Doing business in the 21st century often includes operations done internationally. For these, there are numerous tax returns required to be filed (form 5471, 5472, 8858, 8883, 8886, 8918, 8938, etc.) which are often overlooked by taxpayers every year. With this fact in mind, the government has established procedures for late & non-filers to “catch up” on their past tax filings without the burden of heavy fines, an olive branch of sorts.
The IRS offers various means for late form 5471 filing relief. Each method has different requirements and is meant for different types of filers. However, it’s important to note that these programs and procedures are only permitted if the company’s foreign financial accounts are from a legal source (funds not gained from illegal activity), and the IRS is not already aware of the non-compliance.
Basically the US taxpayer needs to inform the IRS first of the non-compliance. If the US taxpayer receives a notification of non-compliance and possible penalty from the IRS, they wouldn’t be able to use these methods. That’s why it’s important to be proactive with your missed filings, as otherwise you may not be able to avoid the $10,000 penalty for a late form 5471 filing if the IRS sends you a notification letter.
Let’s take a look at each one and how one can apply for them:
|Filing Relief||General Description||Penalty Details|
|Streamlined Domestic Offshore Procedure (SDOP)||- Not willful conduct for failure to report/not pay taxes due|
- Individual Taxpayers(including estates of inv. taxpayers)
- Cannot do if under IRS civil examination of tax returns
|5% of the maximum aggregate balance in the unreported foreign financial account(s) during the 6 year period.|
|Streamlined Foreign Offshore Procedure (SFOP)||- Meet applicable non-residency requiremen|
- Not willful conduct for failure to report/not pay taxes due
- Must file delinquent/amended tax returns for past 3 years & delinquent FBARs for past 6 years
|Will not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties|
|Delinquent International Information Return Submission Procedures (DIIRSP)||- Do not use Streamlined Filing Compliance Procedure|
- Have Reasonable Cause for not timely filing
|IRS’s Voluntary Disclosure Program (VDP)||- Committed tax or tax-related crimes and have criminal exposure due to your willful violation of the law|
- Taxpayers who participate in the Voluntary Disclosure Practice intend to seek protection from potential criminal prosecution
|In general, the civil fraud penalties of 75% (fraudulent failure to file income tax returns) will apply to the tax year with the highest tax liability. However this may be applied to more than one year (up to all six years or more) if the taxpayer is uncooperative and does not make any agreement to resolve the issue.|
Streamlined Domestic Offshore Procedure (SDOP)
This filing option is available to taxpayers which failed to report foreign financial assets and pay tax on these not due to willful conduct, which is conduct that is due to negligence, inadvertence, or mistake or conduct that is the result of a good faith misunderstanding of the requirements set out in the tax laws.
This provides a streamlined procedure for filing amended or delinquent returns for US taxpayers (individuals or estates) residing in the United States. This option is also available for taxpayers who have previously filed delinquent or amended returns in the past. However if the IRS has already initiated a civil examination of the taxpayer’s returns, they cannot use this procedure.
The streamlined program requires the taxpayer to file income tax returns or delinquent/amended returns for 3 prior years and applicable FBARs for 6 prior years, along with a declaration attesting that their failure to file was not willful.
After completing the streamlined compliance procedure, the taxpayer is expected to comply with U.S. law for all future years and file proper returns and filing procedures.
Streamlined Foreign Offshore Procedure (SFOP)
This filing option is also available to offshore taxpayers (those outside the US) which failed to report foreign financial assets and pay tax on these not due to willful conduct.
Taxpayers using this Streamlined Foreign Offshore Procedure should be:
- U.S. Citizens, lawful permanent residents, and those meeting the substantial presence test of IRC section 7701(b)(3)
- For each of the most recent 3 years which the U.S. Tax return due date has passed, filed a delinquent/amended tax return and required information returns.
- For each of the most recent 6 years in which the FBAR due date has passed, file any delinquent FBARs.
The full amount of tax and interest due must be remitted with the delinquent/amended returns.
The benefit of this procedure is the taxpayer would not be subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties, or FBAR penalties. However, any previously assessed penalties for those years in question would not be abated. Include at the top of the first page of each delinquent or amended tax return and at the top of each information return “Streamlined Foreign Offshore” in red. In addition to this complete and sign a statement on the Certification by U.S. Person Residing Outside of the U.S.(Form 14653), attach both the original and copies to each tax return and information return being submitted, and make payments for all taxes due on the reflected tax returns.
Delinquent International Information Return Submission Procedures (DIIRSP)
This option is for taxpayers who do not use the streamlined filing procedures or OVDP and have not filed one more required international information returns (with reasonable cause) and are not under civil examination or have already been contacted by the IRS for the missing information return. However all past income tax returns and tax payments must be settled, only the delinquent information return for past years being missing.
A reasonable cause statement must be attached to each delinquent information return filed.
The IRS will not impose a penalty for the failure to file the delinquent Form 5471 if you properly reported on your U.S. tax returns, and paid prior taxes. However, it’s important to note that “reasonable cause” is due to a significant cause hindering your ability to file the information form, so be sure to consult a lawyer before you choose this route.
IRS’s Voluntary Disclosure Program (VDP)
The Voluntary Disclosure Practice is a compliance option for taxpayers who have committed tax/tax-related crimes with criminal exposure due to willful violation of the law, and wish to seek protection from potential criminal prosecution.
A voluntary disclosure occurs when the taxpayer provides a timely, truthful and complete disclosure through designated procedures, along with cooperating with the IRS to correct the tax liability and make full payments for tax, interest and applicable penalties owed.
However it’s important to note that this Voluntary Disclosure Program can only be used before the IRS has started any civil examination or criminal investigation, received information of your noncompliance from a third party or criminal enforcement action.
These forms of various methods of relief for filing late form 5471 and other filing allow the taxpayer a way to stay compliant. Consider these options should you miss filing your past year tax filings.
In this article we outline the four major ways a U.S. taxpayer can undergo late form 5471 filing relief from past years. Be sure to do your own research on the requirements and pros & cons of each type of procedure. You may be able to apply for one of the filings reliefs which could save you thousands of dollars in possible penalties from the IRS. However, before you decide on one, be sure to go over these with a tax professional to see any possible consequences of each. And If you need more information about form 5471, contact us.
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