Successfully Fighting 6721(e) Intentional Disregard Penalties 

Successfully Fighting 6721(e) Intentional Disregard Penalties

Successfully Fighting 6721(e) Intentional Disregard Penalties 

The Internal Revenue Service has many different types of penalties they can issue against Taxpayers who have not properly reported their taxes or international information returns (such as FBAR and FATCA).  While some of the more common types of penalties are FBAR Penalties, FATCA Penalties, Form 3520 Penalties, and Tax Fraud Penalties – there is also an Internal Revenue Code Section 6721(e) penalty for failing to report or to resolve information return filings. While the penalties can be steep, if the Taxpayer is able to show the noncompliance is due to reasonable cause and not willful neglect, the penalty may be minimized or eliminated. Let’s take a look at 6721(e) Failure to File Correct Information Returns.

26 U.S.C. 6721(e)

In pertinent part:

      • Imposition of penalty

          • In general: In the case of a failure described in paragraph (2) by any person with respect to an information return, such person shall pay a penalty of $250 for each return with respect to which such a failure occurs, but the total amount imposed on such person for all such failures during any calendar year shall not exceed $3,000,000.

      • Failures subject to penalty

          • For purposes of paragraph (1), the failures described in this paragraph are—

            • (A) any failure to file an information return with the Secretary on or before the required filing date, and

            • (B) any failure to include all of the information required to be shown on the return or the inclusion of incorrect information.

      • Reduction where correction in specified period

        • (1) Correction within 30 days

          • If any failure described in subsection (a)(2) is corrected on or before the day 30 days after the required filing date—

            • (A) the penalty imposed by subsection (a) shall be $50 in lieu of $250, and

            • (B) the total amount imposed on the person for all such failures during any calendar year which are so corrected shall not exceed $500,000.

Internal Revenue Manual  (20.1.7.8.2) for 6721(e) Procedures 

In pertinent part:

    • Failure to File Correct Information Returns IRC 6721

      • For information returns or statements, a penalty may be imposed for filing returns:

        • After the due date,

        • Without all required or correct information (including missing, incorrect and/or not currently issued TINs),

        • On paper when required to be filed on electronic media,

        • When filed on paper, in a manner which does not allow them to be processed, or

        • When filed on electronic media, in a manner which does not allow them to be processed or be read by machine (not processable).

      • No more than one IRC 6721 penalty will be imposed per return, even when a return contains more than one failure, for example, a return was filed late and missing a TIN.

      • For purposes of IRC 6721, the term “information return” means any return required to be filed as described in IRC 6724(d)(1).

      • See Exhibit 20.1.7-1 and Exhibit 20.1.7-2 for applicable penalty rates and maximum limitations. 20.1.7.8.1 (09-08-2021)

    • Reduction of the Penalty

      • If a failure is corrected within 30 days after the due date of the information return required to be filed, the penalty will be reduced.

      • If the failure is corrected more than 30 days after the due date of the information return required to be filed, but on or before August 1 of the filing year, the penalty will be reduced.

        • Note: The reduction of penalty discussed in (2) does not apply to returns that are not due on January 31, February 28 or March 15 (for example, Form 8300 because this form does not have a fixed due date but is due within 15 days of cash receipt). See Exhibit 20.1.7-3 for due date of information returns subject to penalties discussed in this IRM. This exception does not apply to Form W-2 and a form reporting non-employee compensation, since these forms have a due date of January 31 for tax years beginning in 2016. These forms still have a reduction in penalty if corrected more than 30 days after the due date but on or before August 1.

      • Small Business Limitation – If the filer’s average annual gross receipts for the three most recent taxable years do not exceed $5,000,000, the maximum penalty in each of the three penalty categories will be reduced.

        • For example, if the filer uses a calendar year for tax purposes, and the calendar year during which the return is required to be filed is 2020, then, the most recent three taxable years are 2019, 2018 and 2017. See IRC 448(c)(3)(C) when computing the average gross receipts test (gross receipts shall be reduced by returns and allowances).

        • For subsidiary entities that have no income tax filing requirement and file their income with the parent entities, the gross receipts for the subsidiary entities will be evaluated based on the aggregated gross receipts of both parent and subsidiary(ies), as member(s) of a controlled group within the meaning of IRC 1563(a). See section 448(c)(2) for additional aggregation rules. See Exhibit 20.1.7-1 and Exhibit 20.1.7-2 for applicable penalty rates and maximum limitations for small and large businesses and reduction of the penalty when corrected within certain time frames.

    • Intentional Disregard of Rules and Regulations

      • The Intentional Disregard of the Rules and Regulations penalty under IRC 6721(e) applies when the facts and circumstances show that the filer knowingly or willfully failed to comply with the filing requirements of the information returns.

      • Intentional disregard occurs when a filer knowingly or willfully chooses to ignore a rule or regulation’s requirements. The facts should show the filer:

          • Was required to file,

          • Knew of or willfully disregarded the requirement to file, and

          • Consciously chose not to file or willfully disregarded (i.e., ignored) the duty to file a timely and correct information return.

      • 26 CFR 301.6721-1(f)(3)(i) provides that a pattern of failures indicates intentional disregard. The greater the number of failures, the greater the likelihood some of those failures could be due to intentional disregard. Additional questions relevant to ascertaining the existence of intentional disregard are:

          • Did the filer correct the failure promptly after the discovery of the failure,

          • Did the filer correct the failure within thirty days after written notification of the failure by the IRS, and

          • Did the filer avoid an administrative inconvenience or was the cost of compliance greater than an IRC 6721 penalty?

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Taxpayers facing these types of penalties should consult with a Board-Certified Tax Law Specialist.

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.

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