The IRS Large Business and International Division (LB&I) has issued guidelines for handling delinquent Forms 1120-F, U.S. Income Tax Return of a Foreign Corporation, and for making filing deadline waivers.
Foreign corporations engaged in a trade or business within the U.S. can claim deductions and credits on income that are effectively connected with income associated with the conduct of a trade or business. Those tax breaks are also conditioned on the foreign corporation filing a true and accurate return, including all the information necessary to calculate the deductions and credits.
The IRS has the authority to waive filing deadlines if the foreign corporation shows that it failed to submit an income tax return although it acted reasonably and in good faith.
The new LB&I guidelines apply in two scenarios:
- A taxpayer not currently being examined informs the LB&I that it failed to file a Form 1120-F on time and that it now seeks to file a delinquent Form 1120-F. In some instances, a taxpayer's representative may approach the LB&I on a no-name basis on behalf of a taxpayer. The taxpayer or representative may seek to submit a delinquent return or discuss the likelihood of a waiver from the filing deadline.
In this scenario, the LB&I should inform the taxpayer (or its representative) that, even though the form is delinquent, it must be filed according to the instructions on Form 1120-F. The LB&I shouldn't accept a delinquent Form 1120-F or accept a request for a waiver from the taxpayer, or discuss it with the taxpayer.
- The LB&I has been assigned the examination of a filed Form 1120-F and determines that the corporation failed to meet the relevant timely filing deadline.
In this scenario, the examination team should inform the taxpayer in writing of the option to request a waiver. However, the team is warned not to advise, instruct or otherwise signal the taxpayer to take any particular action. If the taxpayer does request a waiver, the team should make a recommendation on granting or denying it and again follow the procedures for processing the recommendation. If the taxpayer doesn't request a waiver, the team should continue the examination of the filed return.
If the taxpayer submits a request in response to a proposed disallowance, the team should again determine a recommendation and follow the procedures for processing the recommendation.
Waiver Summary Analysis
The guidelines include a "Waiver Summary Analysis" that sets out factors that should be considered in granting a waiver. They include determining whether the corporation:
- Cooperated in the process of determining its income tax liability for the tax year for which the return wasn't filed,
- Voluntarily identified itself to the IRS as having failed to file a U.S. income tax return before the IRS discovered the failure to file,
- Was aware of its ability to file a protective return before the deadline for doing so,
- Hadn't previously filed a U.S. income tax return,
- Failed to file a U.S. income tax return because, after exercising reasonable diligence, the corporation was unaware of the necessity for filing the return, and
- Failed to file a U.S. income tax return because of intervening events beyond its control.
Examiners also are instructed to consider any other mitigating or exacerbating factors.
The LB&I memo states that its purpose is to ensure that examiners analyze waiver requests in a "fair, consistent and timely manner." The guidelines are effective as of February 1, 2018, and will be added to the Internal Revenue Manual within two years of that date.