IRS Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, has been a filing requirement for many decades if a U.S. taxpayer owns a significant amount of a foreign corporation.
The form has gotten ever longer over the years and is now long and difficult to complete, and in some cases, will cause the taxpayer additional tax due. (e.g., Subpart F income, etc.)
For years these Forms were attached to the taxpayer’s return with an additional copy sent to an address at the IRS in Philadelphia… and it was extremely rare to get any IRS reply regarding a filing, even if the form was very late.
THOSE DAYS ARE OVER.
The IRS has been warning in public statements that the Form 5471 penalties were coming and would be automatically assessed by the IRS computer. The penalty under IRC Section 6038(b)(1) is $10,000 for each late or incomplete Form 5471. Remember, very often, the information on this form does not result in any taxable income or tax due for the taxpayer. So, the $10,000 penalty is a “disclosure” penalty, unrelated to the actual tax consequences of the information provided on the form.
The penalty is real, and is now being automatically assessed. See the attached.
Our client’s corporation (Form 1120) fell on hard times. They, despite our advice, choose not to file tax returns for a few years. They owed no tax due to losses. After a few notices arrived in their mail, we were asked to prepare the late returns. The corporation had two Controlled Foreign Corporations, and we appropriately completed and attached the Forms 5471 (and warned the client about the IRS threats to impose penalties).
As you can see from the attached, a few months after the tax returns were filed – with a very large Net Operating Loss and no possible tax due – a $20,000 penalty notice arrived in the client’s mail regarding late filed Forms 5471. We are trying a “reasonable cause” waiver of the penalty.
The reasonable cause requested failed. Here’s a copy of the Federal Tax Lien for $30,000 that now is recorded against this dissolved corporation.
Notice of Federal Tax Lien
So, be advised, the days of sending late Form 5471s to the “black hole” address in the Philadelphia, IRS office (or any other IRS Service Center) and expecting no reply or consequences are gone, gone, gone.
Note, in recent years, a taxpayer does not file Form 5471s in Philadelphia. There is no longer a requirement to send a 2nd copy to Philly as in years past. Now, it just gets filed once, as an attachment to your tax return (Paper-filed or e-filed).
Note further: The days can’t be far off from when the penalty will be automatically assessed on failure to attach a Form 5471 to a Form 1040 or other returns. Also, the same penalties apply, in theory to a late filed Form 5472 for a corporation 25% or more owned by a non-U.S. taxpayer.
IRS Rules that have been around for years, but not often enforced:
Failure to file information required by section 6038(a) (Form 5471 and Schedule M).
A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.
Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901, 902, and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c)(2) for limits on the amount of this penalty.
Failure to file information required by section 6046 and the related regulations (Form 5471 and Schedule O). Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction. If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period or fraction thereof during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000.
Criminal penalties. Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046.
From the IRS website on this issue:
A reader of this blog called to let me know their Form 1120 with a Form 5471 for 2009 was filed 11 days late after March 15, 2010, with no extension filed. This start-up company has net operating losses from its date of incorporation. Owed no tax. Had no Subpart F income of any sort. The IRS sent a penalty letter for $10,000. They are pursuing a reasonable cause waiver.
I am always available for questions or comments at (510) 797 8661.
The taxpayer filed Form 5471 11 days late because the CEO was out of town on business and could not sign the tax returns on March 15, 2010. The taxpayer failed to file an extension. The return reported a loss. No tax was paid-in or due.
The taxpayer provided a long, hard-luck story about why the return was filed late. They did NOT have reasonable cause, which is normally some uncontrollable hardship that kept them from filing on time.
Thankfully, the IRS reversed the $10,000 penalty. See attached.
Even with the IRS, common sense and reason actually do work sometimes.
Very informative review of Form 5471 and 5472 filing issues in this report from the Treasury Inspector General For Tax Administration for 2006 on Form 5471 and 5472 penalties.