In my practice I have encountered situations where a taxpayer has delinquent Form 5471 or Form 3520, but there is no additional tax liability associated with the delinquent forms. In these situations, a natural questions arises on how to best deal with this situation.
One of the options is to follow Q&A 18 of the Offshore Voluntary Disclosure Program (OVDP) Rules. (This program is now discontinued). In very limited circumstances, Q&A 18 allows a small number of eligible taxpayers escape Form 5471 and Form 3520 penalties.
Form 5471 is used by the IRS to satisfy the informational reporting requirements of 26 U.S.C. § 6038 (“Information reporting with respect to certain foreign corporations and partnerships”) and 26 U.S.C. § 6046 (“Returns as to organization or reorganization of foreign corporations and as to acquisitions of their stock”). It must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in specified foreign corporations, if various requirements are met. Failure to file Form 5471 may result in the imposition of steep penalties (see this article for more details).
Form 3520 (Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts) is used by U.S. persons (and executors of estates of U.S. decedents) to report certain transactions with foreign trusts, ownership of foreign trusts under the rules of IRC §§ 671 through 679, and receipt of certain large gifts or bequests from certain foreign persons. Failure to file Form 3520 may result in very heavy penalties.
From the outset, it is important to understand that Q&A 18 has a very limited application. It is only relevant in the situation where the taxpayer failed to file Forms 5471 or Forms 3520, but he reported and paid tax on all their taxable income with respect to all transactions related to the foreign corporations or foreign trusts. The IRS is not likely to impose a penalty for the failure to file the delinquent Forms 5471 and 3520 if there are no underreported tax liabilities and the taxpayer has not previously been contacted regarding an income tax examination or a request for delinquent returns.
Whether Q&A 18 applies to your particular situation is a question that should be determined by an international tax attorney experienced in the area of voluntary disclosures. NOTE: IRS OVDI & OVDP Programs are closed. If your attorney determines that this OVDP provision is applicable in your situation, the attorney should file delinquent information returns with the appropriate service center according to the instructions for the form and attach a statement explaining why the information returns are filed late. Note that the Form 5471 should be submitted with an amended return showing no change to income or tax liability. The attorney should further include at the top of the first page of each information return “OVDI – FAQ #18” to indicate that the returns are being submitted under this procedure.
Amended Return Shows Additional Income Unrelated to Form 5471
An interesting question arises in situations where amended tax returns do show additional income, but the income is not in any way related to Form 5471. While your attorney should carefully review the nature and source of the income, it is possible that Q&A 18 will still apply assuming all other requirement of Q&A 18 are met.
Contact Sherayzen Law Office for Voluntary Disclosure Help with Tax Information Returns
It must be remembered that this article is produced for educational purposes only and does not constitute legal advice; only your tax attorney can determine whether Q&A 18 applies to your situation and how to best comply with its requirements.
Note: The OVDP has been discontinued. If you have undisclosed foreign business entities or foreign trusts, contact Sherayzen Law Office for help. Our experienced international tax team will thoroughly review your case, assess your information tax return (Form 5471, 8865, 3520, et cetera) liability, identify the available voluntary disclosure options and implement the agreed-upon strategy (including preparation of all legal and tax documents).