On June 14, 2016, the Internal Revenue Service (IRS) published an International Practice Unit (IPU) on the monetary penalty for failing to file Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation (available here). Under IRC section 6038B(a)(1)(A), a US person who transfers property to a foreign corporation in an exchange described in IRC sections 332, 351, 354, 355 or 361 is required to file Form 926 and accompanying information with the IRS. The Form 926 and accompanying information must be filed with the US person’s income tax return for the taxable year that includes the date of the transfer.
Failure to comply with the reporting requirements (e.g., failure to timely file a Form 926 or providing false or inaccurate information) can result in a penalty equal to 10 percent of the fair market value of the transferred property for which there was a failure to comply, up to $100,000. However, the penalty is not limited if the failure to furnish was due to intentional disregard. The penalty may be waived if the US person demonstrates that the failure to comply was due to reasonable cause and not to willful neglect. If there is a failure to comply, the statute of limitations on assessment of tax for the year of noncompliance potentially remains open until three years after the date on which the required information is provided.
The IPU contains detailed instructions to IRS revenue agents for purposes of examining this issue and determining whether to assert a penalty. In our experience, the IRS in recent years has been more aggressive in asserting penalties for failure to comply with information reporting requirements and has imposed a heavy burden on taxpayers to demonstrate that the reasonable cause exception applies. This IPU states that additional IPUs on information reporting penalties in other situations (e.g., failure to file Form 5471, issues associated with offshore bank accounts and check-the-box rules for foreign entities) will be forthcoming. Given the increased focus on penalties in this area and statute of limitations issues, taxpayers subject to these information reporting requirements should ensure that they are complying with the IRS rules in this area.