Be Substantially Compliant or Face Monetary Penalties
By Mary Vasilescu, CPA, MST
File complete forms 5471 and 5472 to avoid penalties and extension of statute of limitation.
The IRS Practice Unit (IPU) “The Meaning of “Substantially Complete” with Reference to International Information Return Penalties,” addresses substantial compliance related to international information returns. This release follows a 2015 issued IPU: “Failure to File the Form 5471 – Category 4 and 5 Filers – Monetary Penalty,” which focuses on Category 4 and 5 filers of Form 5471 “Information Return of U.S. Persons with Respect to Certain Foreign Corporations.” Since there is no definition in the Regulations or the Code of what is considered “substantially complete,” the recent IPU is useful information for taxpayers required to file foreign information forms by giving them guidance on how the IRS determines if a return meets the filing requirements by being substantially complete.
IRC Section 6038 requires certain U.S. citizens who are shareholders, officers, or directors of certain foreign corporations to file Form 5471 as part of their tax returns. Failure to submit the form correctly, either late or incomplete, may result in monetary penalties – unless the taxpayer can show reasonable cause or substantial compliance.
- An initial penalty of $10,000 per Form 5471 each year followed by additional penalty of $10,000 for every 30-day beginning 90 days after the individual was warned that a failure exists, to a maximum amount of $50,000 per Form 5471 each year
IRC Section 6038A provides that for 25% foreign-owned U.S. corporations required to report form 5472 that fail to do so a penalty of $10,000 is imposed for each tax year for which the corporation fails to furnish the information to the IRS or maintain records.
Additionally, the statute of limitation for the U.S. taxpayer’s entire return stays open for three years after the filing of the substantially completed Forms 5471 and 5472. If the taxpayer cannot prove reasonable cause the IRS can make any adjustments to any and all items in the entire tax return with no expiration until the required forms are filed. If the taxpayer can establish reasonable cause, then the limitation period is suspended only for the items the taxpayer failed to disclose.
The Unit explains that in order to determine whether a tax return satisfies a reporting requirement two standards may apply: strict compliance and substantial compliance. The IPU states that based on case law the substantial compliance applies to regulatory requirements and strict compliance applies to statutory requirements. The IPU cites as guidance on the meaning of “substantially complete” of international information returns the Field Service Advice (“FSA”) 33381431, and two Chief Counsel Advice (“CCA”) 200645023 and 200429007.
Practitioners and taxpayers should monitor filing of Forms 5471 and 5472 for completion and accuracy and are encouraged to review prior year filings for errors or missing information. Also, ensure that forms 5471 were filed for dormant corporations. Failure to correctly file the forms can have a significant cost considering the potential penalties and the expanded statute of limitations provisions.
For a link to the June 2017 IPU: https://www.irs.gov/pub/int_practice_units/iga_c_17_03_01_02.pdf
For a link to the October 2015 IPU: https://www.irs.gov/pub/irs-utl/FEN9433_01_06R.pdf
Mary Vasilescu, CPA, MST is Wiss’ international tax expert and advises clients on the formation, structure and taxation of business ventures, start-up enterprises and joint ventures in the U.S. and abroad, including mergers and acquisitions, restructuring, and international tax planning.