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2024 Form 5471 Penalties | International Tax Lawyer & Attorney

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Failure to timely and correctly submit Form 5471 with a US tax return may lead to an imposition of Form 5471 penalties. In this article, I will discus the most important 2024 Form 5471 penalties that US taxpayers may face if they fail to comply with the Form 5471 requirements.

2024 Form 5471 Penalties: Purpose of Form 5471

We first need to understand the purpose of Form 5471 and broadly identify who may need to file this form. The IRS Form 5471 is an extremely complex form that is used to satisfy the reporting requirements of mainly two esoteric sections of the Internal Revenue Code: 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 should be noted that Form 5471 is used to satisfy other US tax provisions, especially after the 2017 tax reform. IRS §§ 6038 and 6046, however, are most relevant for our discussion of Form 5471 penalties.

Certain US citizens and US tax residents who are officers, directors or US shareholders of a foreign corporation may need to file Form 5471 and accurately comply with its reporting requirements. Failure to file Form 5471 or failure to file a correct Form 5471 may result in the imposition of steep IRS penalties.

The First Set of 2024 Form 5471 Penalties: Failure to file information required under section 26 U.S.C. § 6038(a)

From the outset, it is important to note that 26 U.S.C. § 6038 applies to two different parts of Form 5471: the Form 5471 proper (i.e. the first six pages containing the identifying information and Schedules A through I plus Schedules H and I-1) and Schedule M of Form 5471. Failure to file either is enough to trigger a $10,000 penalty for each annual accounting period of each foreign corporation. If the IRS sends the taxpayer a notice of a failure to file, an additional $10,000 penalty (per foreign corporation) will be charged for each 30-day period (or fraction thereof), during which the failure continues after the 90-day period in which the notification occurred, has expired. This additional penalty is limited to a maximum of $50,000 for each failed filing.

Furthermore, there is an income tax penalty associated with the failure to comply with 26 U.S.C. § 6038 in a timely manner – the taxpayer may be subject to a 10% reduction of certain available Foreign Tax Credits. A further 5% reduction may be applied for each 3-month period (or fraction thereof), during which the failure to timely report or file continues after the 90-day period of IRS notification has expired. (26 U.S.C. § 6038(c)(2) places certain limitations on this penalty).

The Second Set of 2024 Form 5471 Penalties: Failure to file information required by 26 U.S.C. § 6046 and related regulations (Form 5471 and Schedule O)

In addition to 26 U.S.C. § 6038 Form 5471 penalties, there is also an additional set of Form 5471 penalties associated with 26 U.S.C. § 6046 (Form 5471 and Schedule O). Failure to comply with 26 U.S.C. § 6046 will subject the taxpayer to another $10,000 penalty for each failure to file for each reportable transaction. Additionally, if the failure to report or file continues for more than 90 days after the date the IRS mails notice of this failure, an additional $10,000 penalty will apply for each 30-day period (or fraction thereof) during which the failure continues after the 90-day period has expired. This additional penalty is limited to a maximum of $50,000.

2024 Form 5471 Non-Compliance May Result in Criminal Penalties

In addition to civil penalties under 26 U.S.C. § 6038 and 26 U.S.C. § 6046, criminal penalties may apply to Form 5471 filers in certain circumstances. In particular, a willful failure to file an accurate Form 5471 may activate the broad provisions of 26 U.S.C. § 7203 (“Willful failure to file return, supply information, or pay tax”), 26 U.S.C. § 7206 (“Fraud and false statements”), and 26 U.S.C. § 7207 (“Fraudulent returns, statements, or other documents”).

2024 Form 5471 Penalties and Persons Other Than the Filer

In situations where the filer should have filed Forms 5471 for other persons, but failed to do so, Form 5471 penalties may be extended to these other persons.

Contact Sherayzen Law Office For Help With 2024 Form 5471 Penalties and Compliance

If you partially or fully own a foreign corporation, you may be subject to the Form 5471 requirements. As explained in this article, failure to timely and/or correctly comply with your Form 5471 filing obligations may result in steep Form 5471 penalties.

Contact Sherayzen Law Office today for professional help concerning Form 5471 penalties, including engaging in offshore voluntary disclosures involving Form 5471.

Contact Us Now to Schedule Your Confidential Consultation!

Fundamental Form 5471 Concepts | Form 5471 Tax Lawyer & Attorney

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Form 5471 is the most important information return that the IRS uses to collect information about foreign corporations with substantial US ownership. US taxpayers must file a Form 5471 with their US tax returns; failure to do so may result in the imposition of significant IRS penalties. In order to identify whether the IRS requires them to file Form 5471, US taxpayers must at the very least understand the following three fundamental Form 5471 concepts: “US Person”, “US Shareholder” and “Controlled Foreign Corporation” (“CFC”). This article introduces readers to these fundamental Form 5471 concepts.

Fundamental Form 5471 Concepts: US Person

The definition of “US Person” is crucial to understanding your Form 5471 filing requirements. Generally, the definition of a US person includes the following categories of taxpayers: US citizens, US tax residents, a domestic partnership, a domestic corporation, certain trusts and certain estates. It should be pointed out that tax-exempt entities can also be US persons.

In order for a trust to be a US Person, it must not be a foreign trust; in other words, it must satisfy the legal tests set forth in the Internal Revenue Code (“IRC”) §7701(a)(30). The first test is that a court within the United States is able to exercise primary jurisdiction over the trust’s administrative issues. The second test is that a US person has authority to make all important discretionary decisions which cannot be vetoed by a non-US person.

In order for an estate to be a US person, it must not be a foreign estate as defined in the IRC §7701(a)(31).

Fundamental Form 5471 Concepts: US Shareholder

The concept of US shareholder is also very important for understanding one’s Form 5471 obligations. The definition of a US shareholder was recently modified by the 2017 Tax Cuts and Jobs Act (“TCJA”).

A “US shareholder” is a US Person who owns either: (a) 10% or more of the total combined voting power of all classes of voting stock of a foreign corporation; or (b) 10% or more of the value of all the outstanding shares of a foreign corporation. The latter rule (10% ownership of the total value of shares) is applicable starting a tax year of a foreign corporation that begins after December 31, 2017.

It is important to point that “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).

Fundamental Form 5471 Concepts: Controlled Foreign Corporation

Owners of shares in a CFC face a far greater Form 5471 compliance burden than owners of shares in foreign corporations which are not CFCs. Hence, the concept of CFC is extremely important to identifying your Form 5471 obligations.

A CFC is a foreign corporation with US shareholders that own on any day of its tax year, more than 50% of either (1) the total combined voting power of all classes of its voting stock, or (2) the total value of its stock. Again, the “ownership” can be direct, indirect or constructive within the meaning of IRC §958(a) and §958(b).

The 2017 tax reform made profound changes to the definition of CFC. Many foreign corporations which were not CFCs under the pre-TCJA rules have been re-classified as CFCs starting tax year 2018.

Contact Sherayzen Law Office for Professional Help With Your Form 5471 Compliance

If you are a US person with an ownership interest in a foreign corporation of 10% or more, you may have extensive Form 5471 reporting obligations. Given the extreme complexity of the form and the high penalties associated with Form 5471 noncompliance, it is important secure the professional and experienced help of Sherayzen Law Office.

Contact Us Today to Schedule Your Confidential Consultation!

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.

Contact Us Today to Schedule Your Confidential Consultation!