IRS Allows Appeals of International Penalties Prior to Payment: IRS Revises Internal Revenue Manual to Provide Pre-Payment Appeal Rights for Certain International Penalties

Sullivan & Cromwell LLP - September 13, 2010

In a significant change in administrative procedure, the Internal Revenue Service (the “IRS”) has amended the Internal Revenue Manual (the “IRM”) to permit taxpayers to administratively protest certain international penalties assessed on taxpayers for, among other things, failing to file certain U.S. federal tax returns or failing to provide information required on these returns. Previously, the imposition of these penalties could be challenged only after the penalties were paid.

On August 27, 2010, the IRS amended the IRM to permit taxpayers to challenge, prior to payment, the assertion of certain penalties imposed on taxpayers with international operations. The change applies to so-called “international” penalties, or penalties that relate to various return-filing requirements with respect to corporations, partnerships, persons, and foreign financial assets. These penalties apply to, among other things, certain U.S. persons’ obligations to file information returns with respect to foreign corporations, foreign trusts, and foreign partnerships, and include penalties assessed for failure to file IRS Forms 926, 3520, 5471, 5472, 8854, and 8865.