Untimely Foreign Corporation or Partnership Tax Returns
Late Reporting of Foreign Business or Partnership: In recent years, the IRS has significantly increased enforcement of noncompliance with reporting of foreign businesses, assets, investments and income. The penalties for filing late or delinquent international information returns – such as Forms 5471, 5472, and 8865 can be steep. While the IRS is typically amenable to abating offshore penalties for first-time noncompliance, that is not always the case. Taxpayers may qualify for offshore tax amnesty by using one of the IRS Offshore Voluntary Disclosure Programs, such as Streamlined Procedures, VDP or Reasonable Cause. While Delinquency Procedures (DIIRSP) is still available, it has essentially morphed into a traditional reasonable cause submission.
What is a Foreign Corporation Tax Return?
A foreign corporation tax return may fall into different categories. If it is a US Person who has an ownership or interest in a foreign corporation, the Taxpayer will usually have to file informational returns on Form 5471 (Foreign Corporation) or 8865 (Foreign Partnership). Sometimes, a Form 926 may also be required – along with an 1120 (depending on the structure of the company).
When it is a foreign person (not limited to individuals), they may have to file a Form 5472 to report ownership in a US corporation with certain transactions that are US related — in addition to a Form 1120-F.
Foreign Corporation Tax Return Penalties
The penalties for noncompliance are extremely lopsided. In fact, in the 2020 Taxpayer Advocate Report, it reiterates just how lopsided and unfair it is – and must be changed. While the penalties for noncompliance with Forms 5471 and 8865 start at $10,000 – the failure to file Form 5472 begins with a $25,000 penalty.
Automatic Assessed Penalties
Oftentimes, Taxpayers get hit with these penalties as a result of “automatic assessments.”
This is very common when a Taxpayer files their forms late and without a strong reasonable cause statement.
The penalty notice will usually arrive on a CP15 Notice.
The CP15 Notice has become much more common in situations in which a timely foreign corporation tax return was not filed. Taxpayers should note the limited time they have to respond (usually 30-days).
Foreign Corporation Tax Return Compliance is Important
In conclusion, filing timely corporate tax returns is very important. For Taxpayers who miss the filing requirements, they may qualify for offshore amnesty. Otherwise, if they were hit with penalties, they may still be able to minimize or eliminate the penalties through protest, appeal or District Court.
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.