Reducing Form 5471 Penalties | Form 5471 Tax Lawyer & Attorney

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Reducing Form 5471 penalties has become a big headache for US shareholders of foreign corporations due to a very aggressive enforcement stance by the IRS. In this essay, I would like to explore the main option for reducing Form 5471 penalties – the Reasonable Cause Exception.

Reducing Form 5471 Penalties: What is Form 5471?

26 USC §6038 requires a US shareholder to report certain information with respect to a foreign corporation which is owned at least ten percent by the shareholder. Additionally, 26 USC §6046 imposes additional reporting requirements on US shareholders and US directors of a foreign corporation with respect to acquisition of its stock, its organization and its reorganization.

All of these reporting requirements can be satisfied by a timely filing of accurate Form 5471 with the taxpayer’s tax return. There are four different categories of Form 5471 filers depending on the taxpayer’s ownership percentage, the event that triggered the filing of Form 5471, whether the taxpayer is a director of the corporation and whether the corporation in question is a Controlled Foreign Corporation (“CFC”). Each of the filer categories needs to complete his own parts of Form 5471 and its Schedules.

Reducing Form 5471 Penalties: Form 5471 Penalties

There are five sets of Form 5471 penalties that may be imposed on US shareholders.

First, with respect to failure to comply with Form 5471 and Schedule M requirements (i.e. failure to comply with 26 USC §6038), there is a $10,000 penalty per form. Additionally, an extra $10,000 penalty per each 30-day period (or a fraction thereof) during which the failure continues after the initial 90-day notice from the IRS. This additional penalty is capped at $50,000 per form.

Second, with respect to failure to comply with Form 5471 and Schedule O requirements (i.e. failure to comply with 26 USC §6046), there is another $10,000 penalty. Similar to §6038, an additional $10,000 penalty may be imposed by the IRS for continuous failure to comply with 26 USC §6046; this penalty also cannot exceed $50,000 per form.

Third, in certain situation, the IRS may recommend criminal penalties under 26 USC §§7203, 7206 and 7207 if a taxpayer fails to comply with 26 USC §§6038 and §6046.

Fourth, failure to timely supply the required Form 5471 information may result in a 10% reduction in the foreign tax credit available under 26 USC §§901, 902 and 960. If the failure persists for 90 days or more after the date when the IRS informs the taxpayer of this failure, an additional 5% reduction is applied for each three-month period (or fraction thereof) of the continuation of the failure to comply with Form 5471 requirements. 26 USC §6038(c)(2) imposes certain limitations on this reduction of foreign tax credit.

Finally, foreign financial asset understatement penalties may be imposed pursuant to 26 USC §6662(j). In other words, any underpayment of tax as a result of a taxpayer’s failure to file an accurate Form 5471 will lead to the imposition of a 40% penalty on the underpaid tax (as opposed to the usual 20% accuracy-related penalty on underpayments).

Reducing Form 5471 Penalties: the Reasonable Cause Exception

All of the penalties listed above may be reduced to zero if the taxpayer is able to establish that he could not comply with Form 5471 requirements due to reasonable cause. For example, see Treas. Reg. §1.6038-2(k)(3).

Reasonable Cause is not defined anywhere in the Internal Revenue Code, but, in general, the courts have followed the Supreme Court’s definition in United States v. Boyle, 469 U.S. 241, 246, 105 S. Ct. 687, 83 L. Ed. 2d 622 (1985). The Boyle case stated that, if a taxpayer exercises ordinary business care and prudence and is nevertheless unable to obtain and provide the required information, the failure to file will be considered to have occurred due to reasonable cause.

This is a standard that, of course, requires a very detailed analysis of the facts that led to Form 5471 noncompliance. Drafting a Reasonable Cause Statement is a very creative and detail-oriented process at the same time. Everything should be analyzed carefully by the international tax attorney who is drafting a Reasonable Cause Statement: taxpayer’s education and work history, his cultural backgrounds, reliance on tax and financial professionals, mistaken understanding of law or facts, circumstances beyond the taxpayer’s control and innumerable other factors.

Reducing Form 5471 Penalties: Administrative Process

In order to establish that the Reasonable Cause exception applies to Form 5471 noncompliance, the taxpayer needs to make an affirmative showing of all facts alleged as reasonable cause in a written statement containing a declaration that it is made under the penalties of perjury. See Treas. Reg. §1.6038-2(k)(3). “The statement must be filed with the district director for the district or the director of the service center where the return is required to be filed.” Id.

Contact Sherayzen Law Office for Professional Help In Reducing Your Form 5471 Penalties

Sherayzen Law Office has a unique expertise in drafting Form 5471 Reasonable Cause Statements with respect to foreign corporations established in a very wide range of countries in Africa, Asia (including Japan), Europe and Latin America; of course, we a also have had a large number of clients who own Canadian corporations. We have helped all of these taxpayers to successfully reduce and even eliminate their Form 5471 penalties.

