Abatement of Delinquent Form 5471
Abatement of Delinquent Form 5471: In recent years, the Internal Revenue Service has significantly increased the enforcement of offshore reporting and compliance. One of the main forms that US taxpayers may have to file when they have an ownership or interest in a foreign corporation is called a form 5471 (aka Information Return of U.S. Persons With Respect To Certain Foreign Corporations). The form 5471 is used to report an interest in a foreign Corporation, and it is due to be filed at the same time a person’s tax return is filed.
Some common issues that make following the form 5471 complex are:
- The corporate information may not be available to the US taxpayer shareholder;
- There may be complex Subpart F and GILTI filing requirements; and/or
- The taxpayer may not understand how to prepare the form
Why Form 5471 is Complicated
The form 5471 is one of the more complicated international information reporting forms.
Unlike the Form 8938 and FBAR, the form 5471 requires the taxpayer to provide a more detailed cross-section of the foreign asset – in this case the foreign asset being the foreign business. Instead of being able to just report the maximum value (FBAR) or maximum asset value and associated income (Form 8938), the taxpayer has to report the income, along with the business deductions and expenses — as well as prepare a detailed balance sheet.
The extent of the 5471 reporting will be based on which category of filer the taxpayer qualifies as — noting that a taxpayer may qualify for multiple categories in the same year, which is often the case with U.S. shareholders of a Controlled Foreign Corporation (CFC).
What if Taxpayer Files a Delinquent 5471?
When a taxpayer misses filing the form 5471, they may become subject to fines and penalties.
The IRS has taken to issuing automatic assessed penalties for non-compliance with 5471 filing. Oftentimes, the taxpayer will receive a penalty notice on a form CP15. The notice (common for 3520, 3520-A and 5471 penalties) will identify the code section that forms the basis for the penalty, the penalty amount, and the amount of time taxpayer has to respond to the penalty notice.
IRS Form 5471 Penalties
The penalties for the form 5471 can be steep. They generally start at $10,000 per violation, but can go up significantly from there depending on how many forms should have been filed, when the unfiled form is submitted, and how many years of noncompliance.
Of important note is the fact that a similar form (Form 5472) previously also started with an initial $10,000 penalty, but a few years back the IRS increased the baseline penalty to $25,000 — and there is concern that the form 5471 may follow in its footsteps.
As provided by the IRS:
“There is a monetary penalty under section 6707A for the failure to include on any return or statement any information required to be disclosed under section 6011 with respect to a reportable transaction.
Generally, the penalty for failure to include information with respect to a reportable transaction is 75% of the reduction in the tax reported on the income tax return as a result of participation in the transaction or that would result if the transaction were respected for federal tax purposes, but not less than $5,000 in the case of an individual and $10,000 in any other case.
The annual maximum penalty for failure to disclose a reportable transaction, other than a listed transaction, cannot exceed $10,000 in the case of an individual, and $50,000 in any other case. The maximum annual penalty for failure to include information with respect to a listed transaction is $100,000 in the case of an individual and $200,000 in any other case.
This penalty is in addition to any other penalty that may be imposed.
For information, see section 6707A and Regs. 301.6707-1.”
Abatement of Form 5471 Penalties
When a taxpayer becomes subject to form 5471 penalties, they may be able to avoid or eliminate the penalty by either qualifying for reasonable cause, meeting one of the exemptions or exceptions for filing, and/or making a voluntary disclosure/offshore tax amnesty submission.
It is important for the Taxpayer to identify the strategy the taxpayer wants to make before engaging with the IRS, because the IRS does not always play fair — so it is important to have your ducks in a row before contacting them.
Form 5471 Enforcement is on the Rise
In conclusion, all signs point toward the IRS continuing to increase enforcement of Form 5471, along with other international information reporting requirements such as FBAR, FATCA Form 8938 3520 and 3520-A. But, just because a person gets hit with form 5471 penalties does not mean they lose the opportunity to try to fight those penalties. There are various tax amnesty programs that may assist a taxpayer with reducing, eliminating and abating form 5471 penalties.
About Our International Tax Law Firm
Our International Tax Law Firm specializes exclusively in U.S. & international tax, and specifically IRS disclosure & compliance with Form 5471 delinquent filing/penalty abatement.
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