The IRS may assess multiple types of tax penalties against a taxpayer. While the most common penalties involve the failure to file a tax return or pay taxes that are owed, taxpayers may also face penalties for failing to report certain types of transactions. To prevent potential penalties, a taxpayer will need to understand their reporting requirements, and those who are facing penalties may want to engage an attorney to determine options for relief.

Transaction Reporting Requirements

Certain types of transactions must be reported to the IRS by filing Form 8886. Taxpayers involved in such transactions, including individuals, corporations, partnerships, trusts, or estates, must file this form for each reportable transaction. Reportable transactions include the following:

• Listed transactions and transactions of interest - The IRS maintains a list of types of transactions that must be reported because they are commonly used for tax avoidance. These include basket option contracts, distressed asset trust (DAT) transactions, and syndicated conservation easement transactions. Other reportable transactions are considered transactions of interest because they have the potential to be used for tax avoidance.

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While nearly everyone in the United States is required to pay taxes, many taxpayers struggle to do so. The U.S. Tax Code is complicated, and it can be easy for a person or business to make mistakes. A taxpayer may also encounter financial difficulties that affect their ability to make payments to the IRS. Because of these issues, there are a variety of reasons why a taxpayer may be subject to penalties, which can make their tax burden even more difficult. Fortunately, the IRS provides different forms of penalty abatement in certain situations. By working with an attorney who is experienced in addressing tax penalties, taxpayers can request abatement and find ways to resolve their tax issues as quickly and affordably as possible.

Abatement for IRS Tax Penalties

The IRS most commonly imposes failure-to-file (FTF) penalties for those who do not file a tax return or extension by the due date or failure-to-pay (FTP) penalties for those who do not pay the taxes owed in full when they are due. Taxpayers may qualify for relief from these penalties in certain circumstances, and they will usually need to show that they failed to meet the IRS’s requirements based on factors that were out of their control. The type of penalty abatement that may be available include:

• First-time penalty abatement - While the name of this form of relief may seem to indicate that it is only available to a taxpayer once, it is actually available any time a taxpayer did not have any penalties in the previous 3 years before the tax year in which they were subject to a penalty. To qualify, a taxpayer will need to file all returns that are currently required or file an extension, and they must pay or make arrangements to pay all taxes that are currently due. If penalties are reduced or eliminated, interest that was charged on these penalties will also be removed or reduced.

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Taxpayers have a number of options for responding to attempts by the IRS to collect taxes. If the IRS conducts a tax audit and determines that there is a tax deficiency, it may perform a tax assessment and take action to collect the amount owed. A taxpayer can appeal the IRS’s determinations by filing a petition in U.S. Tax Court, and after a petition has been filed, the IRS is prohibited from taking action to perform a tax assessment or collect taxes while the matter wends its way through the Tax Court process. However the U.S. Tax Court is currently experiencing delays, and this may result in complications and difficulties for some taxpayers.

Responding to Tax Court Delays and Premature Tax Assessments

Typically, the U.S. Tax Court receives 23,000 to 26,000 petitions from taxpayers each year. As of July 23, 2021, the Tax Court court has already received more than 24,000 petitions this year, and this has affected its ability to process cases. Because of the large number of petitions, there may be a delay between when a person files a petition with the Tax Court and when the Tax Court serves notice of a petition to the IRS.

A taxpayer has a 90-day window to file a Tax Court petition after receiving a Notice of Deficiency from the IRS. Normally, the IRS will not perform a tax assessment or begin the process of collecting taxes for 15 days after the end of this 90-day period. This allows time for the Tax Court to process a petition and serve notice to the IRS. However, due to the current backlog of petitions, the Tax Court has been taking around 75 days to process petitions. This means that unless a person filed a petition near the beginning of the 90-day window, the IRS is likely to perform a premature tax assessment.

The requirements that taxpayers must follow when reporting their income to the IRS can be complicated. This is especially true for those who have foreign investments, including individual taxpayers, corporations, and partnerships. Recently, the IRS issued a notice that taxpayers with an interest in controlled foreign partnerships will need to file some new forms starting in 2022. By understanding these requirements, taxpayers can ensure that they are providing the correct information and taking steps to avoid potential tax penalties.

Schedule K-2 and K-3

U.S. taxpayers who have an interest of 10 percent or greater in a partnership that was formed in a foreign country are required to provide information about the partnership to the IRS, including details about a partner’s ownership interest and their allocations of income and tax deductions and credits. Starting in the 2021 tax year, the IRS will be requiring partnerships, S corporations, and individual partners to report information of international tax relevance on two new schedules, K-2 and K-3. These schedules will be included in the following forms:

• Form 1065 - U.S. Return of Partnership Income

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When a couple chooses to end their marriage, they will need to address a wide variety of financial matters, and they will need to make decisions about how to handle multiple types of divorce-related tax issues. However, there are many situations where couples separate before getting divorced, either as a trial to determine whether to move forward with ending their marriage or in preparation for their final split once the divorce process is complete. 

When a couple is living separately while they are still legally married, they will need to address certain types of unique tax issues. The decisions they make during this time may be based on how they expect to handle matters during their divorce, or they may need to take temporary measures to ensure that both parties’ financial needs are addressed properly. It is important for spouses to understand their rights and options when addressing these matters, since decisions that may be beneficial for one spouse may lead to financial difficulties for the other.

Tax-Related Matters to Address During a Separation

Couples who file tax returns while separated will need to determine whether they will file jointly or separately. While filing a joint tax return may provide some benefits, such as a lower tax rate and the ability to claim certain credits, spouses should be aware that they will both be liable for any taxes that are owed, as well as any tax debts or penalties uncovered during a subsequent IRS audit.