Relief from Penalties for Late-Filed Form 5471
One of the more common international reporting requirements is a Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations. Form 5471 is the primary form used by the IRS to collect the information listed in Section 6038(a)(1) about foreign corporations with substantial U.S. ownership (at least a 10 percent interest).
Penalties apply for failure to report the information required under Section 6038 by failing to timely file Form 5471.
If a taxpayer fails to timely file Form 5471, the IRS may assert a $10,000 penalty for each failure for each applicable annual accounting period, plus an additional $10,000 for each month the failure continues, beginning 90 days after the taxpayer is notified of the delinquency, up to a maximum of $60,000 per return (initial penalty of $10,000 plus the continuation penalty maximum of $50,000 per return) (Section 6038(b)). It is very important to note that a single failure to timely report Section 6038 information causes a taxpayer's entire related federal income tax return to remain open for assessment indefinitely until the required information is provided to the IRS (Section 6501(c)(8)). Once the information is provided, the statue does not expire for three more years. A taxpayer can limit the extended assessment period to items that relate to the unreported Sections 6038 information if the taxpayer demonstrates that the reporting failure was due to reasonable cause.
Form 5471 Late Filing Penalty Relief
The good news is that the IRS can waive the penalties for delinquent international information returns (i.e., Form 5471). As of July 1, 2014, taxpayers that have failed to file a Form 5471 may file it under the IRS's Delinquent International Information Return Submission Procedures. The procedures allow taxpayers to avoid penalties under Sections 6038 if the taxpayer timely filed its original income tax return but omitted the required international information forms.
Before a taxpayer can take advantage of the procedures, however, the taxpayer must further qualify to request the relief.
To qualify, the taxpayer:
- Cannot have filed one or more required international informational returns (e.g., Form 5471);
- Must be able to demonstrate that based on the facts and circumstances, the failure to timely file was due to “reasonable cause” and not willful conduct;
- Cannot be under civil examination or a criminal investigation by the IRS; and
- Cannot have already been contacted by the IRS about the delinquent Form 5471 filing(s).
The determination of whether a taxpayer acted with reasonable cause and in good faith is made on a case by case basis, taking into account all pertinent facts and circumstances. Under IRS regulations, “reasonable cause” can include an honest misunderstanding of the facts or law which is reasonable in light of the experience and knowledge base of the taxpayer. A taxpayer’s reliance on the advice of a tax professional may, but does not always, demonstrate reasonable cause. However, reliance on incorrect facts, even if the taxpayer was unaware that they were incorrect, is generally insufficient to show reasonable cause.
The IRS, when determining to grant relief, will look at a number of factors including the taxpayer’s compliance history in determining whether ordinary care and prudence have been exercised. For example, did the taxpayer exercise a degree of care? Care that a reasonably prudent person would be seen as doing if they provided the relevant supporting documentation to their tax advisor and it was the tax advisor that missed the required filing—that is, the taxpayer relied on its tax advisor.
Oftentimes the IRS will abate penalties for first-time offense taxpayers who do not already have a history of noncompliance. They also may review the length of time between the event cited as a reason for the noncompliance and subsequent compliance for demonstrating reasonable cause.
If a taxpayer believes it can establish reasonable cause for its failure to file, the taxpayer should file an amended income tax return with the delinquent information return attached, and include a so-called “reasonable cause” statement with the relevant facts and circumstances. The taxpayer also must establish that the conduct and failure to file was not willful and negligent. As part of that statement, taxpayers must certify that any entity for which the information returns are being filed was not engaged in tax evasion. The reasonable cause statement must be signed under penalties of perjury.
Although using the delinquent international information return procedures does not guarantee that the IRS will not impose a penalty, it is the taxpayer’s best opportunity to have the penalties waived.