The IRS has been cracking down on international taxation in recent years, especially for US persons failing to file their US tax returns back home. With the increasing interconnectivity and sharing of information between countries, not only between governments but also set in regulations for banks, the risk of non-filings for foreign company holdings has increased over the year. This especially prevalent with the goals of the OECD (Organisation for Economic Co-operation and Development), but also FATCA as well.
In addition to individual returns (1040s), US persons are also subject to other non-filing penalties in relation to their foreign share ownership (form 5471) or other international transactions and assets kept abroad. Specially for form 5471, the IRS reserves the right to assess a penalty of $10,000 for failing to file the form. Thus this penalty could be $10,000 for each year of non-compliance. And if the IRS has identified and requested the filing of this form, the IRS can assess an additional $10,000 per month after the first initial 90 day period, for a total penalty of up to $50,000.
The penalties as described by the IRD and on their instructions for form 5471, are as below:
Failure to file information required by section 6038(a) (Form 5471 and Schedule M). A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the information required by section 6038(a) within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.
Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901, 902 (with respect to foreign corporate tax years beginning before January 1, 2018), and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c) (2) for limits on the amount of this penalty.
Failure to file information required by section 6046 and the related regulations (Form 5471 and Schedule O). Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction. If the failure continues for more than 90 days after the date the IRS mails notice of the 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. The additional penalty is limited to a maximum of $50,000.
As outlined in the IRS’ description, the form 5471 penalties can be quite severe starting at $10,000 and going upwards to $50,000 for non-compliance and non-filings.
In the past for incomplete information provided in form 5471, the IRS has imposed penalties for errors such as failures to identify the filer’s category on page 1, failure to include complete data for identity and location of foriegn corporation, failure to complete all the required 5471 schedules, stating that specific information will only be provided upon request from the IRS, providing computer-generated form 5471 not inline with IRS requirements and failure to provide proper financial statements of the FC. However the requirements and standards for misfilings have been updated by the IRS in 2017 outlined in their IPU (International practice unit).
Form 5471 penalty Statistics
To give you a general idea for the numbers of dollars spent for form 5471 penalties, here is the latest publicly available information from the IRS for penalties collected by the IRS from 2008-2012.
|Late-Filed form 5471 penalties ($Millions)||$7.6||$71.5||$48.6||$54.3||$41.0||$215.4|
|Less Late-Filed Form 5471 Penalty Abatements ($Millions)||($0.4)||($56.0)||($36.4)||($41.0)||($16.1)||($149.5)|
|Total Late-Filed Form 5471 Net Penalty Assessments||$7.2||$15.5||$12.2||$13.3||$24.9||$65.9|
|Rate of Return||N/A||22%||25%||24%||61%||31%|
Source: 2013 TIGTA audit report
As you can see in the table, the IRS assessed $215.4 millions dollars of form 5471 penalties from 2008-2012, with $149.5 being abated or waived off due to a valid reasonable cause, for a total collection of $65.9 million. However it’s very important to note that with the recent updates to how the IRS reviews their abatement policy (IPU 2017), together with the updates to their automatic penalty assessments, the IRS has improved their policies in both detecting and reviewing form 5471 filings and possible penalties.
Relief options for late filings of Form 5471
In light of the challenges to being fully up to date on tax filings, especially for those with international business transactions or expats living outside the country, the IRS has created ways for late international tax form filings (including form 5471) that minimize penalties. These relief options provide the US person and tax payer to various methods to be in tax compliance for past years. Read more in-depth about these relief options here.
The IRS has put more and more attention on foreign corporation holdings and US citizens living aboard not in compliance with the tax filing obligations. If you have not filed a form 5471 for your FC holdings, it may be better to explore the relief options provided by the IRS to update your past tax filings and reduce your risk of a potential $10,000 penalty for failure to file this form. If you need more information about form 5471, contact us.
And if you need help managing your foreign company’s shares, checkout this online share management software at Eqvista.