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How to Utilize Section 6751 to Successfully Challenge IRS 5472 Penalties

How to Utilize Section 6751 to Successfully Challenge IRS 5472 Penalties

By Anthony Diosdi

Under Internal Revenue Code 6038A requires any domestic corporation (including single member LLCs treated as disregarded entities) that is 25 percent foreign-owned to annually file a Form 5472 and a Form 1120 with the Internal Revenue Service (“IRS”). The penalty for failure to file Form 5472 is $25,000. If such failure continues for more than 90 days after notification by the Internal Revenue Service (“IRS”), there is an additional penalty of $25,000 for each 30-day period or fraction.

The problem is a significant number of individuals that operate U.S. companies which are 25-percent owned do not know they have a Form 5472 of the reporting obligation. Many of these same individuals believed they could correct the noncompliance by late filing a Form 5472 and Form 1120 with the IRS. This often results in the IRS automatically assessing a 5472 penalty. Hapless individuals operating a 25-percent owned U.S. company assessed a 5472 penalty must then seek an abatement of the penalty through the IRS Appeals office. The most commonly cited defense to the 5472 penalty is the reasonable cause defense. Unfortunately, to date, the IRS has not been generous in abatement 5472 penalties under a reasonable cause defense. As a result, companies assessed a 5472 penalty should not only rely on a reasonable cause defense. They should also consider a defense to the 5472 penalty provided under Internal Revenue Code Section 6751. This article discusses defenses under Section 6751 available to individuals assessed a 5472 penalty by the IRS.


Internal Revenue Code Section 6751(b)(1) requires personal, written supervisory approval of the initial determination “of [a penalty] assessment.” That section applies to all Title 26 penalties, except for penalties under Sections 6651 (penalties for the failure to file a tax return or to pay a tax), 6654 (penalty for the failure by an individual to pay estimated income tax), and 6655 (penalty for the failure by a corporation to pay an estimated tax).

Section 6751(b) requires the IRS to follow two procedural requirements when imposing a 5472 penalty. First, a company assessed the penalty must receive notice of the penalty, the section of the Internal Revenue Code that imposes the penalty, and how the penalty is computed. Second, the “initial determination” to assess a 5472 penalty must be approved “in writing” by an “immediate supervisor” or an “approved higher official.”

One would think that the assessment of a 5472 penalty would involve a multilayer of review by IRS agents in an audit. This is not the case, 5472 penalties are now almost always assessed systemically or semi-systemically. Essentially, this means that 5472 penalties are typically automatically assessed by computer. Whether or not automatically imposed penalties assessed by the IRS can be approved “in writing” by an “immediate supervisor” or an “approved higher official” is debatable. But if the IRS is going to the position that automatically assessed penalties can be approved “in writing” by an “immediate supervisor” or an “approved higher official,” it better be able to legally substantiate the process. If the IRS cannot substantiate it followed the rules promulgated in Section 6751(b), the IRS must concede the 5472 penalty.

Obtaining Information From the IRS to Prove Section 6751 Was Not Followed

As discussed above, if there is no evidence sufficient to demonstrate that the IRS complied with Internal Revenue Code Section 6751(b), the IRS must concede the 5472 penalty. We will now discuss how a company may potentially establish that the IRS did not comply with Section 6751. We will begin with how to obtain records from the IRS.

In the late 1960s and throughout the 1970s, Congress passed a number of acts aimed at increasing the openness with which the agencies such as the IRS carried out their regulatory responsibilities. The most important of these was the Freedom of Information Act (“FOIA”). It established a liberal disclosure policy regarding access to information obtained, generated and held by the government. “Any person” is entitled to request and receive identifiable records held by an agency, unless the records in question fall within one of the Act’s nine exemptions. Disclosure is the norm. A requester’s motives or her relation to the information she seeks to acquire are irrelevant. An agency’s refusal to disclose requested information is subject to de novo judicial review and the government has the burden of proving that the information it seeks to withhold is, in fact, exempt from disclosure.” See 5 U.S.C.A. Section 552(a)(4)(B). The United States Supreme Court has stated that FOIA “does not obligate agencies to create or retain documents; it only obligates them to provide access to those materials in question that have been “created and retained.” See Kissinger v. Reports Committee for Freedom of Press, 445 U.S. 136, 152, 100 S.Ct. 960, 969, 63 L.Ed.2d 267 (1980).