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IRS Written Advice Abatement Procedures | IRS Tax Lawyer

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This is the concluding article in our series of articles on the topic of the IRS Written Advice Defense. In prior articles, we have outlined the general legal test of the IRS Written Advice Defense and described each of the three prongs of this test. In this article, I would like to discuss the IRS Written Advice Abatement Procedures – i.e. the actual administrative process for requesting abatement of penalties based on this defense.

This article is for educational purposes only and I strongly encourage you to retain the services of an experienced tax attorney before engaging in the IRS Written Advice Abatement Procedures.

IRS Written Advice Abatement Procedures: Form 843

The centerpiece of the IRS Written Advice Abatement Procedures is Form 843. Taxpayers who are entitled to an abatement of penalties pursuant to 26 U.S.C. §6404(f) should complete and file Form 843. At the top of Form 843, taxpayers should write: “Abatement of penalty or addition to tax pursuant to section 6404(f).” Furthermore, taxpayers should state on Form 843 whether the penalty or addition to tax has been paid.

IRS Written Advice Abatement Procedures: Documents to Be Submitted with Form 843

The taxpayers must submit copies of the following documents together with their Form 843 (note that these documents are directly related to the three-prong legal test for the IRS Written Advice Defense):

1. A copy of the taxpayer’s written request for the IRS advice (with a statement of adequate and accurate facts);

2. A copy of the erroneous written advice provided by the IRS to the taxpayer and relied upon by the taxpayer; and

3. A copy of a report (if any) of tax adjustments (the report should identify the penalty or addition to tax and the item for which the erroneous IRS written advice was requested).

In addition to these required documents, I recommend that most of Form 843 abatement requests be accompanied by a detailed description of facts, the erroneous IRS written advice, the taxpayer’s reliance on this advice and how this reliance led to the imposition of a penalty.

IRS Written Advice Abatement Procedures: Time Limitations for Filing Form 843

The IRS regulations also address the issue when Form 843 should be submitted in order to be considered a timely request for abatement. The regulations specified that any abatement of a penalty or addition to tax pursuant to 26 U.S.C. §6404(f) will be permitted only if the request for such an abatement “is submitted within the period allowed for collection of such penalty or addition to tax, or, if the penalty or addition to tax has been paid, the period allowed for claiming a credit or refund of such penalty or addition to tax.” Treas. Reg. §301.6404-3(e).

IRS Written Advice Abatement Procedures: Where to File Form 843

The mailing address of Form 843 depends on whether the incorrect IRS advice is related to an item on a federal tax return. If the advice is related to an item on the taxpayer’s tax return, then Form 843 should be submitted to the IRS center where the tax return was originally filed. On the other hand, if the erroneous IRS advice is not concerning any item of the taxpayer’s federal tax return, then the taxpayer should submit Form 843 to the IRS Center where the taxpayer’s return was filed for the taxable year in which the taxpayer relied on the erroneous advice.

Contact Sherayzen Law Office for Professional Help With Respect to Abatement or Reduction of IRS Penalties

If the IRS imposed a penalty with respect to your prior noncompliance with US international tax returns, such as FBAR, Forms 926, 3520, 5471, 5472, 8621, 8865, 8938, et cetera, contact Sherayzen Law Office to explore your IRS penalty reduction options. Sherayzen Law Office is an international tax law firm that has helped US taxpayers around the world to deal with these penalties. We can help You!

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IRS Written Advice Defense: Adequate & Accurate Information | Tax Lawyer

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This is the fourth article on the topic of the IRS Written Advice Defense under 26 U.S.C. §6404(f). The first three articles outlined the legal test for the Defense and described the first and the second prongs of the test. In this say, I will briefly discuss the final third prong of the IRS Written Advice Defense – the requirement to provide adequate and accurate description of facts.

IRS Written Advice Defense: Taxpayer Must Provide Adequate and Accurate Description of Facts

When a taxpayer asks the IRS for advice, he must provide adequate and accurate description of his facts based on which the IRS has to make its decision. If the taxpayer fails to supply the IRS with adequate and accurate information, then the IRS Written Advice Defense will fail. See Treas. Reg. § 301.6404-3(b)(4). It should be noted that the IRS “has no obligation to verify or correct the taxpayer’s submitted information.” Id.

This is a much more difficult task that it may appear, because “adequate” really means here a complete set of all material facts that may influence the IRS analysis. If the taxpayer provides only the facts that are favorable and omits the facts which are unfavorable, the IRS advice will not give the taxpayer the protection against imposition of future penalties that the he seeks.

This is why I strongly encourage taxpayers to retain tax attorneys to submit their written request for the IRS written advice. This is especially true in the area of US international tax law.

Contact Sherayzen Law Office for Professional Help With Your IRS Written Advice Defense And Any Other Reasonable Cause Defense

Sherayzen Law Office has an extraordinary experience in drafting Reasonable Cause Statements on various grounds, including IRS advice. We have drafted such statements in defense against imposed and potential FBAR, Form 926, 3520, 5471, 8621, 8865 and other IRS penalties.

