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Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
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Experience:  Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
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ForCustomer pls.Hi: Lane,Thanks for your info.Could

Resolved Question:

For NPVAdvisor, pls.

Hi: Lane,

Thanks for your info.

Could I ask does the following article from the treaty (Canada - US) applies to a Canadian Corp if it's the corp who provides services in US to the US Co.

---------------------

Withholding of Taxes in Respect of Personal Services

1. Deduction and withholding of tax on account of the tax liability for a taxable year on remuneration paid to an individual who is a resident of a Contracting State (including an entertainer or athlete) in respect of the performance of independent personal services in the other Contracting State may be required by that other State, but with respect to the first five thousand dollars ($5,000) in the currency of that other State, paid as remuneration in that taxable year by each payer, such deduction and withholding shall not exceed 10 per cent of the payment.

-----------------

The purpose is to reduce the withholding tax if possible.

In addition, which form should be used - W8 ECI or W8 BEN?
Thanks
Submitted: 1 year ago.
Category: Tax
Expert:  Lane replied 1 year ago.

Lane :

Hi,

Lane :

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?

Lane :

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

Lane :

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

Lane :

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

Expert:  Lane replied 1 year ago.
Our chat has ended, but you can still continue to ask me questions here until you are satisfied with your answer. Come back to this page to view our conversation and any other new information.

What happens now?

If you haven’t already done so, please rate your answer above. Or, you can reply to me using the box below.
Expert:  Lane replied 1 year ago.

Hi lucia,

Yep, see this:

Treas. Reg. section 1.894-1(d)(3)(iii) provides that an entity will be fiscally transparent under the laws of an interest holder’s jurisdiction with respect to an item of income to the extent that the laws of that jurisdiction require the interest holder resident in that jurisdiction to separately take into account on a current basis the interest holder’s respective share of the item of income paid to the entity, whether or not distributed to the interest holder, and the
character and source of the item in the hands of the interest holder are determined as if such item were realized directly from the source from which realized by the entity.

Although Canada does not have analogous provisions in its domestic law, it is anticipated that principles comparable to those described above will apply.


SO this is treated just as if the Canada Corp is an individual(better said, the individual owning the Canada Corp. is treated as if the income simply comes to the individual).


So the passage you asked about DOES apply.

(Just wanted to get that to you) Be right back

Lane
Expert:  Lane replied 1 year ago.

OK, Form W8-ECI – stands for effectively connected income (ECI).

So, you'd use the W8-ECI if the person or entity is a recipient of U.S. source income that's (or is deemed to be) effectively connected with the conduct of a trade or business within the United States.

But here, (from the instructions for W8-BEN), ...

Purpose of form. Foreign persons are subject to U.S.
tax at a 30% rate on income they receive from U.S.
sources that consists of:
• Interest (including certain original issue discount
(OID));
Dividends;
• Rents;
• Royalties;
• Premiums;
• Annuities;
• Compensation for, or in expectation of, services
performed;
• Substitute payments in a securities lending transaction;
or
• Other fixed or determinable annual or periodical gains,
profits, or income.


If you receive certain types of income, you must
provide Form W-8BEN to:

• Establish that you are not a U.S. person;
• Claim that you are the beneficial owner of the income
for which Form W-8BEN is being provided or a partner in
a partnership subject to section 1446; and
• If applicable, claim a reduced rate of, or exemption
from, withholding as a resident of a foreign country with
which the United States has an income tax treaty.





Further, here's the definition of EFFECTIVELY CONNECTED INCOME:

Effectively connected income. Generally, when a
foreign person engages in a trade or business in the
United States, all income from sources in the United
States other than fixed or determinable annual or
periodical (FDAP) income (for example, interest,
dividends, rents, and certain similar amounts) is
considered income effectively connected with a U.S.
trade or business. FDAP income may or may not be
effectively connected with a U.S. trade or business.
Factors to be considered to determine whether FDAP
income and similar amounts from U.S. sources are
effectively connected with a U.S. trade or business
include whether:

• The income is from assets used in, or held for use in,
the conduct of that trade or business, or
• The activities of that trade or business were a material
factor in the realization of the income.



I don't know all of the circumstances but it appears to me that the W8-BEN is the one to be used, as what you are describing would not come under the definition of Effectively connected Income.



Hope this helps

Lane

Customer: replied 1 year ago.

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?


 


Thanks again,

Expert:  Lane replied 1 year ago.

Then yes, the limited entity makes it more clear that it's ECI.

ON Reg. section 1.894-1(d)(3)(iii), however, I'm not so sure that is does, if the limited is not forced to distribute the income to the individual (as the C-corp is not here).

Note that the passage you pasted says "... paid to an individual ...

