Form 5471 Penalties: Consequences of Not Filing & How to Get Back Into Compliance

Form 5471 Penalties: Consequences of Not Filing & How to Get Back Into Compliance

U.S. persons who are officers, directors, or shareholders in certain foreign corporations must file Form 5471 with their income tax returns. The IRS assesses an automatic penalty of $10,000 for failure to file this information return. However, if you've overlooked the form, there are options to get back into compliance.

The international tax attorneys at Wiggam Law are here to help you navigate Form 5471 penalties.

Key takeaways

• Form 5471: must be filed by U.S. persons who are officers, directors, or shareholders in certain corporations.
• Penalty for not filing: $10,000 per foreign corporation, per year, assessed automatically regardless of tax owed.
• Continuation penalty: an additional $10,000 penalty every 30-day period beginning 90 days after the IRS mails a CP15 notice, up to $50,000.
• Additional consequences: 10% reduction of available foreign tax credits, plus an additional 5% reduction for every three-month period beginning 90 days after the IRS mails a CP15 notice.

Penalty for Not Filing Form 5471

The penalty for not filing Form 5471 is $10,000 per form per year. The IRS may also add continuation penalties of $10,000 per month, up to $50,000, if you don't respond to Notice CP15 within 90 days. That makes the maximum penalty $60,000, plus IRS interest that compounds daily.

If you're involved with multiple foreign corporations, you may face even higher penalties as you're required to file a form for each corporation, and the penalties apply per form.

Additional Consequences of Not Filing Form 5471

Not filing this form as required also exposes you to these risks:

• Unlimited time to audit your tax return: An IRS auditor can review your return at any time if you don't file Form 5471 as required, while normally the agency only has three years to audit a return.
• Reduction in foreign tax credits: The IRS will reduce the foreign taxes available to claim a credit against by 10%. For example, if you pay $50,000 in foreign taxes eligible for a credit, the tax base used to calculate the credit is reduced to $45,000.
• Continuation credit reductions: If you don't file within 90 days of when the IRS issues Notice CP15, the IRS will apply an additional 5% reduction in each of the following three-month periods, or fraction thereof.
• Form 8883 Penalties: You may also incur penalties, such as accuracy-related penalties, for not attaching Form 8883 to Form 5471, if required, or if you attach the form but don't complete it fully or accurately.
• Criminal exposure: Although the IRS addresses most failure-to-file information return cases with civil penalties, the agency can recommend a criminal investigation in cases where it suspects tax evasion or other crimes under sections 7203, 7206, or 7207 of the Internal Revenue Code (IRC).

The IRS may also assess the full $10,000 penalty if you fail to include all of the information required on Schedule O under section 6046. You may also face penalties if you allow another person to file Form 5471 or Schedules J, M, or O on your behalf and they report incorrect information.

Who Needs to File?

U.S. persons must file Form 5471 if they are directors, officers, or shareholders in certain foreign corporations, or if they had control of a foreign corporation during its annual accounting period. This includes:

• U.S. persons who own more than 10% of the shares or more than 10% of the shares with voting rights in a specified foreign corporation.
• U.S. persons who are officers or directors of a foreign corporation where a U.S. person owns 10% or more of the shares or voting rights.
• U.S. persons who have more than 50% of the total combined voting power of a foreign corporation or more than 50% of the total value of shares of all classes of stock in a foreign corporation.

For tax purposes, a U.S. person is a U.S. citizen, resident, or domestic entity (corporation, partnership, trust, etc.). The Form 5471 instructions identify five categories of taxpayers who must file, with numerous exceptions and guidelines for dealing with recently acquired shares, foreign corporation sales, and other extenuating circumstances.

Avoiding and Mitigating Form 5471 Penalties

Filing Form 5471 late automatically triggers failure-to-file penalties, but the IRS will abate the penalties if you qualify for reasonable cause or first-time penalty abatement. You may also be able to avoid or reduce the penalties through the agency's Delinquent International Information Return Submission Procedures (DIIRSP) or Streamlined Filing Compliance Procedures.

Reasonable Cause

If you acted with ordinary care and prudence but still missed the filing requirement, you may qualify for reasonable cause penalty abatement. The IRS may also accept reasonable cause relief in cases where you understated the value of a foreign asset. Individuals, corporations, and other entities may apply for reasonable cause relief.

To qualify, you must show the agency that you acted with reasonable caution or that events outside of your control prevented you from filing. If the IRS approves your claim, they'll generally abate the full failure-to-file penalty, and if you're seeking relief on an accuracy-related penalty for underreporting tax, the relief will apply to the portion of the understatement that qualifies for reasonable cause.

First-Time Penalty Abatement (FTA)

The IRS will only grant first-time penalty relief on Form 5471 failure-to-file penalties if all of the following apply:

• Form 5471 was filed with a late corporate (Form 1120) or partnership (Form 1065) income tax return.
• The corporate or partnership return qualifies for a first-time abatement of its late-filing penalties.

