Automatic Penalties for Late Form 5471s and Related Forms

Automatic Penalties for Late Form 5471s and Related Forms

On January 1, 2009, the IRS will begin to automatically assess section 6038 penalties for each late-filed Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and late filing penalties under section 6651 for related forms.

IRS is now sending out letters notifying taxpayers with late-filed Form 5471s in prior years that a separate $10,000 late filing penalty applies to each late Form 5471 filed after the Form 1120 due date (including extensions) or each Form 5471 that does not include complete and accurate information, in addition to the Form 1120 late filing penalty, even if no income tax is due on the Form 1120. In addition to the monetary penalty, IRS is saying it may also apply a 10 percent reduction in foreign taxes available for section 901, 902, and 960 foreign tax and deemed paid credits. We note that possible penalties could be assessed on any late-filed Form 5471, attached Form 1040, Form 1041, or Form 1065 as well as Form 1120. Any outstanding or late Form 5471s should be filed as soon as possible to avoid the automatic assessment. Taxpayers may want to consider requesting reasonable cause abatement of any penalties that get assessed.

A Form 5471 Guide is available to Tax Section members as a resource to further explain the issues involved with this information reporting requirement. Additional information is also available on the filing requirements and instructions for the Form 5471.

Form 5471 should be filed as an attachment to the taxpayer’s federal income tax return, including those filed electronically. Certain U.S. citizens and U.S. residents who are officers, directors, or shareholders in certain foreign corporations are responsible for filing the Form 5471. The categories of persons potentially liable for filing Form 5471 include U.S. citizen and resident alien individuals, U.S. domestic corporations, U.S. domestic partnerships, and U.S. domestic trusts. The filing requirements for Form 5471 relate to persons who have a certain level of control in certain foreign corporations as described on pages 1-3 on the Instructions for Form 5471.

With this automatic assessment, client financials may be impacted as well. Some accounting firms have been requiring audit clients to accrue the 5471 penalties on their audited financial statements under FAS 5, even if the IRS did not assess it. However, other firms believe that companies would have reasonable cause for failure to file or when it was unlikely that the IRS would assess a penalty.