In an International Practice Unit (IPU), the IRS outlined the steps its auditors should take when issuing a recordkeeping and reporting summons to a U.S. corporation that is 25% owned by a foreign shareholder.
The tax agency also elaborated on what to do when the U.S. corporation doesn’t substantially comply with the summons.
Definition of a reporting corporation
The tax code generally imposes reporting and recordkeeping requirements on domestic reporting corporations (DRCs), which are defined as 25% foreign-owned. Reporting corporations must furnish certain information with respect to transactions with “related parties” by filing an annual information return. A corporation is 25% foreign-owned if any one foreign person owns at any time during the tax year at least 25% of:
- The total voting power of all classes of stock entitled to vote, or
- The total value of all classes of stock.
A foreign related party (FRP) is a direct or indirect 25% foreign shareholder of the DRC or a person who is related to the DRC or to a 25% foreign shareholder.
Generally, a summons issued by the U.S. government isn’t legally enforceable when the subject of the summons resides in a foreign country. However, a DRC may be designated by an FRP as its agent with respect to any IRS request or summons for records.
The IPU sets out the steps IRS auditors should take when considering issuing a “6038A summons,” when they should actually issue one and what to do when a DRC doesn’t substantially comply with the summons. The steps include the following:
- The auditor should consider whether a request pursuant to an income tax treaty or a tax information exchange agreement, with a country where the records are located, could secure the information sought. When records of an FRP are obtainable within 180 days of an information exchange request pursuant to a tax treaty or tax information exchange agreement, the IRS will generally use such procedures before issuing a summons.
- Generally, the place for the summoned person’s appearance will be the nearest IRS office. The IRS and the individual can agree (in a letter separate from the summons) that a summons seeking only records may be satisfied by mailing the records.
- The date for appearance must be no less than ten calendar days from the date the summons is issued.
- When issuing the summons, the auditor should consider issuing another summons for records that are in the custody or control of the DRC.
If the DRC doesn’t provide the documentation requested by the due date, the auditor should prepare a “Notice of Proposed Adjustment” with reasonable adjustments based on the information currently known. In addition:
- If a taxpayer submits a foreign document, the auditor should consider issuing an information document request for the English translation and specify the date the English translation is due.
- When exercising its discretion with respect to the noncompliance penalty, the IRS must consider the information provided by the DRC and related parties unless such information is insufficient to prove relevant facts.
- The noncompliance penalty can’t be overturned in court merely because the amount of deductions (or cost of property) determined by the IRS differs from the actual costs incurred or doesn’t clearly reflect income.
Adequate support documents
For U.S. entities that are owned by foreign entities and file U.S. tax returns, it is crucial to have all of the relevant information for the entity in the United States. U.S. taxpayers are required to support all of the positions claimed on a return with adequate documentation.