IRS Penalties & Form 5471 Reasonable Cause
Form 5471 Reasonable Cause: The IRS has a new weapon in its arsenal for issuing penalties for non-compliance with certain international information reporting. In recent years, the Internal Revenue Service has begun issuing automatic assessment penalties for non-compliance with Form 5471.
In order to Taxpayers to avoid or dispute these penalties, the filer may make a Reasonable Cause statement submission. If the Taxpayer U.S. person can provide reasonable cause, then the IRS is supposed to waive or abate international reporting penalties.
The longer these penalties linger, the harder it is to dispute. And, with the IRS making foreign accounts compliance a key enforcement priority, it is important for Taxpayer to get into compliance sooner as opposed to later.
26 U.S. C. Section 6038 (a)
26 U.S.C. Section 6038 refers to Information reporting with respect to certain foreign corporations and partnerships.
As provided by the code section:
Every United States person shall furnish, with respect to any foreign business entity which such person controls, such information as the Secretary may prescribe relating to—
(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—
(I) 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
(i) 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
(ii) information comparable to the information described in clause (i) 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.
(2) Period for which information is to be furnished, etc. The information required under paragraph (1) shall be furnished for the annual accounting period of the foreign business entity ending with or within the United States person’s taxable year. The information so required shall be furnished at such time and in such manner as the Secretary shall prescribe.
(3) Limitation No information shall be required to be furnished under this subsection with respect to any foreign business entity for any annual accounting period unless the Secretary has prescribed the furnishing of such information on or before the first day of such annual accounting period.
(4) Information required from certain shareholders in certain cases If any foreign corporation is treated as a controlled foreign corporation for any purpose under subpart F of part III of subchapter N of chapter 1, the Secretary may require any United States person treated as a United States shareholder of such corporation for any purpose under subpart F to furnish the information required under paragraph (1).
(5) Information required from 10-percent partner of controlled foreign partnership In the case of a foreign partnership which is controlled by United States persons holding at least 10-percent interests (but not by any one United States person), the Secretary may require each United States person who holds a 10-percent interest in such partnership to furnish information relating to such partnership, including information relating to such partner’s ownership interests in the partnership and allocations to such partner of partnership items.
Automatic Assessment of Form 5471 Penalties
As provided by the IRS
In August, 2008, the Internal Revenue Service began issuing letters to some taxpayers to alert them to an upcoming procedural change relative to the automatic assessment of penalties. These letters were issued to taxpayers who may not have timely filed their corporate return and/or not timely filed their Forms 5471.
IRC Section 6651(a)(1) provides a penalty for the failure to file income tax returns (Form 1120) by their due date (including extensions). The penalty is 5% of the tax required to be shown on the income tax return for each month (or fraction thereof) during which such failure continues. The amount of the penalty shall not exceed 25%. No penalty is applicable under IRC Section 6651(a)(1) if no underpayment of tax is shown on the return.
In addition, 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).
IRC Section 6038(c) provides for a 10% reduction of the foreign taxes available for credit under IRC Sections 901, 902 and 960. Per IRC Section 6038(c)(3), this reduction to the foreign taxes can be applied in addition to the monetary penalty.
As of January 1, 2009, the Internal Revenue Service Center began to automatically assert the monetary penalty under 6038(b) on late filed Forms 1120 with Forms 5471 attached. This does not preclude assertions under Sections 6038(b) if the Form 5471, as filed, is determined to be substantially incomplete or 6038(c) at a later date upon an examination. For general filing requirements and other specific information see
Form 5471 instructions.
For those taxpayers who are required to electronically file their income tax return under Treasury Decision 9363, they are also required to e-file any amended returns for certain previous tax years. Please see our guidance on e-filing amended returns under Amended and Superseding Returns. Please note that guidance is provided by tax year.
For those taxpayers who are submitting amended/delinquent Forms 5471 and wish to submit a Reasonable Cause statement with their filings, the Service recommends the following procedures.
For those taxpayers who are filing these amendments on paper, please submit your returns to the Campus in which you regularly file your income tax return. For those taxpayers who are required to electronically file, they may submit a Reasonable Cause statement attached to their return in a PDF format. Please name this file “ReasonableCause5471.pdf” and describe it as “Reasonable Cause 5471. Attach the PDF to the top level consolidated return.
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