Section 6700 Penalties – False Or Fraudulent Statements

Promoting abusive tax shelters. Taxpayers and tax return preparers should be aware of the various penalties that exist and can be assessed for certain actions (or nonactions). One such action includes promoting an abusive tax shelter. In a previous blog, Freeman Law provided an expansive overview of tax shelter penalties: Tax Shelter Penalties: Listed Transactions and Reportable Transactions. However, in a recent memorandum, the Office of Chief Counsel of the Internal Revenue Service commented on what constitutes a “false or fraudulent” statement under Section 6700.

Section 6700, Generally

Under Subchapters A and B of 26 U.S. Code Chapter 68, taxpayers may be subject to certain additions to tax and assessable penalties. Taxpayers who promote abusive tax shelters can be subject to Section 6700 of the Internal Revenue Code. Section 6700 generally provides as follows:

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Failure To Report Foreign Trust Results In 35% Penalty Against The Owner/Beneficiary

The 35% penalty under I.R.C. section 6677 for failing to report a distribution from a foreign trust applies against a person who is both the beneficiary and grantor/owner of a foreign trust.  At least, that is now the rule for taxpayers in the second circuit.  This draconian penalty for failing to properly report a foreign trust is applicable even if the taxpayer and trust paid all required taxes, if any, with respect to the trust.

In the case before the court, the taxpayer (Wilson) was the sole owner and beneficiary of a foreign trust.  He received a distribution from the foreign trust.  He filed his tax return late.  The IRS assessed a penalty equal to 35% of the amount of the distribution for failing to timely disclose the distribution.

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