Relief from Penalties for Late Filing of Foreign Business Forms


Internal Revenue Code (“IRC”) Section 6038 requires that every U.S. person file an information return with respect to any foreign business entity that the U.S. person controls. This information is reported via Form 5471, Information Return With Respect to Certain Foreign Corporations, and Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships. IRC section 6038A also requires domestic corporations that are 25 percent foreign-owned to furnish information to the IRS with respect to such owner. This information is reported via Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. These forms are to be filed with the taxpayer’s federal income tax return on or before the due date, including extensions.

If a taxpayer fails to timely file a Form 5471 or 8865 the IRS may assess a $10,000 penalty for each failure to file for each applicable accounting period. In addition, the IRS may assert an additional $10,000 penalty for each month that failure to file continues beginning 90 days after the taxpayer is notified of such failure to file up to a maximum of $60,000 per return (initial penalty of $10,000 plus a maximum continuation penalty of $50,000). The IRS may assess the same penalties for failure to file Form 5472, however, there is no maximum penalty threshold as there is with failure to file Forms 5471 or 8865. It is also important to note that failure to file any of these forms causes a taxpayer’s entire federal income tax return to remain open for assessment indefinitely until the required information is submitted to the IRS.

To become compliant, there are two procedural options for taxpayers that have not filed Forms 5471, 8865 or 5472 on a timely basis. The available options depend on whether or not the taxpayer’s original federal income tax return was filed on a timely basis.

If the original federal income tax return was filed on a timely basis

The taxpayer can amend the tax return to include any required international information return(s) under the Delinquent International Information Return Submission Procedures. These procedures are generally available to taxpayers that have failed to file any required international information return provided that the taxpayer has reasonable cause for not timely filing the information returns, is not under IRS civil examination or criminal investigation and has not already been contacted by the IRS about delinquent information returns. This option is available to taxpayers who meet the above requirements regardless of whether or not a taxpayer has unreported income. Upon the filing of an amended income tax return with the required international information return(s), the taxpayer should include a statement of all facts establishing reasonable cause for the failure to timely file the international information return and certify under penalties of perjury that tax evasion was not motive for failure to timely file. If a taxpayer meets and follows the above requirements and procedures, the IRS will presumably not automatically assess penalties under IRC Sections 6038 and 6038A.

If the original federal income tax return was NOT filed on a timely basis

Any necessary international information return(s) should be included upon filing the tax return. The Internal Revenue Manual provides that the IRS will systematically assess the $10,000 penalty per Form 5471 and/or Form 5472 upon receipt of a late federal income tax return (Forms 1120 or 1065). Although currently there is no systematic assessment procedure for a late-filed Form 8865, the IRS also retains authority to assess the $10,000 penalty if received after the due date. Once the IRS has assessed a penalty, taxpayers have two options under which they may request penalty abatement. Under the first option, taxpayers can generally receive first-time abatement (“FTA”) of the penalty assessed if the taxpayer has not previously been required to file a return or has no prior penalties for the preceding three tax years (with the exception of the estimated tax penalty). Under the second option, taxpayers may request penalty abatement through providing reasonable cause basis for penalty relief. The IRS may provide a taxpayer penalty relief if the taxpayer can prove they exercised ordinary business care and prudence in determining its tax obligations but nevertheless failed to file a timely international information return.

Taxpayers should be aware of the filing requirements in connection with ownership control of foreign entities as well as potential filing requirements for having a 25 percent or more non-U.S. shareholder. Taxpayers who have not been willful in their failure to report gross income from foreign financial assets or meet their reporting obligations for international information returns should carefully consider the options available to become compliant with their tax reporting obligations. Although available, penalty assessment relief is not guaranteed for delinquent informational returns, and it is recommended that taxpayers consult with their tax advisor before making any disclosures to the IRS.

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