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I'll have to do a little homework here ... but tell me (in terms of substance over form, I think I know generally what the answer will be) in Canada is this corporation a pass through ? or does it pay taxes at the corporate level?
I still don't see ya coming in ... I'm going to have to read the treaty, but I will tell you that typically the treaties differentiate between personal income and business income
Get back to me on the type or corporation (I must tell you that I am not well versed in the business side of taxes in Canada) and if you'd like me to opt out I can BUT I will also tell you that I'm a heck of a researcher and understand the underlying principals .... let me know
I'm going to move us to Q&A now, so I can start digging ... Get back to me and let me know as much as you can and where you want to go from here
Sorry, Lane. I closed website page by mistake, but only received your answer from my email.
Well, the Canadian corp is not a pass through entity, but a limited corporation, same as C Corp in USA.
So, in this case, Reg. section 1.894-1(d)(3)(iii) still applies?
I think the service income qualifies for effectively connected income. So, would W8 ECI a better choice, without quoting the treaty article (which is a little confusing) and exempt withholding tax?
Sorry, you mean to use W8 ECI to claim effectively connected income (W8 Ben is for treaty benefit, right?)
For the treaty article you quote, it seems the Canadian Co. doesn't need to pay tax in US, but it's income sourced from USA, is 1120F not required?
Since this is another question, I will submit the rate now and we will continue on this topic.
Could I have another question, pls?
If the US company (level 1) hires a Canadian Company (level 2) as its subcontractor and paid 50k, and the Canadian company hires a US subcontractor (level 3) for part of the contract job needs to be done in US and paid him 10k. All other services (worth 40k) provided by the Canadian company was done in Canada. In this case, should US company (level 1) withhold tax on the payment of 10k to the Canadian company (level 2)?
Ok, pls kindly confirm.
Thanks for your professional opinion!
Thank you!! You too!
Could I confirm that for the case I mentioned, would Canadian Co. still needs to receive 1042 and be withheld for tax, and then to file1120F to claim refund or 1042 and 1120F can be completely erased, and no necessary to file with IRS at all, because the Canadian is exempted from US tax?
Thank you very much for your quick response!
May I have a new question, pls?
If the company (LLC) filed form 8832 to classify as a C corp, but since the filing (both 1120 and form 5472) is late, therefore, IRS levies 10k penalty on late filing of 5472 (no penalty on 1120 because the company had no business activities, therefore only small loss for accounting fee and franchise tax paid). Is there anyway to modify the filing and waive the penalty?
I checked guide of form 8832, unless over 50% members are changed, the LLC can re-elect within 60 months. But the LLC's members are same, so it seems it's impossible to switch back to file as a partnership. Any other way to avoid the heavy penalty?
Three members - one company, two individuals, all are foreign persons and over 25% owners.
The most complex part of requesting FTA is determining whether your client qualifies. FTA applies only to certain penalties and certain returns filed. Your client must also satisfy the clean compliance criteria:
Note the last sentence:
Let me see if I can find the full article here I copied this from. It was from an AICPA newsletter I believe.
IN the mean time here's the paragraph that relates to the REASONABLE CAUSE EXCEPTION from the IRS internal manual section on granting this abatement: (from http://www.irs.gov/irm/part20/irm_20-001-001r.html#d0e1042 )
Generally, relief from penalties falls into four separate categories:
Correction of Service error
Finally, here's advice from the AICPA newsletter on requesting the relief:
To qualify for FTA, your client must meet the clean compliance criteria rules:
Clean three-year penalty history. Your client cannot have penalties of a “significant” amount assessed in the prior three years on the same type of tax return. IRS procedures do not publicly define significant amount, but in practice, the IRS has used any penalty amount as significant in its application of the FTA qualification. Practitioners should remind the IRS of the “significant amount” qualification if the IRS rejects the request because of a small penalty amount assessed in the past three years. The estimated tax penalty is an exception and would not disqualify your client from receiving FTA.
Required returns filed. Your client must have filed all tax returns for the past three years, as required.
Keep in mind that there is an unpublished ceiling on the penalty amount that the IRS will abate under FTA by phone. If your client’s penalties are substantial, you can request FTA in writing. If you request abatement in writing, provide other relevant penalty relief arguments, including any reasonable cause arguments. This will increase your client’s chances of penalty abatement.
FTA has been traditionally used by tax professionals who know internal IRS procedures. Now, you have all of the information necessary to request FTA for clients with a clean compliance history and save them from IRS penalties.
