IRC 6038 & Automatic 5471 Penalties

IRC 6038 & Automatic 5471 Penalties

IRC 6038 & Automatic 5471 Penalty

IRC 6038: When it comes to foreign corporations and partnerships, IRC 6038 is a very important code section. Internal Revenue Code Section 6038 refers to U.S. persons who have a reporting requirement for ownership in a foreign corporation (IRS Form 5471) or foreign partnership (IRS Form 8865)

What is IRC 6038?

And, the with IRS offshore compliance enforcement at an all-time high, it is important for U.S. Persons with foreign entities (especially foreign corporations) to be in tax and reporting compliance.

Common IRC 6038 Questions we will answer:

  • Who Has To Report?
  • Who is a U.S. Person?
  • What are some of the more common forms?
  • What if a person does not report under Section 6038?
  • What are the Penalties?
  • How to Avoid, Limit or Reduce Penalties?
  • How Golding & Golding can help you

This article will focus on:

  • Reporting Requirements
  • Reasonable Cause
  • Offshore Amnesty

IRC 6038 & Who Has to Report

Generally Informational Reporting refers to U.S. Person.

Who is a U.S. Person (Corporation and Individual)

Before you get too excited, “U.S. Person” is more than just U.S. Citizens. For individuals it includes:

  • U.S. Citizens
  • Legal Permanent Residents/Green Card Holders
  • Foreign Persons who meet the Substantial Presence Test

Form 5471

IRS Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporationsis filed with the IRS when a person has an interest in a Foreign Corporation.

The 5471 Form can be intense, and oftentimes requires the assistance of a Tax Attorney (especially if it is being filed untimely)

Form 5471 – Five (5) Different Categories of Filers

Category 1: (Previously Reserved)

Category is now used by U.S. shareholders of specified foreign corporations (SFCs) subject to the provisions of section 965

Category 2 

A person who owns at least 10% or more of the foreign corporation

Category 3  

A person acquires stock in total of stock ownership exceeds 10%

Category 4

A U.S. person who had control (defined below) of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period

Category 5

A U.S. shareholder who owns stock in a foreign corporation that is a CFC for an uninterrupted period of 30 days or more during any tax year of the foreign corporation, and who owned that stock on the last day of that year.

General Reporting Requirements (selected portions)


“(A) the name, the principal place of business, and the nature of business of such entity, and the country under whose laws such entity is incorporated (or organized in the case of a partnership);

(B) in the case of a foreign  corporation, its post-1986 undistributed earnings (as defined in section 902(c)

(C) a balance sheet for such entity listing assets, liabilities, and capital; (D)transactions between such entity and—

(i) such person

(ii) any corporation or partnership which such person controls, and

(iii) any United States person owning, at the time the transaction takes place—

  • in the case of a foreign corporation, 10 percent or more of the value of any class of stock outstanding of such corporation, and
  • (II) in the case of a foreign partnership, at least a 10-percent interest in such partnership; and
  • in the case of a foreign corporation, a description of the various classes of stock outstanding, and a list showing the name and address of, and number of shares held by, each United States person who is a shareholder of record owning at any time during the annual accounting period 5 percent or more in value of any class of stock outstanding of such foreign corporation, and
  • information comparable to the information described in clause ) in the case of a foreign partnership.
  • The Secretary may also require the furnishing of any other information which is similar or related in nature to that specified in the preceding sentence or which the Secretary determines to be appropriate to carry out the provisions of this title.”

What Happens if a Person does Not Report?

If a person does not report, they may be subject to certain fines and penalties.

Penalty Information (Failure to Furnish)

If any person fails to furnish, within the time prescribed under paragraph (2) of subsection (a), any information with respect to any foreign business entity required under paragraph (1) of subsection

(a), such person shall pay a penalty of $10,000 for each annual accounting period with respect to which such failure exists.

Increase in penalty where failure continues after notification If any failure described in paragraph (1) continues for more than 90 days after the day on which the Secretary mails notice of such failure to the United States person, such person shall pay a penalty (in addition to the amount required under paragraph (1)) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues with respect to any annual accounting period after the expiration of such 90-day period.

The increase in any penalty under this paragraph shall not exceed $50,000.

IRS Issues Form 5471 “Automatic Penalties” 

As provided by the IRS:

[A] separate penalty may apply to each Form 5471 which is filed after the due date of the income tax return.  This penalty will apply whether or not any tax is due on Form 1120.

IRC Section 6038(a) requires information reporting with respect to certain foreign corporations (Form 5471) and describes the information required to be reported on this form.  

IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for each Form 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).

What if I am Out of Compliance?

If you are out of IRS compliance, the penalties can be severe. Therefore, you may consider entering the IRS offshore voluntary disclosure/tax amnesty or submit a reasonable cause statement, before it is too late.

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure

Contact our firm today for assistance.