Defenses to 5471 Tax Form Penalty Violations: IRS Overview

Defenses to 5471 Tax Form Noncompliance Layman’s Terms

Defenses to 5471 Tax Form Penalty Violations

Defenses to 5471 Tax Form Noncompliance Layman’s Terms: As if international tax law is not complicated enough — these days it seems like the internet is riddled with offshore disclosure fodder written by self-proclaimed world renowned tax experts on FBAR, FATCA, 5471 etc — who leave Taxpayers in an (unnecessary) state of fear and duress once they reach out to our firm. When it comes to the various IRS international information reporting forms, it is true that the Form 5471 is complicated and the penalties can be tough — but the penalties can oftentimes be defended and abated.  Similar to other international information reporting forms, such as Internal Revenue Service Forms 5472 and 8865 — the 5471 noncompliance penalties are not based on any specific amount of tax due to the IRS.  In fact, oftentimes the Taxpayer will have no income tax liability whatsoever — and has not missed any income reporting on their U.S. tax return. Instead, they were simply unaware of a reporting requirement and may have been dinged with what is referred to as an “assessable penalty” — which means the penalty is assessed without the opportunity to dispute the penalty beforehand — such as when tax penalties stem from an audit.  Let’s review some important tax tips about defenses to 5471 Tax Form noncompliance:

What is Form 5471

Form 5471 is an international information reporting form used by US Persons to report ownership or interest in a foreign corporation.

What is an Assessable 5471 Penalty

A penalty that was issued without the Taxpayer having prior notice or an opportunity to avoid before issuance of the penalty.

Preemptive Defense to Form 5471 Noncompliance with Offshore Disclosure/Amnesty

If a Taxpayer learns that they are out of compliance, then before they are penalized they may have the opportunity to avoid the penalty by submitting to one of the offshore voluntary disclosure program packages. The Amnesty Programs are programs developed by the Internal Revenue Service to assist Taxpayers who are already out of compliance for non-reporting.

Some of the more common programs, include:

• Voluntary Disclosure Program (VDP or “New” OVDP)
• Streamlined Domestic Offshore Procedures
• Streamlined Foreign Offshore Procedures
• Delinquency Procedures
• Reasonable Cause

Form 5471 Reasonable Cause is First Line of Defense to 5471 Tax Form Noncompliance 

If the taxpayer has already been issued a Form 5471 penalty and receives a CP15 Notice, they may want to consider submitting a reasonable cause protest letter — detailing facts and circumstances sufficient to prove that they acted with reasonable cause and not willful neglect. If the Taxpayer is successful, then the IRS will abate (remove) the penalty. If not, then typically it authorizes the taxpayer to pursue an appeal.

Appeal Rights/Collection Due Process Hearing

Depending on whether the Taxpayer wants the entire matter to be decided by the IRS Office of Appeals (which for all intents and purposes is binding on both parties), or prefers a more detailed comprehensive Collection Due Process Hearing in which the Taxpayer has more options to pursue Tax Court — will determine whether taxpayer wants to pursue an appeal after the protest is rejected — or later in the process by way of a Collection Due Process Hearing.

CDP to Tax Court

If the taxpayer chooses the Collection Due Process and is further denied relief, then they can take the matter over to Tax Court for further litigation. Otherwise, if they did not pursue a Collection Due Process Hearing, they will have limited opportunity to move the case forward with the IRS.

Pay the Bill & Sue in Federal Court

The Taxpayer has another alternative, which is to simply pay the bill and then make a request a refund. If the refund is denied at the IRS level — then the taxpayer can pursue the matter and litigate it in federal court (usually a 2-year SOL). Whether or not the Taxpayer has to actually pay the full penalty upfront in accordance with the Flora Rule may be up for debate — based on a recent ruling involving Flora and the FBAR.

All Hope is Not Lost

Whether the taxpayer learns that they missed the filing and wants to proactively avoid the penalty or was already hit with a penalty and seeks to abate it — taxpayers have various options available to them to minimize or avoid penalties. You should speak with a Board-Certified Tax Lawyer Specialist licensed in the State they operate their firm from.

About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.

Contact our firm for assistance.