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International Penalties Beware of Modified Form 872, Consent to Extend Time to Assess By EDWARD M. ROBBINS, Jr.

Posted by Hochman Salkin Toscher Perez P.C. Posted on Wednesday, May 09, 2018

Beware: some IRS Agents are modifying Form 872 (Consent to Extend the Time to Assess Tax) to include additional language for international penalties and blown statutes.  Although, the forms appears to be the standard preapproved Form 872, reflecting “last revised in July of 2014” or “last revised January 2018”, the altered form contains an additional paragraph typed into the body of the agreement.

First example of additional language:

(6) Without otherwise limiting the applicability of this agreement, this agreement also extends the period of limitations for assessing any penalty imposed under IRC §§ 6038, 6038A, 6038B, 6038D, 6677 or 6679.

This additional paragraph relates to extending the assessment statute specifically to include international penalties in Chapter 61 of the Code.  Interestingly, the IRS has claimed that section 6038 penalties have no statute of limitations.  If so, why are agents typing in and including this language on the consent form?

The Code provides the general rules for assessments including various exceptions including extension of time by agreement[1].  By timely executing a valid Form 872, the parties can extend the time for the IRS to assess.[2]  Once the tax and penalties are assessed, the IRS uses its formidable administrative collection powers to collect.[3]

Question is what are taxpayers agreeing to if they sign this version of the Form 872?  Does the IRS even need to extend the statute for section 6038 penalties?  What, if any, impact is there to the IRS’s ability to assess the stated international penalties if the taxpayer executes this version of the agreement?   Is the taxpayer agreeing or stipulating that the international penalties are assessable?  Is the taxpayer waiving its defense that the section 6038 international penalties are not assessable?

Once the Service determines that a section 6038 penalty applies, the Manual instructs its agents to prepare a Form 8278, Assessment and Abatement of Miscellaneous Civil Penalties, and Form 886-A, Explanation of Items, and forward to the Service Center to assess the penalty.[4]  The Manual also states that section 6038 penalties are not subject to deficiency procedures.  The Service fails to address how the IRS can automatically assess a nonassessable penalty.  Can taxpayers agree to allow the IRS to assess a nonassessable penalty even though the Internal Revenue Code does not provide the authority?  Does the IRS explain to taxpayers they may be waiving any potential rights to challenge the assessment?

The Code distinguishes between assessable and non-assessable penalties.  Section 6201(a)[5] provides the general authority for the IRS’s ability to assess all taxes, which include “interest, additional amounts, additions to the tax and assessable penalties imposed by this title (emphasis added).”  The section states that to assess a penalty it must be an assessable penalty.

Section 6671 provides the rules for assessment of assessable penalties as identified in Chapter 68  – Subchapter B  – Assessable Penalties ((§§ 6671 to 6725).[6]  Chapter 68 (Additions to the Tax, Additional Amounts, and Assessable Penalties) also contains section 6665(a) [7] a companion section to 6671 on a slightly different subject.  Section 6665(a) appears to expand the assessable penalty assessment rules to include any penalty under Chapter 68, not just the penalties in Subchapter B.

Penalties on the Modified Form 872

• Section 6038: Information returns required for certain foreign corporations (Form 5471) and partnerships (Form 8865), and foreign disregarded entities (Form 8858); the associated penalty is in the text of section 6038 all in Chapter 61 (Information And Returns (§§ 6001 to 6117));
• Section 6038A: Information returns required for certain foreign-owned U.S. corporations (Form 5472); the associated penalty is in the text of section 6038A all in Chapter 61 all in Chapter 61 (Information And Returns (§§ 6001 to 6117));
• Section 6038B: information returns required for certain transfers to foreign persons (Forms 926 and 8865); the associated penalty is in the text of section 6038B all in Chapter 61 (Information And Returns (§§ 6001 to 6117);
  Section 6038C: Information returns required for certain foreign corporations engaged in U.S. business (Form 5472); the associated penalty is in the text of sections 6038C all in Chapter 61 (Information And Returns (§§ 6001 to 6117);
• Section 6038D: Information returns regarding foreign financial assets (Form 8938); the associated penalty is in the text of section 6038D all in Chapter 61 (Information And Returns (§§ 6001 to 6117);
• Section 6048: Information returns required for certain reportable events for a foreign trust (Forms 3520 and 3520-A)[8]. However, the associated penalty, section 6677 is in Chapter 68 – Additions To The Tax, Additional Amounts, and Assessable Penalties (§§ 6651 to 6751) and is an assessable penalty.
• Section 6046: United States persons, in certain circumstances, required to file a return if they acquire or dispose of an interest in a foreign corporation, or if their proportional interest in a foreign corporation changes. (Form 5471 Schedule O). However, the associated penalty, section 6679 is in Chapter 68 – Additions To The Tax, Additional Amounts, and Assessable Penalties (§§ 6651 to 6751) and is an assessable penalty.
  • Section 6046A: United States persons, in certain circumstances, required to file a return if they acquire or dispose of an interest in a foreign partnership, or if their proportional interest in a foreign partnership changes. (Form 8865). However, the associated penalty, section 6679 is in Chapter 68 – Additions To The Tax, Additional Amounts, and Assessable Penalties (§§ 6651 to 6751) and is an assessable penalty.
    Observations:

None of the section 6038 penalties itemized in paragraph (6) above are governed by the statute of limitations.  The Internal Revenue Manual[9] specifically states these International Penalties are not considered taxes and generally have no statute of limitation for assessment, whereas, penalties related to tax are generally treated as taxes and governed by the statute of limitation for assessment for the underlying return.

