Foreign Information Returns, Income Tax Returns, and Civil Penalties

By Colin Walsh, J.D., Chicago

Editor: Mark Heroux, J.D.

The Internal Revenue Code imposes a $10,000 per return penalty on taxpayers that fail to timely file certain foreign information returns. In the past several years, the IRS offered taxpayers three consecutive Offshore Voluntary Disclosure Programs (OVDPs). The frequently asked questions (FAQs) explaining these OVDPs direct taxpayers to file delinquent returns and attach a reasonable-cause statement in exchange for penalty relief. Many taxpayers that file delinquent foreign information returns as directed by the FAQs still are assessed a $10,000 penalty for each late-filed foreign information return. Taxpayers have incurred significant time and expense to abate these penalty assessments. In light of these harsh penalties, a taxpayer should be certain to timely file all foreign information returns, even if that taxpayer cannot timely file its income tax return.

The regulations issued under Secs. 6038 and 6038A, which govern, respectively, Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, establish penalties for failure to timely file these forms.

Regs. Sec. 1.6038-2(k)(1) establishes the penalty for failure to furnish Form 5471:

If any person required to file Form 5471 under section 6038 and this section fails to furnish any information described in paragraphs (f) and (g) of this section within the time prescribed by paragraph (i) of this section, such person shall pay a penalty of $10,000 for each annual accounting period of each foreign corporation with respect to which such failure occurs. [emphasis added]

Under the plain language of the regulation, a Form 5471 must be filed within the time prescribed. The regulation does not require that the Form 5471 be filed within the time and manner prescribed. Thus, the plain language of Regs. Sec. 1.6038-2(k) does not mandate attaching a Form 5471 to an income tax return to be timely filed to avoid penalties.

This plain-language argument under Regs. Sec. 1.6038-2(k) is supported by recent changes to the Treasury regulations issued under Sec. 6038A, which establishes a penalty for late Forms 5472. Regs. Sec. 1.6038A-4(a)(1) imposes a monetary penalty for failure to furnish Form 5472 "within the time and manner prescribed in §1.6038A-2(d)." On Dec. 23, 2014, Treasury removed previous Regs. Sec. 1.6038A-2(e), which had stated:

If the reporting corporation's income tax return is untimely filed, Form 5472 nonetheless must be timely filed. When the reporting corporation's income tax return is ultimately filed, a copy of the Form 5472 must be attached.

Thus, prior to this amendment, a Form 5472 was timely even if not attached to an income tax return. Treasury removed Regs. Sec. 1.6038A-2(e) and established that a Form 5472 must be attached to an income tax return beginning in 2014. A Form 5471, unlike a Form 5472, does not need to be attached to an income tax return to be timely. When Treasury amended Regs. Sec. 1.6038A-2(e), it could have amended Regs. Sec. 1.6038-2 to make clear that a Form 5471 had to be attached to an income tax return, but this was not done. A Form 5471, unlike a Form 5472, arguably does not need to be attached to an income tax return to be timely.

In sum, prior to 2014, both Form 5472 and, arguably, Form 5471 did not need to be attached to an income tax return to be filed timely. In 2014, Treasury amended its regulations (T.D. 9707) to establish that a Form 5472 must be attached to an income tax return to be timely filed. No such verbiage has been added to Treasury regulations that govern Form 5471.

Taxpayers who cannot file an income tax return should still timely file Forms 5472 and 5471. A timely submission will assist in penalty abatement efforts and will help establish reasonable cause. Taxpayers who file foreign information returns should keep certified proof of delivery. Because these foreign information returns are attached to income tax returns, the IRS is unlikely to process a foreign information return filed on its own. Taxpayers who do not timely file foreign information returns must establish reasonable cause to obtain a penalty abatement.

EditorNotes

Mark Heroux is a principal with the Tax Services Group at Baker Tilly Virchow Krause LLP in Chicago.

For additional information about these items, contact Mr. Heroux at 312-729-8005 or mark.heroux@bakertilly.com.

Unless otherwise noted, contributors are members of or associated with Baker Tilly Virchow Krause LLP.

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