Obtaining Relief From Form 1120-F Deficiency Penalties: Filing Protective Returns and Seeking Reasonable Cause Waiver

Among the stricter penalty regimes of the U.S. tax code is the consequence for failure of a foreign corporation to file a Form 1120-F Income Tax Return of a Foreign Corporation. The federal tax code requires foreign entities with an effective presence in the U.S. to file this return and report income and loss “effectively connected” with the U.S.

A foreign corporation subject to Form 1120-F filing obligations that fails to file the return within 18 months of its original due date risks having all its eligible deductions disallowed. This results in the corporation paying tax on its gross income and also usually leads to substantial underpayment penalties—tax cost for noncompliance is very high.

Foreign corporations that are uncertain as to U.S. filing obligations may file a protective return Form 1120-F to avoid losing deductions after the 18-month window. Protective returns generally include claiming a treaty-based position, which is reported on Form 8833. In addition to protective returns, Treas. Reg. 1.882-4(a)(3)(ii) provides a process for foreign corporations to seek relief from penalties for delinquent filings by making a reasonable cause request.

The regulations spell out the specific criteria under which the Service may consider a request for relief. Tax advisers need to be well acquainted with the Form 1120-F rules to avoid costly tax consequences.

Listen as our experienced panel provides a practical guide to navigating the process of obtaining relief from Form 1120-F noncompliance.

1. Filing Protective Form 1120-F
   1. Circumstances indicating a Protective Return
   2. Claiming treaty-based return position on Form 8833 with a Protective Return
   3. Permanent Establishment tests under which the IRS may assert filing requirements
2. Penalties and Consequences of failure to file a required Form 1120-F
   1. 18-month deduction disallowance window
   2. Substantial understatement penalties
   3. Information issues involving Foreign partnerships and completing Schedule P
3. Claiming relief under Treas. Reg. 1.882-4(a)(3)(ii)
4. Standards for IRS review in determining whether relief will be granted under 1.882-4

The panel will discuss these and other important topics:

• Identifying the consequences of failing to file a Form 1120-F for companies that have tax liabilities or filing obligations
• Determining whether to file a Form 1120-F protective return
• Claiming treaty benefits on a Form 1120-F after filing a protective return
• Seeking relief under Treas. Reg. 1.882-4(a)(3)(ii)
• Standards applied by the IRS in determining whether to grant relief from late filing of Form 1120-F

Learning Objectives

After completing this course, you will be able to:

• Decide when it would be beneficial to file a Form 1120-F protective return
• Determine treaty-based positions that must be reported on Form 8833
• Identify the criteria under Treas. Reg. 1.882-4(a)(3)(ii) for filing a reasonable cause request for waiver of Form 1120-F penalties and deduction disallowance
• Recognize consequences of failing to timely file a Form 1120-F

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience at mid-level within the organization, preparing complex tax forms and schedules, supervising other preparers/accountants. Specific knowledge and understanding of income sourcing and effectively-connected income rules pertaining to foreign entities engaged in trade or business in the U.S.; familiarity with foreign tax information and income tax returns.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).