The IRS Large Business and International Division (LB&I) recently issued a memorandum (LB&I-04-0218-0007
) providing guidance on handling delinquent Forms 1120-F, U.S. Income Tax Return of a Foreign Corporation
, and waiver requests pursuant to Treas. Reg. 1.882-4(a)(3)(ii). The memorandum, effective Feb. 1, 2018, is intended to ensure that examiners are analyzing waiver requests in a fair, consistent and timely manner under the regulations.
Typically, foreign corporations engaged in a U.S. trade or business are required to file Form 1120-F by the earlier of the date of notification by the IRS that a return is due or 18 months after the due date as set forth in Section 6072. If a taxpayer is delinquent with this filing, it generally may not be able to utilize any deductions or credits under Section 882(c)(2) and will be taxed based on its gross income. Taxpayers are permitted to file a waiver request under Treas. Reg. 1.882-4(a)(3)(ii) that may allow the foreign corporation to claim deductions and credits if the IRS determines that the taxpayer acted reasonably and in good faith in failing to timely file a return.
The LB&I memorandum provides guidelines that apply to the following two scenarios: First, when a taxpayer not currently under examination approaches LB&I about a delinquent Form 1120-F; and second, when LB&I determines that a Form 1120-F is delinquent as part of an examination of a taxpayer.
In general, the memorandum states that a taxpayer that is not currently under examination should file a delinquent Form 1120-F in accordance with the filing instructions for such form. A taxpayer that is currently under examination and for which LB&I has determined a required Form 1120-F is delinquent should be notified of the option to request a waiver if one has not already submitted. If the taxpayer has submitted the waiver request, an LB&I exam team should develop its analysis and reach a recommendation to either grant or deny the taxpayer’s request based on the guidelines set forth in the memorandum.
The memorandum contains several attachments, including a Form 1120-F Waiver Summary Analysis and Form 1120-F Waiver Procedure Guidelines. The Form 1120-F Waiver Summary Analysis provides a standardized list of questions that are to be used by the examiner to analyze if a waiver may be granted. The following are the factors considered in the Form 1120-F Waiver Summary Analysis:
- Whether the corporation cooperated in the process of determining its income tax liability for the taxable year for which the return was not filed
- Whether the corporation voluntarily identifies itself to the Internal Revenue Service as having failed to file a U.S. income tax return before the Internal Revenue Service discovers the failure to file
- Whether the corporation did not become aware of its ability to file a protective return by the deadline for filing a protective return
- Whether the corporation had not previously filed a U.S. income tax return
- Whether the corporation failed to file a U.S. income tax return because, after exercising reasonable diligence (taking into account its relevant experience and level of sophistication), the corporation was unaware of the necessity for filing the return
- Whether the corporation failed to file a U.S. income tax return because of intervening events beyond its control
- Whether other mitigating or exacerbating factors existed
Form 1120-F Waiver Procedure Guidelines provide examiners with general instructions on steps to be taken under the two scenarios discussed above and details the process for determining the recommendation on a taxpayer’s request for waiver under Treas. Reg. 1.882-4(a)(3)(ii).
The IRS is scrutinizing Form 1120-F non-filers in its audit ‘campaigns’ announced in 2017. Taxpayers with delinquent Forms 1120-F not filed within the required period described above should consider remedial measures. These measures include submission of a waiver request under Treas. Reg. 1.882-4(a)(3)(ii) using the procedures outlined in the memorandum.
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