But that 1.894-1(d)(3)(iii) says " ... require the interest holder resident in that jurisdiction to separately take into account on a current basis the interest holder’s respective share of the item of income paid to the entity, whether or not distributed to the interest holder"

THAT sounds like a pass through (S-corp, LLC, partnership, sole proprietorship in the US), NOT not a separate taxable entity, like the C-Corp


Here, I believe we need to look at the article that deals with business profits

Be right back
Customer: replied 1 year ago.

Thanks!

Expert:  Lane replied 1 year ago.
YW,

Looking at it now.

Article 5 of the 2007 protocol replaced the 2nd paragraph of Article 7 Business profits.

Putting it together. give me a few.

No need to reply... I'll be back with something in Juuust a few
Expert:  Lane replied 1 year ago.

OK, nothing changed in Article VII, relating to your question.

The applicable paragraph says this:

The business profits of a resident of a Contracting State shall be taxable only in that State unless the resident carries on business in the other Contracting State through a permanent establishment
situated therein. If the resident carries on, or has carried on, business as aforesaid, the business profits of the resident may be taxed in the other State but only so much of them as is attributable to that permanent establishment.

So taxed only in the resident state, Canada.

This would still be EFI, so W8-ECI to claim the tax treaty benefit that there should be NO withholding.

Lane


Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 1 year ago.

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.


 


Thanks!

Expert:  Lane replied 1 year ago.

Thanks Lucia,

I'll watch for the question.

JA changed my screen name to my first name (Lane, I think to make it easier to watch for requests)

So now all you'll need to do is say For Lane Only.

Thanks ,

I'll start looking at that one

Expert:  Lane replied 1 year ago.



So sorry ... I just re-read your post, I though you were going to submit as a DIFFERENT question.





Let me address...

Sorry, you mean to use W8 ECI to claim effectively connected income (W8 Ben is for treaty benefit, right?)

I DID mean W8-ECI (Both are for tax treaty, but the type of income is what determines which of the two forms)






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?

From looking at the regs, it IS required. See this:

From: http://www.irs.gov/instructions/i1120f/ch01.html#d0e173

Treaty or Code exemption. If the corporation does not have any gross income for the tax year because it is claiming a treaty or Code exemption, it must still file Form 1120-F to show that the income was exempted by treaty or Code. In this case the corporation should only complete the identifying information (including items A through M) at the top of page 1 of Form 1120-F and a statement that indicates the nature and amount of the exclusions claimed. In the case of a treaty exemption, the corporation may complete item W at the top of page 2 of Form 1120-F, which includes completing and attaching Form 8833, if required in lieu of attaching a statement. In the case of a Code exemption under section 883, the corporation must attach Schedule S (Form 1120-F) in lieu of attaching a statement.




Again, sorry for the mis-read. I was waiting for a separate question. Hopefully this isn't too late.


Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

Hi: Lane


 


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)?


 


Thanks!

Expert:  Lane replied 11 months ago.

Hi Lucia, be right back after some research ... a VERY QUICK answer is that, as with many of these issues they WILL default to withholding and the client will be required to submit a W8 or use a 1042 with a US return to generate a refund of the withholding.

Lane

Customer: replied 11 months ago.

Ok, pls kindly confirm.


 


Thanks!

Expert:  Lane replied 11 months ago.


Yes, the answer is correct.

The US company will almost always withhold to manage it's own risk as a withholding agent.

The Canadian entity will take action to show tax treaty treatment to either ...

eliminate this withholding (in the case where the Canadian company is treated as a pass-through, like a Sub-S corp)...

or

if a separate entity corporation doing business in US it will use the 1120-F as addressed above:

Treaty or Code exemption. If the corporation does not have any gross income for the tax year because it is claiming a treaty or Code exemption, it must still file Form 1120-F to show that the income was exempted by treaty or Code. In this case the corporation should only complete the identifying information (including items A through M) at the top of page 1 of Form 1120-F and a statement that indicates the nature and amount of the exclusions claimed. In the case of a treaty exemption, the corporation may complete item W at the top of page 2 of Form 1120-F, which includes completing and attaching Form 8833, if required in lieu of attaching a statement. In the case of a Code exemption under section 883, the corporation must attach Schedule S (Form 1120-F) in lieu of attaching a statement.


Lane
Expert:  Lane replied 11 months ago.

Follow-up:

In the case where the Canadian Corp is a pass through and, (as we saw in the tax treaty on the LAST question), is treated as an individual they will use the W-8...

(...forgot to include the process for applying treaty treatment here)

But again if it's a separate entity corp (like a C-Corp) it will use it's 1120-F to generate a refund of these dollars


Hope this helps

Lane

If 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.
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 11 months ago.

Thanks Lucia,

Seeing a trend here eh?

They withhold, taxpayer takes action to limit or eliminate, depending on entity type.

