Choice Of Forum Matters: Tax Court And District Court Reach Different Conclusions On Same Facts Regarding Penalties
Taxpayers in a dispute with the IRS have a choice of forum in which to litigate. The Tax Court provides a pre-payment judicial review while taxpayers who pay in advance can sue for refund in Federal District Court. The choice of forum can have a material impact on the outcome of the litigation as is demonstrated by the Federal District Court decision in McNeill1 (“McNeill 1”) and the Tax Court decision in McNeill2 (“McNeill 2”).
Taxpayers who have underpaid their taxes can avoid accuracy-related penalties under Code Sec. 6662 by demonstrating that they acted with reasonable cause and in good faith. In general, the most important factor in determining whether a taxpayer acted with reasonable cause and good faith is the taxpayer’s effort to assess the proper tax liability.
The Internal Revenue Code (IRC) requires the filing of a number of different information returns with respect to foreign entities or transactions. These “international information returns” include Form 5471 (for US persons who own shares in certain foreign corporations), Form 5472 (for U.S. corporations that are 25% owned by foreign persons), Form 8865 (for U.S. persons who are partners in certain foreign partnerships), Form 3520 (for transactions with foreign trusts and for the receipt of certain foreign gifts) and Form 8938 (for foreign assets generally). For each, there is a significant penalty for failing to timely and correctly file the form. But the penalty does not apply if the failure was due to reasonable cause (sometimes with the additional condition that the failure was not due to willful disregard). But what is “reasonable cause?”
By Henry Stow Lovejoy
April 2016 Edition
The “trust fund recovery penalty” can impose sizeable liabilities on officers and other employees of financially struggling or failed companies that fail to pay withholding or employment taxes. Individuals facing this penalty will often claim that they had no choice, that there were no funds not already spoken for or controlled by others. To their chagrin, these employees learn that the trust fund recovery penalty imposes a strict obligation on any person with knowledge of unpaid employment taxes, with only a narrow exception for encumbered funds.