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6038A guidance issued.

The IRS has guidance on procedures it will follow before imposing the noncompliance penalty under Internal Revenue Code section 6038A and said the penalty will be used sparingly.

The tax code requires a foreign related party to authorize a "reporting corporation" (generally a U.S. corporation 25% owned by a foreign shareholder or a foreign corporation with a U.S. branch) to act as its agent to accept an IRS summons for information on transactions covered by section 6038A. A reporting corporation also must produce, in response to a summons, records and testimony concerning transactions between it and certain foreign related parties. Failing to comply with either requirement can result in the noncompliance penalty.

In addition to other penalties, the IRS can deny, in whole or in part, a reporting corporation's expenses and acquisition costs arising out of transactions with certain foreign related parties.

However, in a recent amendment to the Internal Revenue Manual (IRM), the IRS said it intends the noncompliance penalty to be used sparingly. The IRM now says the penalty generally will not be applied for failure to sesignate an agent if the foreign related party promptly and fully complies with all section 6038A information requests.

The IRM also says the IRS must issue form 4564, an information document request, before a summons is issued. If the reporting corporation does not respond, a summons ordinarily will not be issued if the IRS can obtain the information under a tax treaty or information exchange agreement within a reasonable time. Only if the IRS still cannot obtain the information will a summons be issued, but even then the noncompliance penalty will not be imposed if the reporting corporation substantially complies in a timely manner. In addition, a proposed noncompliance penalty will not be assessed unless approved by the IRS Office of Associate Chief Counsel (International).

Observation: Since the noncompliance penalty could be very harsh, the IRS's reasonable interpretation provides welcome relief to taxpayers.

Edited by Anrew R. Biebl, CPA, Biebl, Ranweiler & Co., New Ulm, Minnesota (small business); Robert Willens, CPA, senior vice-president at Lehman Brothers, New York City (corporate); Marianne Burge, CPA, director of international tax services, Kenneth Kral, CPA, international tax partner and Marylouise Dionne, Esq., international tax manager at Price Waterhouse, New York City (international).
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Author:Biebl, Andrew R.
Publication:Journal of Accountancy
Date:Feb 1, 1992
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