Thanks again
Lane
Customer: replied 11 months ago.

Thanks for your professional opinion!

Expert:  Lane replied 11 months ago.


Thanks, XXXXX XXXXX to pint out that SOMETIME there is a logical sequence to follow (even if it's to eliminate possibilities).

Given THESE types of scenarios, starting with the assumption that the CORP. Can ALWAYS withhold if it believe there's any CHANCE that it needs to, and then looking for the way to eliminate or limit, as per the treaty...

I think is a good way to START the process.
You're welcome and thanks again for the rating and thinking of me

Lane
Customer: replied 11 months ago.

Thank you!! You too!

Customer: replied 11 months ago.

Hi: Lane


 


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?


 


Thanks again!

Expert:  Lane replied 11 months ago.



Yes they will.

See this:

U.S. Activity

(a) Canadian corporation doing business in the U.S.

A Canadian corporation owned by a person who provides personal services in the U.S., and which is paid for the services of the individual is liable to file a U.S. 1120F U.S. Income Tax Return for a Foreign Corporation.

Further:

...In Situation 4, a nonresident alien performs work within the United States as an employee of a foreign person. The Service ruled that wages paid to the nonresident aliens in those two situations are subject to income tax withholding and FICA and FUTA taxes. The Service reasoned that the wages are effectively connected with the conduct of a trade or business in the United States. Furthermore, it said that assuming the section 864(b)(1) exception (for temporary residents) does not apply to Situation 4, the wages are subject to graduated tax rates under section 871(b) and to income tax withholding under section 3402(a)...

Therefore, a Canadian corporation or individual paying salary or wages to an individual must withhold taxes (see "Treaty Issues" below). These wages and withholdings are reported on form 1042S, which must be filed with the IRS together with form 1042 each year, whether or not any withholdings are made.
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

Thank you very much for your quick response!

Customer: replied 11 months ago.

Hi: Lane


 


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?


 


Thanks,

Expert:  Lane replied 11 months ago.

First, a couple of questions:

Form 5472 is not required when various foreign persons own 25% or more of the U.S. Company in the aggregate. Rather, it is only required where any one foreign person owns 25% or more of the U.S. corporation. If two or more foreign persons each own 25% or more of a U.S. corporation, then multiple forms must be filed.

(1) Your client is the only owner? ... and does own 25% or more?

Let me know, still digging in..

Thanks


Customer: replied 11 months ago.

Three members - one company, two individuals, all are foreign persons and over 25% owners.


 


Thanks,

Expert:  Lane replied 11 months ago.
K.

First, I see nothing right off .. HOWEVER,

If your client has a clean compliance record, this may be a candidate for "first time Penalty Abatement."

Effectively, IRS rewards taxpayers with a history of compliant behavior with a one-time penalty amnesty.

They will classify it one of the following ways:

Reasonable cause. This is a facts-and-circumstances test in which the taxpayer demonstrates that he or she exercised ordinary business care and prudence in determining the tax obligation, but nevertheless failed to comply.

Statutory exceptions. The IRS waives or abates penalties because of specific exceptions. For example, Sec. 6654(e) provides exceptions to the estimated tax penalty when the tax is less than $1,000, when there is no tax liability in the preceding year, or when the taxpayer is newly retired or disabled.

Correction of an IRS error. The IRS waives penalties when it makes an error. For example, if the IRS incorrectly posted an extension to file, resulting in a failure-to-file penalty, the IRS would waive the penalty. This category can also include erroneous written or oral advice from the IRS that the taxpayer relied on using ordinary business care and prudence.

Appeals nonassertion or relief due to hazards of litigation.The IRS Office of Appeals can waive penalties to settle a case based on “hazards of litigation,” which is the probability that the IRS determination will not be upheld in court.

Administrative waiver.The IRS may formally interpret or clarify a provision to provide administrative relief from a penalty it would otherwise assess. The IRS may address an administrative waiver in either a policy statement, news release, or other formal communication stating that the policy of the IRS is to provide relief from a penalty under specific conditions. For example, in 2012, the IRS provided relief for the failure-to-pay penalty for taxpayers with financial hardship (see IR-2012-31).


Obviously only number one might apply here.



Requesting FTA

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:

  • For individuals, FTA applies to the failure-to-file and failure-to-pay penalties. Estate and gift tax returns do not qualify for FTA waivers.
  • For businesses and payroll clients, FTA applies to the failure-to-file, failure-to-pay, and/or the failure-to-deposit penalties. S corporation and partnership late-filing penalties also qualify under FTA.

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 )

 

20.1.1.3 (11-25-2011)
Criteria for Relief From Penalties

  1. Generally, relief from penalties falls into four separate categories:

    • Reasonable cause

    • Statutory exceptions

    • Administrative waivers

    • 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.

