marina View #23-01
Asia Square Tower 2
Singapore 018961
+65 8648 3995


3465 Camino Del Rio South, Suite 400
San Diego, CA 92108


Centro Corporativo Dayco
Blvd. General Gustavo Salinas #11050
Suite 602, Col. Aviacion
22014 Tijuana, B.C., Mexico
+52 (664) 504 6415

Entering the U.S. Business Market

Download Our Free Guide

Foreign investors: Learn about options for opening a business and tax compliance in the U.S.