Penalty Abatement Options for Forms 5471, 5472, and 8865
The U.S. tax system demands that individuals and corporations with international ties submit various information returns to the Internal Revenue Service (IRS).
Failure to comply within the stipulated time frame can lead to hefty penalties.
However, various options can help lessen or even nullify these penalties.
Key Reporting Requirements and Penalties
The Internal Revenue Code (IRC) outlines three critical forms that U.S. taxpayers must file concerning their involvement with foreign entities: Form 5471, Form 5472, and Form 8865.
The Internal Revenue Code Section 6038 mandates U.S. persons with control over foreign business entities to report information via Form 5471 or Form 8865, as appropriate. Additionally, Section 6038A obliges 25% foreign-owned domestic corporations to file Form 5472.
Not complying with these obligations can result in penalties starting from $10,000 for every Form 5471 or 8865 that is not timely filed. For every month the delay persists (beginning 90 days post IRS notification), an additional $10,000 is charged, capped at $60,000 per return.
For Form 5472, the penalty begins at $25,000 and increases by the same amount each month, with no maximum limit.
Other forms such as Form 926 and FinCEN Form 114 relate to international reporting but are not discussed here.
Extended Limitation Period
It is vital to note that failure to file Forms 5471, 5472, or 8865 in a timely manner also affects the limitation period under Section 6501(c)(8) of the IRC.
Typically, there is a three-year assessment period which begins only after the required information is submitted. If the returns are not filed on time, the assessment period remains open indefinitely.
However, if the delay is due to a reasonable cause and not willful neglect, the limitation period is only extended for items related to the failure.
Options for Penalty Relief
There are several avenues that taxpayers can explore to alleviate or avoid penalties for late filing of international information returns.
1. Proof of Timely Filing
If the IRS assesses a penalty but the taxpayer can prove that they filed the required forms on time, the penalties are rendered inapplicable.
Such cases may arise due to discrepancies between the taxpayer’s records and those of the IRS. In such scenarios, taxpayers should contact the IRS to rectify the records.
2. First-time Penalty Abatement (FTA)
The IRS offers penalty relief through its First Time Abate policy for taxpayers meeting specific criteria, including a history of tax compliance. This policy is generally applicable to Forms 5471 and 5472 if the related Form 1120 or Form 1065 is abated under the FTA provisions.
More information on the FTA policy can be found in the Internal Revenue Manual (IRM) Section 184.108.40.206.3.2.1.
3. Delinquent International Information Return Submission Procedures
For taxpayers who have not been contacted by the IRS concerning delinquent information returns and are not under any civil examination or criminal investigation, the IRS has established the Delinquent International Information Return Submission Procedures.
Taxpayers may file delinquent returns with a statement of reasonable cause attached to each return.
4. Streamlined Filing Compliance Procedures
These procedures are designed for taxpayers who can certify that their failure to report foreign financial assets and pay taxes on these assets did not result from willful misconduct.
The procedures provide taxpayers with an efficient process for filing amended or delinquent returns and resolving their tax and penalty obligations. For more information, visit the IRS’s Streamlined Filing Compliance Procedures page.
5. Reasonable Cause
If none of the above options are viable, taxpayers may invoke reasonable cause as a defense against penalties. The IRS evaluates reasonable cause claims on a case-by-case basis by considering all relevant facts and circumstances.
Timely submission of international information returns is essential for compliance with U.S. tax laws. Taxpayers facing penalties for late submission should explore the various relief options available.
Additionally, they should consider consulting a tax professional to guide them through this intricate process.