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IRS Written Advice Defense & The Written Request | Tax Lawyers MN

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This article is a continuation of the series of articles on the IRS Written Advice Defense. In the first article of this series, I outlined the legal test for the Defense. The second article of the series focused on the first prong of that test. In this essay, I would like to briefly highlight the second prong of this legal test: the IRS written Advice must be issued in response to a taxpayer’s written request.

IRS Written Advice Issued in Response to Written Request by the Taxpayer

This second prong of the IRS Written Advice Defense is not as simple as it seems at first. The main issue here is when a specific written request is considered to be made by a taxpayer. Obviously, if the taxpayer writes a written request himself, it was made “by a taxpayer”. What about a request made by a taxpayer’s representative?

The IRS regulations state that a written request from a taxpayer’s representative shall be considered a “written request by the taxpayer” only if two conditions are met. First, a taxpayer’s representative must be “an attorney, a certified public accountant, an enrolled agent, an enrolled actuary, or any other person permitted to represent the taxpayer before the Service and who is not disbarred or suspended from practice before the Service.” Treas. Reg. §301.6404-3(b)(3).

Second, “the written request for advice either is accompanied by a power of attorney that is signed by the taxpayer and that authorizes the representative to represent the taxpayer for purposes of the request, or such a power of attorney is currently on file with the Service.” Id.

The Written Request for the IRS Written Advice Must Be Properly Made

In a future article, I will describe the property abatement procedure with which the taxpayer’s written request must comply. For the purposes of this essay, I just wish to point out that this is the second major issue concerning written requests for the IRS Written Advice.

Contact Sherayzen Law Office for Professional Help With Your IRS Written Advice Defense And Any Other Reasonable Cause Defense

If the IRS has imposed penalties as a result of an audit of your tax return or FBAR, contact Sherayzen Law Office for professional help. We have helped US taxpayers around the world to deal with their IRS penalties, and We can help You!

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IRS Written Advice Defense: Reasonable Reliance | International Tax Lawyer

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In a previous article, I outlined the three-prong legal test of the IRS Written Advice Defense. This article aims to explore the first prong of that test: the IRS written advice was reasonably relied upon by the taxpayer. In particular, I would like to explain two important concepts of this part of the test: “advice”and “reasonable reliance”.

IRS Written Advice Defense: Advice

In the context of the IRS Written Advice Defense, “advice” is not just any written response provided by the IRS. Rather, for purposes of the IRC section 6404(f), a written response issued to a taxpayer by the IRS “shall constitute ‘advice’ if, and only if, the response applies the tax laws to the specific facts submitted in writing by the taxpayer and provides a conclusion regarding the tax treatment to be accorded the taxpayer upon the application of the tax law to those facts.” Treas. Reg. § 301.6404-3(c)(1).

IRS Written Advice Defense: Reasonably Relied Upon

The IRS Written Advice Defense can only work if the taxpayer actually reasonably relied upon the advice furnished by the IRS – i.e. the taxpayer took an action or failed to act in response to the advice. One of the main issues here is the timing of the taxpayer’s reliance.

In situations related to an item on a taxpayer’s federal tax return, if an IRS advice was received after the taxpayer already filed his original return, the IRS Written Advice Defense is likely to fail because the IRS will not consider the taxpayer’s post factum reliance on its advice as reasonable.

There is an exception, however, with respect to situations where the taxpayer took action in response to the IRS advice and filed an amended tax return. As long as the amended return conforms with the IRS written advice, “the taxpayer will be considered to have reasonably relied upon the advice for purposes of the position set forth in the amended return.” Treas. Reg. §301.6404-3(b)(2)(iii).

Similarly, in cases where an IRS written advice is furnished with respect to an item unrelated to a federal tax return (e.g. estimated tax payments) and it is furnished before the taxpayer acted or failed to act on the item that caused the imposition of IRS penalties, the IRS will again not consider the taxpayer’s reliance as reasonable or timely.

IRS Written Advice Defense: Duration of the Period of Reliance

It is also important to remember that a period of reliance on the IRS written advice only lasts until the taxpayer is put on notice that the advice no longer corresponds to the IRS position. The question is: what does being “put on notice” mean?

There are five situations which will end the taxpayer’s period of reasonable reliance on the IRS advice as long as they occur subsequent to the issuance of the advice by the IRS:

(a) the taxpayer receives a letter from the IRS stating that the advice no longer reflects the IRS position;

(b) a tax treaty is enacted or a new tax law was passed and both of these events concern the item with respect to which the IRS advice was issued;

(c) A decision of the United States Supreme Court;

(d) The issuance of temporary or final regulations by the IRS ; or

(e) The issuance of a revenue ruling, a revenue procedure, or other statement by the IRS that was published in the Internal Revenue Bulletin.

Contact Sherayzen Law Office for Professional Help With Your IRS Written Advice Defense And Any Other Reasonable Cause Defense

If the IRS imposed penalties as a result of a tax return or FBAR audit, contact Sherayzen Law Office for professional help. Taxpayers around the world have learned to trust Sherayzen Law Office to bring their US tax affairs in order and rigorously defend them against the imposition of FBAR and other penalties related to the US international information returns. We can help You!

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