On December 7, 2022, the IRS made changes to their procedures for First-Time Abatement (FTA) of certain international penalties linked to Form 5471 and Form 5472. This is welcomed news as it means taxpayers have another avenue for abatement of these penalties which start at $10,000 per Form 5471 and $25,000 per Form 5472.
FTA is a form of penalty relief which waives penalties for taxpayers who have a good history of compliance in the past 3 years and are currently compliant with their obligations. The purpose of this relief is to give a break to taxpayers who generally stay up to date on their tax obligations. The benefit of FTA is that the taxpayer does not need to prove reasonable cause, IRS error, statutory exception, or administrative waiver to be eligible for the relief.
The procedures for the application of penalties and FTA are detailed in the Internal Revenue Manual (IRM). Previously, one part of the IRM stated FTA is not available for any international penalties and another part of the IRM provided an exception which allowed FTA for some international penalties. The exception is for Form 5471 and Form 5472 penalties that are systemically assessed because the forms are attached to a late filed Form 1120 or Form 1065. If the underlying Form 1120 or Form 1065 penalties are abated by FTA, the Form 5471 or Form 5472 penalties may also be abated under FTA.
The conflicting procedures led to inconsistent application of FTA for the Form 5471 and Form 5471 penalties and caused confusion for taxpayers. Taxpayers are frequently unaware of FTA and having one part of the IRM incorrectly indicating that FTA is not available for international penalties made it even less likely that a taxpayer would be aware of the potential penalty relief available to them. The conflict also created confusion for IRS agents who were unsure whether to rely on the portion of the IRM with allowed the exception or the portion which disallowed it.
The IRS recently corrected the discrepancy in a memo to the Office of Appeals. The memo corrects the conflicting procedures and now both relevant parts of the IRM indicate that FTA can apply to certain Form 5471 and Form 5472 penalties. The changes to the IRM will lead to a more consistent application of FTA and extinguish any doubt as to the validity of the exception. This is a welcome change for taxpayers because it clarifies the IRS procedures and solidifies another avenue for abatement of the expensive Form 5471 and Form 5472 penalties. Hopefully in the future FTA will be expanded to other international penalties like the penalties associated with Form 8865, Form 8938, Form 3520, and Form 3520-A.