The Penalties for IRS Form 5471, Avoiding Form 5471 Fines

Form 5471 Penalties and Reduce Risk of an IRS Late Filed Penalty

Form 5471 Penalties

The Internal Revenue Service continues to aggressively enforce noncompliance issues involving Taxpayers with unreported foreign accounts, assets, investments, and income. This also includes US Taxpayers who have unreported foreign entities — such as foreign corporations, partnerships, and trusts. Form 5471 refers to IRS Information Return of U.S. Persons With Respect To Certain Foreign Corporations. With the introduction of the TCJA (Tax Cuts and Jobs Act of 2017) came further complications with filing Form 5471 — due to the newly required GILTI, IRC 965 Repatriation Tax Act, and FDII requirements. Further complicating the reporting on the IRS 5471 Form are the requirements for Taxpayers of CFCs to track Subpart F Income and other complex tax requirements.  Unlike other international reporting forms such as the FBAR and 8938 — which are primarily used to report value — Form 5471 is a complex form. It is a bookkeeping return and requires the filer to include assets, liabilities, equity, Subpart F, GILTI, and more.  Failure to report the form timely may result in offshore penalties.  In addition, if the entity has its own account & investments in an FFI, it may need to file a separate FBAR or 8938.  These penalties can be reduced or avoided by using one of the offshore voluntary disclosure programs.

Late Filing of the IRS Form 5471

The Form 5471 Penalties are on the rise.

Common issues and questions we receive regarding IRS Form 5471 penalties:

• • • When is IRS Form 5471 Due?

    • What if I do not file the form timely?

    • What 5471 Penalties does the IRS Issue?

    • Can I go to Jail?

    • How can I get into compliance?

This is because many individuals are unaware that they are required to file the Form 5471, and/or may not be able to obtain or access the information necessary to complete the form. With that said, it is typically better to at least give it your best shot and file the form either timely or if untimely (using one of the IRS Voluntary Disclosure Programs) as opposed to not filing it at all — and facing the severe penalties the IRS can and does issue concerning Form 5471.

What is Form 5471?

Form 5471 is an international informational return. It is an IRS form utilized by U.S. Taxpayers to report their foreign business interest. Depending on the type of foreign business interests a person has, they may have to file a form 5471, 8865 (and/or possibly other forms such as Form 8621) If you qualify (and are lucky), you may be able to avoid filing form 5471 and instead qualify to file Form 8938, which has its own pros and cons – but is typically easier to prepare than form 5471 is.

When is Form 5471 Due?

For individuals, Form 5471 is due at the same time your tax returns are due. Therefore, if you file an extension for your individual tax return, you include four 5471 along with your extension.

What if you do Not File Form 5471?

If you do not file IRS Form 5471, you may be subject to significant fines and penalties. In a recent summary prepared by the National Taxpayer Advocate, non-compliance with Form 5471 (and Foreign Trusts, Form 3520-A) are two non-compliance issues that often serve as catalysts for the IRS to issue large penalties.

Failure to file under section 6038(a)

• • • A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the required information within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired.

    • The additional penalty is limited to a maximum of $50,000 for each failure. Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901, 902, and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c) (2) for limits on the amount of this penalty.

Failure to file information under section 6046 

• • • Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction. If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period or fraction thereof during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000.

Criminal Penalties

• • • Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046. Note. Any person required to file Form 5471 and Schedule J, M, or O who agrees to have another person file the form and schedules for him or her may be subject to the above penalties if the other person does not file a correct and proper form and schedule.

Section 6662(j)

• • • Penalties may be imposed for undisclosed foreign financial asset understatements. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment. See sections 6662(j) and 6664(c) for additional information

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties. 

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure.  Contact our firm today for assistance.