IRS form 5471 review
I have received notice from IRS on form 5471, penalty reference number 711.
I need you to review IRS notice, form 5471 and provide your comment on what is incorrect on the form.
Your comments and suggestions on what is incorrect
A Penalty Reference Number (PRN) of 711 means that the penalty was assessed by the IRS Service Center.
Service Center penalties are typically assessed automatically during tax return processing.
They are not the result of a detailed audit conducted by an auditor, which would have resulted in the assessment of a penalty with PRN 625.
The most likely reason for your penalty is the late filing of Form 5471.
The IRS automatically assesses penalties when Form 5471 is attached to a primary tax return (e.g., Form 1120 or 1040) that is filed late.
A less likely, but possible, reason is the filing of a formally incomplete form (e.g., a missing EIN or Category of Filer).
Both scenarios are detected automatically by the Service Center.
Although the likely reason for the penalty is procedural (late filing or formal incompleteness) rather than substantive, verifying the content of the form is critically important besause it is a mandatory prerequisite for any penalty abatement strategy.
The IRS will not consider a request for penalty abatement if the filed Form 5471 is not substantially complete.
FTA is an administrative relief for taxpayers with a clean compliance history (for the preceding 3 years).
FTA is not directly applicable to international penalties (IRC § 6038).
The mechanism for relief is indirect and is applicable only if Form 5471 was filed concurrently with a late-filed primary tax return (e.g., Form 1120 or 1040).
In this scenario, FTA is used to abate the underlying (domestic) late-filing penalty (e.g., under IRC § 6651).
If this underlying penalty is abated through FTA, the related international penalty on Form 5471 is abated automatically (IRM 20.1.9.3.5).
If the primary return was filed on time, but Form 5471 was filed later (separately or with an amended return), FTA is not applicable.
FTA is based on objective compliance history and does not require an examination of the specific facts and circumstances surrounding the violation.
It is not available if the taxpayer does not have a clean compliance history (e.g., significant penalties) for the preceding 3 years.
Success is tied to the possibility of abating the penalty on the primary tax return through FTA.
Utilizing this relief generally makes the taxpayer ineligible for FTA until a 3-year clean compliance history is re-established.
This is the primary statutory defense, which allows for penalty abatement if the violation occurred due to reasonable cause and not willful neglect.
The taxpayer must demonstrate the exercise of «ordinary business care and prudence».
Asserting this defense requires the filing of a written statement signed under penalties of perjury.
This defense is expressly provided for by statute.
It is applicable regardless of the compliance history (unlike the method in point 2).
It requires the submission of convincing evidence.
The assessment depends on the discretion of the IRS agent («to the satisfaction of the Secretary»).
The IRS applies stricter standards to international penalties.
For example, reliance on a professional advisor (a CPA or an attorney) regarding filing obligations or the substance of the return is generally not accepted as Reasonable Cause (IRM 20.1.9).
If a taxpayer requests RC but qualifies for FTA, the IRS will generally grant FTA without considering the RC arguments.
This can be disadvantageous, as it consumes the taxpayer's eligibility for FTA for the next 3 years (see point 2.3.3).
If strong grounds for RC exist, it may be strategically advantageous to insist on the application of RC to preserve future eligibility for FTA.
If the Service Center denies a request for penalty abatement, the taxpayer has the right to an independent review of the case.
The mission of the Office of Appeals is to resolve tax disputes without litigation.
Appeals Officers are authorized to consider the hazards of litigation — the likelihood that the IRS's position will not prevail in court.
The case is reviewed by an officer independent of the Service Center.
It is possible to settle the dispute based on an assessment of the hazards of litigation.
The arguments under point 3 receive more thorough consideration.
The process may take many months.
The process requires the preparation of a formal written protest.