Again, let me see if I can find the full article. I remember that it was from an AICPA newsletter, in the even you want to be looking as well.
Found it. Here we go:References
Buttonow, J. (2012, November 26). First-time penalty abatement. Retrieved October 12, 2013, from http://www.cpa2biz.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2012/CPA/Nov/PenaltyAbatement.jsp
The IRS instituted the first-time penalty abatement waiver in 2001 to bolster voluntary compliance and help fairly administer the application of penalties.
According to a 2012 Treasury Inspector General for Tax Administration report, in 2010 about 1.65 million individual taxpayers qualified for FTA. However, according to the same TIGTA report, only 8.8% of the taxpayers in the sample it tested actually received the abatement. The report indicates that the primary reason for this disparity is that most taxpayers and tax professionals do not know FTA exists. This is largely because the IRS does not indicate FTA as a relief option on its penalty-related notices. This is likely a strategic move. If the IRS publicized FTA, the IRS would be inundated with requests.
The TIGTA report also highlights that the IRS often incorrectly applies its rules in determining whether taxpayers qualify for FTA, due in part to the IRS’s unreliable Reasonable Cause Assistant, an internal system tool used to make penalty abatement decisions. This inconsistency often necessitates that practitioners send a written request for abatement using one of the other four categories of penalty relief. With sufficient knowledge of the FTA process and a phone call to the IRS, tax professionals can often save their individual and business clients from penalty assessments."
Other than this possibility, I see no recourse. Further it seems to be fairly common that once this has happened, the 10K penalty, the company really remains "on the radar screen," "under the microscope," of IRS (continuously highly scrutinized).So this path may be a way to, at the very least, get your reasonable cause argument "on record," that this was a result of mistake, rather than intention. And at best, the only way I see to get relief from this area that has become a focus in recent years.Hope this has helpedLaneIf this HAS helped, I would appreciate a feedback rating of 3 (OK) or better … That's the only way they will pay us here.
HOWEVER, if you need more on this, PLEASE COME BACK here, so you won't be charged for another question.
Just in case some of this might apply. see this:
"One of the exceptions sometimes cited by tax advisors is that if a transaction between a foreign corporation and a foreign owner or related party do not result in the generation of income tax, or if a transaction is exempt pursuant to the provisions of a tax convention (treaty) between the U.S. and the country of residence of the foreign corporation, then there is no requirement to file Form 5472. Although this is true, there are some factors that are often overlooked.
As regards XXXXX XXXXX exemption, the relief from filing Form 5472 only applies if the corporation files Form 8833. Treaty-Based Return Disclosure pursuant to IRC Section 6114 or 7701(b). "
And finally, nothing new here, BUT reading the last paragraph again implies that reasonable casue first time abatement may be the way to go:
Thanks so much, Lane.
The client filed 843 already, but received a letter saying that the business didn't act with prudence, therefore IRS denied abate but to ask the client to appeal if they want.
It is the first filing after formation of LLC. It's a mistake, not an intention. I don't know whether FTA is still available to try. But I read the guide of IRS Modified FTA guide, it seems, it doesn't apply to 1120. So, what I understand is late filing 1120 and related forms can't use FTA to ask for abatement, am I right?
Penalty relief under the first time abatement provision does not apply to returns with an event-based filing requirement, such as Form 706, U.S. Estate Tax Return; Form 709, United States Gift (and Generation - Skipping Transfer) Tax Return; Form 1120, U.S. Corporation Income Tax Return; and Form 1120S, U.S. Income Tax Return for an S Corporation if, in the prior three years, at least one Form 1120S was filed late but not penalized. This list is not all-inclusive.
So in this case, what would be the best choice for the next step?
Does the client qualify in all the "previously compliant" areas?If so, you should appeal.IN my experience, simply send ins in the 843 with no more explanation than can be placed in box 7 has always been pushed back (almost as a knee-jerk reaction, by IRS)From another article by Mr Buttonow, he goes much deeper into the area of not simply giving in to that first denial:http://www.aicpa.org/Publications/TaxAdviser/2013/July/Pages/Buttonow_July2013.html.aspxFrom there:
When the taxpayer or practitioner calls or writes the IRS to request an FTA, the IRS evaluates the request using an automated tool. To uniformly apply penalty abatements, the IRS developed a decision-support software program called the Reasonable Cause Assistant (RCA). The program was designed to help IRS employees make penalty relief determinations for individuals (failure-to-file and failure-to-pay penalties) and businesses (failure-to-deposit penalty). The IRS requires its employees to use this program to make determinations on penalty abatement requests, including requests for an FTA.
