How Use a Section 6751(b)(1) Defense in an International Penalty Case


Chapter 61 of the Internal Revenue Code contains countless reporting requirements regarding foreign information filing obligations. Many of the sections under Chapter 61 impose significant penalties for the failure to comply with the reporting requirements.
Common Reporting Requirements and Penalties
The Internal Revenue Code requires certain persons to provide the IRS with information regarding foreign corporations. This information is typically provided on Form 5471, which is used to satisfy the reporting requirements of Sections 6038 and 6046. Failure to file Form 5471 correctly can result in penalties, including:
- $10,000 penalty for failure to file.
- An additional $10,000 penalty for each 30-day period of noncompliance (up to $60,000 per return, per year).
Similarly, Form 5472 is required for 25% foreign-owned U.S. corporations and comes with its own penalties:
- $25,000 penalty for failure to file.
- $25,000 additional penalty for each 30-day period after 90 days of noncompliance.
Section 6751(b)(1) as a Defense
Section 6751(b)(1) requires written supervisory approval for initial determinations of penalties. This section may serve as a defense against international penalties by requiring:
- Proper notice of the penalty and how it was computed.
- Written approval by an immediate supervisor or higher official.
Different Court Interpretations
The courts have differing opinions on the timing of penalty authorization:
The Eleventh Circuit
In Kroner v. Commissioner, the court ruled that supervisory approval must occur before final assessment but not necessarily before initial determination.
The Second Circuit
This court ruled that penalty approval must happen before a notice of deficiency is issued, making it difficult to apply in international penalty cases.
The Fifth Circuit
Similar to the Second Circuit, the Fifth Circuit emphasized the importance of approval before issuing final partnership adjustments.
How to Use FOIA to Challenge International Penalties
To determine if Section 6751(b)(1) applies to your case, a Freedom of Information Act (FOIA) request should be filed to obtain the IRS administrative record, including:
- Notices and letters regarding penalty assessment.
- Audit reports and internal correspondence.
- Forms such as Form 300 (Civil Penalty Approval Form) or Form 8278.
Analysis of these documents can reveal whether the IRS followed proper penalty approval procedures.
Conclusion
Section 6751(b)(1) may be a viable defense in international penalty cases, but the effectiveness depends on obtaining the IRS administrative record. Consulting a legal professional for case-specific advice is recommended.
Author: Anthony Diosdi
Tax Attorney at Diosdi & Liu, LLP
Contact: adiosdi@sftaxcounsel.com