The IRS recently sent letters to certain corporate taxpayers advising them that effective January 1, 2009, penalties for late-filed Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, will automatically be asserted when such forms are attached to a late-filed Form 1120, U.S. Corporation Income Tax Return. The automatic assertion of penalties for late-filed Forms 5471 is a significant change from the current IRS procedure in which penalties are assessed at the discretion of an examiner after a return is selected for examination.
U.S. citizens and residents (including U.S. corporations, partnerships, and trusts) who are officers, directors, or shareholders in certain foreign corporations are required to file Form 5471 to satisfy reporting requirements under Secs. 6038 and 6046. The information reporting requirements under those sections relate to U.S. persons who have a certain level of control in foreign corporations.
For each Form 5471 that is late filed or does not include complete and accurate information, a $10,000 penalty can be imposed under Sec. 6038(b)(1). This penalty is assessed in addition to the Sec. 6651(a) penalty for failure to file or pay tax, regardless of whether any tax is due on the tax return. Reasonable cause relief is available to taxpayers under Sec. 6038(c)(4). If a taxpayer fails to file a Form 5471 for more than 90 days after the IRS notifies the taxpayer of the failure to file, an additional $10,000 penalty can be imposed under Sec. 6038(b)(2) for each 30-day period (or fraction thereof) the failure to file continues, with a maximum penalty of $50,000. Moreover, Sec. 6038(c) provides a 10% reduction of the foreign taxes available for credit under Secs. 901, 902, and 960 for any failure to file Form 5471.
Description of New Policy
The Service implemented its new policy beginning January 1, 2009. In its current form, the new policy applies only to late-filed Forms 1120 (and returns in the Form 1120 series) with Form 5471 attached. The new penalty policy does not apply to individual income tax returns (Form 1040, U.S. Individual Income Tax Return) or partnership returns (Form 1065, U.S. Return of Partnership Income). In addition, the policy applies to late-filed but not incomplete or inaccurate Forms 5471. Further, the new policy is limited to Forms 5471 and does not apply to other forms that are required to be filed under Sec. 6038. (Other forms that must be filed under Secs. 6038 or 6046 are Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities, and Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships.)
It should be noted that although the new policy appears to be limited in its scope, it does not preclude the IRS from asserting penalties that may be beyond the scope of the policy. The Service is continuously evaluating this policy and may revise it as necessary. In addition, the new policy does not alter the current IRS policy for asserting the failure to file or pay a tax penalty under Sec. 6651(a).
Under the new policy, when a corporate income tax return is filed late with Form 5471 attached, the IRS will automatically send a “notice to respond” to the taxpayer. This notice will allow the taxpayer to ask the IRS to abate the late-filing penalty based on reasonable cause. If the IRS does not receive a timely response or is not satisfied with the reasons to abate the penalty, the Service will issue a “notice to assess” to the taxpayer. This procedure is consistent with the current IRS policy on the failure to file or pay penalties. The IRS does not intend to automatically assert the penalty under Sec. 6038(c), which reduces the foreign tax credit. The IRS will assert this penalty only on examination of the corporate income tax return.
Taxpayers who timely filed their corporate income tax returns but failed to attach the necessary Forms 5471 can amend their returns with the required Forms 5471 attached. The IRS has implemented a limited procedure at its Ogden facility that will allow taxpayers to request reasonable cause relief before any assertion of penalties. The delinquent Form 5471 can be attached to Form 1120X, Amended U.S. Corporation Income Tax Return, along with a reasonable cause statement. The Form 1120X should indicate that a reasonable cause statement is attached to the return. In these instances, the IRS has indicated that it will consider whether reasonable cause exists before asserting penalties.
If the original return was e-filed, taxpayers are required to e-file the amended return. If a paper return was originally filed, the amended return should be filed at the applicable IRS Center where the corporation filed its original return. Taxpayers should include the reasonable cause statement with the amended return but must separately mail the reasonable cause statement to: Internal Revenue Service, ARKA Monterrey Park, 1973 N. Rulon White Blvd, Mail Stop 6552 (ARKA)—Attn: AM Clerical, Ogden, UT 84404.
John Miller is a faculty instructor at Metropolitan Community College in Omaha, NE. John Keenan is a tax director with Deloitte Tax LLP in Washington, DC. Vibhuti Patel is a manager with Deloitte Tax LLP in Washington, DC. The editor and Mr. Keenan are members of the AICPA Tax Division’s IRS Practice and Procedures Committee. For further information about this column, contact Mr. Miller at firstname.lastname@example.org.
This item does not constitute tax, legal, or other advice from Deloitte Tax LLP, which assumes no responsibility with respect to assessing or advising the reader as to tax, legal, or other consequences arising from the reader’s particular situation.