Penalties for Incomplete, Late Filed or Non-Filing of Form 5471
Are you a U.S. citizen who serves as an officer, director, or shareholder in a foreign corporation? If so, you are probably required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, with your income tax returns (e.g., Form 1040, Form 1120). For late filed forms covering periods after December 31, 2008, the IRS is now automatically assessing the $10,000 penalty under IRC Section 6038(b)(1). There can be additional penalties assessed if certain information is not included, or you do not respond to a request for additional information related to the Form 5471, including the possible loss of foreign tax credits (FTC). The initial $10,000 penalty can be increased to up to $50,000 for continued refusal to file the form when requested by the IRS.
The U.S. Treasury and IRS have been aggressively asserting more and different penalties for failure to report required foreign information, even when all U.S. income taxes have been paid. This can also occur even when the Form 5471 is filed, but the IRS considers there is not substantial compliance in providing required information on the form, e.g., the Category of Filer boxes is not completed.
Lack of Guidance on What is “Substantial Compliance”
There are actually no rules in the Internal Revenue Code or regulations that set forth guidance as to how taxpayers are to determine when they have substantially complied with the Form 5471 filing requirements. The closest guidance taxpayers have is in a document the IRS provides to its agents on penalties that apply if certain categories of U.S. shareholders fail to comply with the reporting requirements of Form 5471.
The International Practice Unit (IPU) discusses two types of errors that may cause a Form 5471 to be substantially incomplete: (1) errors apparent on the face of the form and (2) errors beyond the face of the return. The first type is the issues mentioned above: failure to complete the Category of Filer part of the form or completing it incorrectly. The second is errors that would be discovered when an agent was reviewing the information and backup to data on the return, such as where the intercompany transactions to be reported on Schedule M were under- or overstated. There is not a specific trip point as to what constitutes (or does not constitute) “substantial compliance”, but is to be based upon the magnitude of the failure and how this might impact an agent’s examination. It should also be noted that the IPU reminded the agents that even a dormant foreign corporation required to file the form must comply (although to a lesser extent).
Multiple Penalties and Forms
While there might be a single form that is required to be filed, there can be more than one penalty assessed for failure to file depending upon the type of information that is being reported on the form. For a new foreign corporation established by a U.S. person, there may be both a Form 5471 (two potential $10,000 penalties) and a Form 926 that is required. In addition, any U.S. individual who is an officer or director of the foreign corporation may also be required to file. A schedule of potential penalties can be accessed by clicking on this link.
Beware: The statute of limitations on assessment for the taxpayer’s entire return (not just items related to the Form 5471) remains open until three years after the IRS receives a completed Form 5471.
While all of these penalties seem rather harsh, especially if there is no change in the taxpayer’s income tax liability upon the filing of the required forms, this is the environment in which the IRS operates.
Contact Moore Stephens Doeren Mayhew for assistance with filing your Form 5471.
Victor (Sandy) Jose, CPA
For more than 35 years, Victor (Sandy) Jose has assisted clients with their inbound and outbound investments, Foreign Account Tax Compliance Act (FATCA) compliance, Offshore Voluntary Disclosure Program projects, as well as other withholding and reporting projects. Sandy has extensive and broad based global experience in the automotive and manufacturing industries. Contact Sandy at email@example.com or (248) 244-3082.
 IRS LB&I International Practice Service Process Unit (IPU), Failure to File the Form 5471-Category 4 and 5 Filers-Monetary Penalty (FEN/9433.01_06(2013)(c)(10/7/15).