As there is no statute of limitations for assertion of the penalties under IRC §§ 6038, 6038A, 6038B, or 6038D what is the purpose of paragraph 6 on the modified Form 872?  As far back as 1959, the Service has a general policy of not asserting taxes retroactively for more than a few prior years even though sometimes there is no statutory bar to assessing unpaid taxes for all prior periods.  The guidance provides that under ordinary circumstances the normal three-year statute may be followed as a guideline in making determinations on the extent of retroactivity.[10]  And, for delinquent returns, the Manual provides guidance that enforcement of delinquency procedures should not be for over six (6) years back.[11]

Chapters 63 and 68 of the Code give the IRS the authority to assess the penalties under section 6677 and section 6679.  But there is no corresponding authority in the Code giving the IRS the authority to assess the section 6038 series of penalties.[12]  If the IRS cannot assess the penalties, the IRS must request the Department of Justice to sue the taxpayer in District Court to collect the penalties and reduce them to a judgment.

Back to the initial question, if the IRS has no authority to assess the section 6038 series of penalties what is the taxpayer agreeing to in paragraph 6? And would signing the Form 872 with the above paragraph constitute a stipulation to the IRS’s ability to assess these penalties or, at least, waive the taxpayer’s ability to make an argument on the validity of the assessment?

Second example of additional language:

(6) With respect to the returns for the period(s) listed in paragraph (1) above, if the three-year period for assessing tax, under Internal Revenue Code section 6501(a), ended prior to the date of this consent, then this consent serves to extend the time to assess tax under any other provision of section 6501 for which the period of time to assess has not ended as of the date of this consent.

Observations:

It appears the IRS is requesting taxpayers to extend any possible provisions of the code that may kept the assessment statute open as of the execution of the Form 872 without identifying what they are focusing on.  This new paragraph seems to be a catch all or safety net for the Service.  It acknowledges the general assessment statute may be expired and it is asking the taxpayer to extend any possible statute exception that might apply.  Although, the law states the IRS cannot revive a closed statute[13] this extension request is usual.

Has the IRS identified a 25% omission of income that may have a six-year assessment statute?  Is the IRS expecting to argue that under the Hire Act the foreign information forms were not substantially correct and the failure extends the normal three-year statute?  Does executing this form trigger waiver on other items extending the assessment statute?  Is the IRS pushing for fraud or another exception and using this language to coax the taxpayer in agreeing to extend?

Conclusion:  Sign nothing without understanding the consequences of the document.  Practitioners should be appraised of the repercussions and consider pushing back on agents.  The altered forms appear to be the pre-approved standard agreement; however, it has been modified by the field agent.  It seems agents amend or alter the preapproved standard Form 872 without noting the change to the taxpayer.  Practitioners should carefully review the Form 872 to identify any potential changes and understand the consequences before signing these altered statute extensions.

EDWARD M. ROBBINS, Jr. is a principal at Hochman, Salkin, Rettig, Toscher & Perez, P.C., and specializes in representing individuals and organizations who are involved in criminal tax investigations, including related grand jury matters, court litigation and appeals, as well as representing and advising taxpayers involved in complex and sophisticated civil tax controversies, including representing and advising taxpayers in sensitive-issue audits and administrative appeals, as well as civil litigation in federal, state and tax court. Prior to joining the firm, he served as the Chief of the Tax Division of the Office of the U.S. Attorney (C.D. Cal).  Mr. Robbins may be reached at EdR@taxlitigator.com or 310.281.3247.

[1] Sec. 6501. Limitations on assessment and collection

(a) General rule – Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed. . . ..

[2]  Sec. 6501(c)(4).

[3] See Chapter 64 – Collection (§§ 6301 to 6361).

[4][4] IRM 8.11.5.1(2) (12-18-2015) Introduction of International Penalties.

[5]  Sec. 6201(a) Authority of Secretary

The Secretary is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title . . ..

[6]  Sec. 6671. Rules for application of assessable penalties

The penalties and liabilities provided by this subchapter shall be paid upon notice and demand by the Secretary, and shall be assessed and collected in the same manner as taxes.  Except as otherwise provided, any reference in this title to “tax” imposed by this title shall be deemed also to refer to the penalties and liabilities provided by this subchapter.

[7] Sec. 6665(a) Additions treated as tax

Except as otherwise provided in this title–

(1) the additions to the tax, additional amounts, and penalties provided by this chapter shall be paid upon notice and demand and shall be assessed, collected, and paid in the same manner as taxes; and

(2) any reference in this title to “tax” imposed by this title shall be deemed also to refer to the additions to the tax, additional amounts, and penalties provided by this chapter.

[8]  These forms are filed as stand-alone forms that are not part of another tax return.

[9] IRM 20.1.9.1.1(3) (10-24-2013)(Common Terms).

Statute of Limitations—Penalties that are not considered taxes generally have no statute of limitation for assessment. Penalties related to returns are generally treated as taxes and governed by the statute of limitation for assessment.

[10]  IRM 1.2.13.1.30 Policy Statement 4-102 (07-10-1959).

[11] IRM1.2.14.1.18 Policy Statement 5-133 (08-04-2006).
[12] The Treasury Regulations under sections 6038, 6038B, 6038C and 6038D do not say the penalty can be assessed.  These regulations use language like “penalty shall be imposed,” or “person shall pay a penalty,” or “person is subject to a penalty,” or “a penalty will apply.”  Whereas, the regulation under section 6038A says the penalty “shall be assessed” but does not provide any authority for the assessment.

[13] To be valid, an agreement by the taxpayer to extend the statute of limitations on assessment must be (1) in writing; (2) entered into before the expiration of the original collection period or a previously agreed upon extension; and (3) executed by the taxpayer and an authorized delegate of the Commissioner. I.R.C. § 6502(a); Treas. Reg. § 301.6502-1(a)(2)(i).