 

 

 

 

Expert:  Lane replied 11 months ago.


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

From there:

"

FTA overlooked

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 helped

Lane

If 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.

Expert:  Lane replied 11 months ago.


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). "

From: http://www.tax-power.com/form_5472.htm

And finally, nothing new here, BUT reading the last paragraph again implies that reasonable casue first time abatement may be the way to go:

IRS expands automated Form 5471 penalty program to Form 5472

Customer: replied 11 months ago.

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?


 


http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Modified-First-Time-Abate-Policy-Provides-Penalty-Relief-in-Certain-Situations


 


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?


 


Thanks again!

Expert:  Lane replied 11 months ago.


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.aspx

From there:

  • IRS personnel use a decision-support software tool called the Reasonable Cause Assistant (RCA) to help determine whether a taxpayer is eligible for an FTA. However, the RCA has been criticized for yielding a high percentage of incorrect determinations of FTA eligibility that IRS personnel generally do not correct.

 

  • Through persistence, a practitioner can often persuade the IRS to reverse an initial incorrect determination that a taxpayer does not qualify for an FTA.

 

 

IRS Abatement Determinations Often Flawed

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

Customer: replied 11 months ago.

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?


 


Thanks again!


 

Expert:  Lane replied 11 months ago.



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.

Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 11 months ago.

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.


 


Thanks!!!

Expert:  Lane replied 11 months ago.

Thank you so much, Lucia.

You should be commended for working so hard to help your clients.

I appreciate you.

Lane
Customer: replied 11 months ago.

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!

Customer: replied 4 months ago.

Hi: Lane


 


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?


 


Thanks again,

Expert:  Lane replied 4 months ago.
My first thought is that you would use the same abatement, attaching a statement saying :

...that this was really all; part of the same issue, because the LLC did not realize the problem and was still acting under the same assumption. ... that you respectfully XXXXX XXXXX this be added to the same abatement, becuase had you know at the time, you would have "bundled," AND that your are being (have been) compkliant since the time that you were made aware...

You can't really AMEND the request for abatement, but I think that the argument that this is really all the same issue is valid.
Customer: replied 4 months ago.

But for the first time abatement, it only applies for a single year, right?

Expert:  Lane replied 4 months ago.

That's why I said that I would ask that this be retroactively added, as it you WOULD have asked as part of the same package had you known that these were coming.

I can think of no other path, there than asking for them to EFFECTIVELY amend the original request, or said differently, abate for these different years UNDER THE SAME REASONABLE CAUSE.

Maybe you attach the previous on (and it's response) and make the case, again, that this was the same issue.

You need to do SOMETHING to link the granted request TO these additional letters, again, making the case that ... had you known at the time of filing what you know now (what you were made aware of with the FIRST letter) you would have filed (just as in the first year ... AND point out that you have been completely compliant SINCE being made aware.


Put this all in one package with copies from the first year AND the favorable response ... to "connect the dots" for them, with a cover letter.

I can think of no other tack.

Lane


Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Customer: replied 4 months ago.

How about the voluntary disclosure?

Expert:  Lane replied 4 months ago.

Voluntary disclosure only applies if your are volunteering something that they haven't already asked you about.

Here, you would be saying that you would have asked for abatement on ALL if you had know at the time.

make sense?

Lane
Customer: replied 4 months ago.

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.

Expert:  Lane replied 4 months ago.

 


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 appreciated
Lane

Customer: replied 4 months ago.

No problem, thanks for verifying it!

Expert:  Lane replied 4 months ago.
That first sentence was supposed to say[FIRST TIME] abatement applies only to one year.

You can always, as my first response tried to point out, ask for abatement for reasonable cause.

lane
Customer: replied 4 months ago.

Do you think the situation I mentioned above can be a reasonable cause?


Thanks,

Expert:  Lane replied 4 months ago.
.


Yes, especially when you have shown good faith by filing already.

There is NO reason not to ask.

The misunderstanding (and honestly vacillation of IRS on Cross border with Canada issues) may allow for a little more lenience than, say, someone trying to hide money in an offshore account in Switzerland.

Don't want to give false hope, but when you see the volume of issues where Canadians and US Citizens both have misunderstood filing requirements, reasonable cause is a little more realistic.

Lane
Lane, JD, CFP, MBA, CRPS
Category: Tax
Satisfied Customers: 4013
Experience: Juris Doctorate, CFP and MBA, Providing Financial & Tax advice since 1986
Lane and 2 other Tax Specialists are ready to help you
Expert:  Lane replied 4 months ago.
.
Thanks much Lucia.

By the way, we're having poutine this evening :0)


Lane
Customer: replied 4 months ago.

Enjoy!

Expert:  Lane replied 4 months ago.

We will!

New, for us here in the Southern US!

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