The IRS can generally disclose a taxpayer’s tax information with a representative that is designated by the taxpayer on a Form 2848, Power of Attorney and Designation of Representative.
This covers all forms included with the taxpayer’s tax return as long as the type of tax return is listed on the Form 2848.
This raises the question as to whether an information return, not a tax return, included with the tax return is covered by the Form 2848. The IRS recently addressed this for the Form 5471 in CCM 201736021.
The Information Reporting Form 5471
The Form 5471 is an information return. It merely reports information to the IRS. It does not compute or report a tax.
The Form 5471 is filed by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations. The form is typically submitted to the IRS with the foreign corporation’s owner’s income tax returns. The form may also be remitted to the IRS separately in some cases.
The Form 5471 Late Filing Penalty
Sections 6038 and 6038A provides for a penalty if the Form 5471 is not timely filed. The penalty is $10,000 for each failure for each applicable annual accounting period. The amount can increase substantially if the taxpayer does not make the filing after the IRS alters them to the missing return.
The IRS has a policy of automatically assessing penalties for the late filing of the Form 5471. The penalty can be abated for reasonable cause. Given the IRS’s current procedures, the penalty may even be avoided by including a reasonable cause statement with the late-filed return.
The Reasonable Cause Statement and the Form 2848
Given the automatic assessed penalties, it is safe to say that most tax attorneys have been tasked with preparing quite a few of these statements over the years.
In doing so, it is common for tax attorneys to have taxpayers sign a Form 2848 to authorize the IRS to talk to the attorney about the penalty. In some cases where the penalty has already been paid and the taxpayer is seeking a refund, the tax attorney may have even signed the refund claim forms to request the refund.
Tax attorneys may also sign statute extensions to allow the IRS additional time to consider their submissions. Tax attorneys are able to do this given the taxpayer’s authorization in the Form 2848.
This brings us to CCM 201736021. The memo provides guidance for how the Form 2848 is to be filled out to authorize a tax attorney to represent a taxpayer for a Form 5471 late filing penalty.
The guidance itself merely says that a Form 2848 that lists the income tax return that the Form 5471 is included with but does not specifically list the Form 5471, does not authorize the tax attorney to represent the client for the Form 5471 or penalties related to the Form 5471.
What About Other Information Reporting Forms?
This raises questions about other information returns. For example, the IRS requires a Form W-2, Wage and Tax Statement, to be attached to individual income tax returns if the taxpayer received wages.
The Form W-2 data is included in the IRS’s wage and income transcripts. The same can be said for the Forms 1099, 1098, 5498, etc. information. The IRS freely shares this information with tax attorneys if they have a Form 2848 that lists the individual income tax return.
Given the reasoning in CCM 201736021, it would seem like the IRS is violating the disclosure rules by disclosing this information to tax attorneys who do not have these forms listed on their 2848s.
This may sound like a trivial matter. It isn’t. Unauthorized disclosure of taxpayer information by IRS employee is a crime. It’s a felony. It may also result in the IRS employee’s employment being terminated and entitle the taxpayer to damages.