Form 5471 Penalties

Editor: Neal A. Weber, CPA

Foreign Income & Taxpayers

It is extremely important that taxpayers timely file federal income tax returns that include Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, regardless of whether the return shows a balance due. Form 5471 is used to satisfy the reporting requirements of Sec. 6038 and related regulations as they apply to foreign corporations. Failing to comply with the Sec. 6038 reporting requirements will result in a penalty of $10,000 for each annual accounting period for which such failure exists, and the penalty will apply even if the income tax return shows no tax due. In addition to the monetary penalty, a 10% reduction may be applied to the foreign taxes available for credit under Secs. 901, 902, and 960.

An IRS Service Center that receives a late-filed income tax return will automatically impose penalty charges in the amount of $10,000 for each Form 5471 attached to the late-filed income tax return. While the taxpayer will be notified of the penalty assessment and given an opportunity to request abatement for reasonable cause, if abatement is denied interest will be charged on the penalty. In some cases, the IRS levies taxpayers’ bank accounts to ensure payment of the penalty. Thus, filing income tax returns late, even when no payment is due, can have detrimental consequences when it comes to penalties under Sec. 6038. There may also be dire consequences with respect to certain elections made on untimely filed returns.

Tax return preparers may want to add a conspicuous “red flag” to tax return filing instructions sent to clients. Such a warning might be couched in the following language:

WARNING—This tax return contains elections, schedules, and/or other forms that require the return to be filed on time and proof of date of filing to be retained. If proof of timely filing cannot be made, penalties and interest could accrue, and beneficial elections could be invalidated.

For more information on the automatic assessment of penalties under Sec. 6038(b)(1), see Keenan and Patel, “IRS Changes Policy for Asserting Penalties for Late-Filed Form 5471,” 40 The Tax Adviser 52 (January 2009); see also information on the IRS website.

EditorNotes

Neal Weber is managing director-in-charge, Washington National Tax, with RSM McGladrey, Inc., in Washington, DC.

For additional information about these items, contact Mr. Weber at (202) 370-8213 or neal.weber@mcgladrey.com.

Unless otherwise noted, contributors are members of or associated with RSM McGladrey, Inc.