Although the IRS has tried to uniformly and consistently apply penalty abatement determinations, the use of the automated RCA has led to unfair determinations, including FTA decisions. According to a 2011 IRS Advisory Council (IRSAC) report, the RCA makes incorrect determinations in 55% of all penalty abatement requests.¡
¡ IRS Advisory Council, 2011 Public Report, “Small Business/Self-Employed Subgroup Report,” at 73 (Nov. 16, 2011).IF, the compliance history is clean I would make the appeal (TO the service center where the Taxpayer would send paper returns), with a very detailed explanation of why, in this case, (1st time filing, non-citizen not aware... , filed as soon as understanding was accomplished, etc.) the actions of the taxpayer were as prudent and reasonable as could be expected ... for THIS taxpayer, or a similarly situated taxpayer.I would appeal to the service to use the "reasonable person test" which (as a part of the substance over form doctrine) says prudence should be measured by what would be reasonable for THIS person, and then explain the facts and circumstances that support that logic.IF the taxpayer wanted to take this to tax court, (which would be the ULTIMATE appeal) he/she MUST exhaust all existing remedies first, and because it has been indicated that an appeal is available you MUST do this first to have "standing" to go further.If there are no historical problems, I WOULD appeal here (unless youi know in your heart and mind that the taxpayer DID NOT act with reasonable care and prudence).Lane
Thanks so much, Lane. The article is very helpful. I'm going to try it.
You mentioned I could file one more appeal. If so, would IRS like to receive duplicated appeals in two different addresses?
The LLC never filed any US tax return before, neither did the members. It's the first time filing after formation. So, there is no previous record meaning previous compliance still applies here? In addition, two years returns and forms 5472 were filed late, could I use FTA for both years, or only the first year?
I would use a cover letter to "package" this as one appeal.I'm guessing that once an awareness was there they filed both?If that's the case, the that will actually GO TO your case that they acted pruently ONCE they had awareness of the problem.But as this IS an administration issue, to comply with the procedural piece do whatever is asked (if you have two different notices, for example) on a tax year basis.You might use words in the cover letter to the effect of the following:"As soon as we were made aware of this obligation we filed BOTH sets of forms immediately." Please find information regarding [both notices, whatever documentation you have]. Therefore we are asking that you consider that, although this concerns two tax years, Our/my action was to take action on BOTH tax years IMMEDIATELY, once we understood that there was a problem.IN terms of two different IRS locations, I don't think that's a problem at all. It will only increase the chances that someone beside a collector will look at this.Obviously you will want to highlight (segregate as a standalone paragraph) that there has NEVER been a problem before.Further (in a another standalone sentence/paragraph), that this set of facts, although relating to two different tax years, is only one set of facts ... and inadvertent omission of filing, that once discovered was done.
Thank you so much for so detailed solution. It's very valuable! I really appreciate your time and professional suggestions and hope you don't mind I may add a small amount of bonus.
I just do what I should. But really appreciate your quick and professional suggestion to help me smooth this difficult out. Hope won't bother your weekend time any more! And talk to you later!
I don't know whether you still remember the above case we discussed before. Now the LLC is granted for free of penalty of late filing f5472 for the first year (2011). Now the LLC received another letter of charging the same penalty for 2012, becuase 2012 was filed late, too. But at the time of filing 2012 f5472 (Apr, 2013), the LLC didn't realized the problem, because all IRS letters regarding 2011 penalty was received around Jun, 2013. So, in this case, could the LLC still be able to apply to waive the penalty and what kind of program should be used?
But for the first time abatement, it only applies for a single year, right?
How about the voluntary disclosure?
First, I'm not sure whether IRS recognize the set of year (1st & 2nd), because it clearly indicate it can only apply to a single year.
Second, the LLC did voluntarily file F5472 without being asked by IRS.
Pls correct me if I'm wrong.
I agree on the first statement, that the abatement only applies to one year.And I misunderstood. ... did not know there was actually a voluntary filing.You would, then, opt for the VDP, and should have a good case AS they have already been filed.
DO understand that Voluntary Disclosure does NOT waive penalties ... only beats IRS to the punch and avoids evasion charges.My apologies... didn't get the fact pattern there.
But I still contend that you simply need to ask for abatement on reasonable cause, regardless of it typically being applied for only one year.
I would seem to me that you DO have reasonable cause here.
Positive feedback appreciatedLane
No problem, thanks for verifying it!
Do you think the situation I mentioned above can be a reasonable cause?