Recent Case Underscores Importance of Delinquent International Information Return Submission Procedures

On February 12, 2018, the IRS assessed $160,000 in penalties against Vivian Ruesch under Internal Revenue Code Section 6038(b) for failure to file Forms 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations, for the years 2005-2010.  On April 16, 2018, the IRS issued to Ms. Ruesch a Notice CP504, Notice of Intent to Seize (Levy) Your Property or Rights to Property.  In response to that notice, Ms. Ruesch submitted, on May 15, 2018, an appeal under the IRS Collection Appeals Program (“CAP”).  Because of a computer coding error, the IRS misclassified Ms. Ruesch’s CAP appeal as a request for a Collection Due Process (“CDP”) hearing. 

In September, 2018, the IRS filed a Notice of Federal Tax Lien (“NFTL”) against Ms. Ruesch in the local public records office, impairing her ability to sell or mortgage interests in real property.  The IRS sent Ms. Ruesch a copy of the NFTL and a Notice of Federal Tax Lien Filing and Your Right to a Hearing.

In December, 2018, the IRS sent Ms. Ruesch a Notice CP508C, Notice of Certification of Your Seriously Delinquent Federal Tax Debt to the State Department.  This notice advised Ms. Ruesch that the Commissioner of Internal Revenue had certified to the Secretary of the Treasury, under IRC § 7345(a), that Ms. Ruesch was a person owing “seriously delinquent tax debt,” namely, her liability for Internal Revenue Code Section 6038 penalties, plus interest thereon.  IRC § 7345(a) provides, “If the Secretary [of the Treasury] receives certification by the Commissioner of Internal Revenue that an individual has a seriously delinquent tax debt, the Secretary shall transmit such certification to the Secretary of State for action with respect to denial, revocation, or limitation of a passport pursuant to section 32010 of the FAST Act.” 

On April 8, 2019, Ms. Ruesch petitioned the U.S. Tax Court challenging the correctness of the Commissioner’s certification to the Secretary of State concerning her, and her liability for the underlying penalties.  The petition sought three forms of relief: (1) redetermination of the penalties assessed against Ms. Ruesch; (2) a determination that the Commissioner of Internal Revenue erred in certifying her as a person having a seriously delinquent tax debt; and (3) a determination that the Commissioner erred in failing to reverse his certification.

IRC § 7345(b)(2)(B)(i) defines “seriously delinquent tax debt” to exclude debt with respect to which a CDP hearing has been requested or is pending.  The idea is that if the taxpayer is addressing the tax debt, by means of a CDP hearing, an installment agreement request, or an offer in compromise, the debt ought not be a basis for action against the taxpayer’s passport.

On May 13, 2019, relying on its erroneous coding of the taxpayer’s CAP appeal as a CDP hearing request, the IRS reversed its certification of the taxpayer’s tax debt as “seriously delinquent.”  Several days later, the IRS discovered its coding error and, on May 20, 2019, again certified Ms. Ruesch to the State Department as a person owing a seriously delinquent tax debt, and issued a new notice of such certification to Ms. Ruesch.

On June 25, 2020, the Tax Court granted two motions filed by the Commissioner of Internal Revenue to dismiss Ms. Ruesch’s petition. Vivian Ruesch, 154 T.C. No. 13. The first motion to dismiss, filed on May 24, 2019, urged the Tax Court to dismiss Ms. Ruesch’s Tax Court case for lack of jurisdiction insofar as it sought redetermination of her underlying liability for the penalties.  In considering the motion, the Tax Court noted that IRC § 7345(e)(1) circumscribes quite narrowly the Court’s jurisdiction in passport cases.  Reviewing IRC § 7345 and its legislative history, the Tax Court noted that the only determination it was authorized to make in such cases is whether the Commissioner’s certification of the taxpayer as a person having seriously delinquent tax debt (or his failure to reverse a certification) “was erroneous.” IRC § 7345(e)(1).  The Court added that the only relief it was authorized to grant in such cases was to grant an order for the Secretary of the Treasury “to notify the Secretary of State that such certification was erroneous.”  IRC § 7345(e)(2).

The second motion to dismiss, filed on September 26, 2019, urged the Tax Court to dismiss the petition on the ground of mootness.  The Commissioner noted Ms. Ruesch’s allegation in her Tax Court petition that she had requested a CDP hearing with respect to the recorded NFTL.  The IRS investigated, and determined that it had received such a request.  The Commissioner represented to the Tax Court that Ms. Ruesch had been offered the CDP hearing she requested, and that her liability for the § 6038 penalties was pending before a settlement officer in the IRS Appeals Office.  Ms. Ruesch is indeed fortunate that the IRS Appeals Office is hearing her contest of the IRC § 6038 penalties assessed against her.

The Tax Court concluded that neither § 7345 nor any other provision of the Internal Revenue Code grants it jurisdiction, at this time and in this case, to consider Ms. Ruesch’s contention that the penalties were “illegally assessed.”  The Court noted that Ms. Ruesch may have a prepayment forum in the Tax Court for contesting the IRC § 6038 penalties assessed against her, upon receipt of a notice of determination after completion of her CDP proceeding.  “Otherwise, her remedy is to pay the liability, file a claim for refund, and file a refund suit in Federal District Court or the U.S. Court of Federal Claims.” 

Ms. Ruesch could have avoided the IRC § 6038 penalties, and the ensuing litigation, had she made a timely submission to the IRS under its International Information Return Submission Procedures.   Under the DIIRSP, taxpayers who do not need to use the IRS’ Voluntary Disclosure Practice or its Streamlined Filing Compliance Procedures to file delinquent or amended tax returns to report and pay additional tax, but who–

  1. have not filed one or more required international information returns,
  2. have reasonable cause for not timely filing the information returns,
  3. are not under a civil examination or a criminal investigation by the IRS, and
  4. have not already been contacted by the IRS about the delinquent information returns,

should file the delinquent information returns with a statement of all facts establishing reasonable cause for the failure to file.  If the IRS accepts the submission, and I have never had the IRS not accept a DIIRSP submission, the taxpayer will be compliant in filing delinquent international information returns, and will not be assessed any penalties for past noncompliance.

International information returns include—

Form 8938 – Statement of Specified Foreign Financial Assets

Form 3520 – Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

Form 3520-A – Annual Information Return of Foreign Trust With a U.S. Owner

Form 5471 – Information Return of U.S. Persons With Respect To Certain Foreign       Corporations

Form 8865 – Return of U.S. Persons With Respect to Certain Foreign Partnerships

Form 5472 – Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business

Form 926 – Return by a U.S. Transferor of Property to a Foreign Corporation

But the DIIRSP are available to a taxpayer only so long as the taxpayer is not under civil examination or criminal investigation, and has not been contacted by the IRS concerning delinquent international information returns.  Therefore, a taxpayer qualifying for the DIIRSP should have his, her, or its delinquent international information returns prepared, and file them under the DIIRSP, as soon as possible.  The Explanation of Changes to the taxpayer’s amended U.S. income tax return should explain the taxpayer’s reasonable cause for failing to timely file the information returns, and that the taxpayer is proceeding under the Delinquent International Information Return Submission Procedures. 

Other articles of interest:

New Law Imperils Tax Debtors’ Inte4rnational Travel

Forms 3520 and 3520-A: What You Need to Know

Stephen J. Dunn

Tax and Estate Planning Attorney and Author