As indicated above, only corporations and partnerships may qualify for FTA on these penalties. Internal Revenue Manual (IRM) 20.1.1.3.3.2.1 (03-29-2023) explains that First-Time Abatement doesn't apply to Form 5471 failure-to-file penalties, except in the situations above as outlined in IRM 20.1.9.

Delinquent International Information Return Submission Procedures (DIIRSP)

The DIIRSP is for taxpayers who haven't filed Form 5471 but want to proactively avoid penalties when they file. To qualify:

• You must have reasonable cause for not filing.
• You must not be under IRS examination or investigation.
• The IRS must not have reached out about the unfiled returns.

If you haven't filed a tax return for the year, file it, attach Form 5471, and include a reasonable cause statement. If you've already filed, you can amend your return if needed and also attach Form 5471 and the reasonable cause statement.

This program doesn't guarantee that you'll avoid penalties. The IRS still has the right to impose penalties as applicable under the law. To protect yourself from the $10,000 failure-to-file and continuation penalties, you should strongly consider working with an international tax attorney.

Streamlined Domestic Offshore Procedures

The Streamlined Domestic Offshore Procedures let qualifying taxpayers get back into compliance with reduced penalties. Designed for individual taxpayers who reside in the United States or the estates of individual domestic taxpayers, this program applies to the following types of unfiled international returns:

• Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business)
• FBAR: Foreign Bank Account Reports (FinCEN Form 114)
• Form 8938 (Statement of Specified Foreign Financial Assets)
• Form 8865 (Return of U.S. Persons With Respect to Certain Foreign Partnerships)
• Form 3520 (Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts)

To qualify, you must certify that the failure to file wasn't willful. You can't be under examination or audit by the IRS, even if related to a different tax form or period. To apply, you'll submit Form 14654 (Certification by U.S. Person Residing in the U.S.) to certify that your conduct wasn't willful. You'll also amend tax returns as needed, noting that you're using the Streamlined Domestic Offshore Procedures, and you'll pay tax, interest, and penalties as required.

Penalties If You Qualify for Streamlined Compliance Procedures

The IRS applies a Title 26 miscellaneous offshore penalty of 5% of the highest aggregate end-of-year value of the unreported foreign asset. When dealing with Form 5471, it's typically based on the stock value as indicated on the form's balance sheet.

If you're also worried about late filing penalties for FBARs, you may be able to get back into compliance through the IRS's Streamlined Procedures or Voluntary Disclosure Program if your actions were willful.

Voluntary Disclosure for Unreported Foreign Assets

In cases where you acted willfully, you may need to use the IRS's Voluntary Disclosure Practice (VDP). It's designed to mitigate the risk of criminal consequences, and you should consider it only after consulting legal counsel.

Unreported Foreign Assets in Georgia

Dealing with the IRS is only part of the process. If you have unreported income, you may also need to amend your Georgia state income tax returns. Our Atlanta-based tax attorneys can help you navigate the Georgia Department of Revenue as well as the IRS. For example, the state's Voluntary Disclosure Program (VDP) may be the right avenue to report the income and minimize penalties on your state tax liability.

FAQs: Form 5471 Penalties

What if I haven't filed Form 5471 for years?

Then, you should reach out to an international tax attorney. You risk a penalty of $10,000 for every unfiled 5471 form, but an attorney can help you find the best way to get back into compliance and minimize the penalties you'll face.

Is there a statute of limitations on penalties for failure to file Form 5471?

No, the IRS can assess these penalties at any time after it realizes you didn't file this form, even years after the due date. The agency can also audit returns that don't have a required Form 5471 attached at any time.

Can I apply for Form 5471 penalty relief with the IRS's streamlined offshore procedures?

Possibly, but only if you reach out before the IRS contacts you, and you certify that your failure to file wasn't willful. The IRS allows foreign and domestic taxpayers to avoid most penalties through its streamlined compliance program, but there are different requirements for U.S. residents and non-residents.

Can I make a streamlined disclosure after I receive Notice CP15?

No, unfortunately, you cannot. You only qualify to use the Streamlined Domestic Offshore Procedures if the IRS hasn't contacted you about the unfiled form yet.

What should I do if I receive Notice CP15 or CP15B about Form 5471 penalties?

Contact the IRS or a tax attorney as soon as possible. The IRS will start charging continuation penalties and reducing your foreign tax credits if you don't respond to this notice. You may also face a heightened risk of audits or criminal exposure.

What if the foreign corporation is dormant?

Then, you may qualify to file a simplified version of Form 5471 under Rev. Proc. 92-70. However, you can still incur penalties for failure-to-file, and you'll still have to apply for penalty relief based on reasonable cause or through the IRS's delinquent or streamlined compliance procedures if you qualify.

Let Our Tax Attorneys Help You With Form 5471 Penalties

If you have unfiled international informational returns, there's a lot at stake. The penalties are intense, and the exposure increases when you have multiple filing requirements or increasing value in your foreign assets.

International tax compliance is extremely complicated, and you need the right guidance to protect yourself from penalties as you get back into compliance. Don't wait – contact us at Wiggam Law today to schedule a consultation with our international tax attorneys.