A company assessed a 5472 penalty penalty should file a FOIA with the IRS as early as possible. A FOIA request should be for the individual’s IRS administrative file for the year the penalty was assessed. The FOIA should ask for all notices, letters, memorandum, contract history, audit reports, correspondence, IRS forms with respect to the IRS determination regarding the 5472 penalty. If such documentation exists, the IRS is required to provide this information in a time period prescribed by law. It typically takes the IRS 90 to 120 days to respond to a FOIA request. Generally, under current IRS procedures, the administrative file should contain a penalty approval form. The particular form will depend on the IRS Operating Division asserting the penalty. Although not an exclusive list, the approval forms include: Form 300 (Civil Penalty Approval Form (Lead Sheet)) or Form 8278 (Assessment and Abatement of Miscellaneous Civil Penalties).  A careful analysis should be made of all the documentation provided by the IRS to determine if the IRS complied with Internal Revenue Code Section 6751. Existing procedures for documenting supervisory approval can be found in the Internal Revenue Manual (“IRM”) at: and If evidence cannot be located in the FOIA response to establish that the IRS complied with Internal Revenue Code Section 6751, the IRS may have violated Section 6751.

Contesting the 3520 Penalty Utilizing Section 6751 Defense

Once the IRS assesses a 5472 penalty, the IRS will issue Notice CP 15 or CP 215. These notices advise the company of the 5472 penalty assessed against it. These notices provide the individual assessed the 5472 penalty 30 days to appeal the penalty assessment (Sometimes it may be possible to negotiate a later response with the IRS). If an individual assessed a 5472 penalty receives a response to a FOIA request in time to respond to a Notice CP 15 or CP 215 and the administrative record indicates that the IRS violated Section 6751, a well drafted and detailed letter should be drafted to the IRS (with attached exhibits) requesting the IRS to concede the 5472 penalty based on the fact that the IRS violated Section 6751(b).

If the IRS does not receive a response to the aforementioned notices or the IRS refuses to remove the 5472 penalty, the IRS will eventually issue a letter entitled “Final Notice of Intent to Levy and Notice of Your Right to a Hearing” or “Notice of Federal Tax Lien Filing and Your Right to a Hearing.” These notices provide the company a final opportunity to contest the 5472 penalty through an administrative hearing known as a “Collection Due Process Hearing.” These correspondences not only provide the company with the last opportunity to contest the 5472 penalty (without having to satisfy the penalty in full) through a Collection Due Process Hearing, timely requesting a Collection Due Process Hearing is a prerequisite to judicial review of a 5472 penalty by the United States Tax Court.

The request for a Collection Due Process Hearing must be made within 30 days of the date of the “Final Notice of Your Right to a Hearing” or “Notice of Federal Tax Lien Filing and Your Right to a Hearing.”  A company can request a Collection Due Process Hearing on an IRS Form 12153 entitled Request for a Collection Due Process or Equivalent Hearing. The Form 12153 must be completed in its entirety.

After the Form 12153 is filed with the IRS, an Appeal Officer will be assigned to the case. Compliance with Section 6751(b) must be evaluated in a Collection Due Process Hearing cases. Compliance with Section 6751(b) must be verified by Appeals as part of its general responsibility to ensure compliance with required administrative administrative procedures under Internal Revenue Code Section 6330(c)(1). See Blackburn v. Commissioner, 150 T.C. No. 9 (2018). If Appeals cannot properly or refuses to verify written supervisory approval, the company assessed the 5472 penalty should consider petitioning the United States Tax Court and request judicial review of the 5472 penalty. This must be done no later than 30 days from the date Appeals issues a Notice of Determination. The petitioning of the Tax Court will result in a docketed Tax Court case.

In a docketed Tax Court Case, the documentary evidence provided through the FOIA must be properly utilized to establish IRS noncompliance with Section 6751(b). This evidence should be submitted to the court through a judicial procedure known as a summary judgment or at trial. In certain cases, the IRS administrative record may be supplemented to include evidence that the actions taken by the IRS are not adequately explained in the record or the IRS failed to consider relevant factors in assessing the 5472 penalty. See Kreit Mechanical Associates, Inc. v. Commissioner, 1347 T.C. 123, 131 (2011).


In many cases, the IRS summary assessment procedure for the 5472 exceeds its statutory authority. If you have been assessed a 5472 penalty, you need a tax attorney that has extensive experience in representing clients before the IRS Appeals Division and the United States Tax Court. We have consulted and represented a significant number of clients that were assessed 5472 penalties.

Anthony Diosdi is one of several tax attorneys and international tax attorneys at Diosdi Ching & Liu, LLP. Anthony focuses his practice on domestic and international tax planning for multinational companies, closely held businesses, and individuals. Anthony has written numerous articles on international tax planning and frequently provides continuing educational programs to other tax professionals.

He has assisted companies with a number of international tax issues, including Subpart F, GILTI, and FDII planning, foreign tax credit planning, and tax-efficient cash repatriation strategies. Anthony also regularly advises foreign individuals on tax efficient mechanisms for doing business in the United States, investing in U.S. real estate, and pre-immigration planning. Anthony is a member of the California and Florida bars. He can be reached at 415-318-3990 or adiosdi@sftaxcounsel.com.

This article is not legal or tax advice. If you are in need of legal or tax advice, you should immediately consult a licensed attorney.