IRS changes policy for asserting penalties for late-filed form 5471.

• Author: Keenan, John

The IRS recently sent letters to certain corporate taxpayers advising them that effective January 1, 2009, penalties for late-filed Forms 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, will automatically be asserted when such forms are attached to a late-filed Form 1120, U.S. Corporation Income Tax Return. The automatic assertion of penalties for late-filed Forms 5471 is a significant change from the current IRS procedure in which penalties are assessed at the discretion of an examiner after a return is selected for examination.

Background

U.S. citizens and residents (including U.S. corporations, partnerships, and trusts) who are officers, directors, or shareholders in certain foreign corporations are required to file Form 5471 to satisfy reporting requirements under Secs. 6038 and 6046. The information reporting requirements under those sections relate to U.S. persons who have a certain level of control in foreign corporations.

For each Form 5471 that is late filed or does not include complete and accurate information, a $10,000 penalty can be imposed under Sec. 6038(b)(1). This penalty is assessed in addition to the Sec. 6651(a) penalty for failure to file or pay tax, regardless of whether any tax is due on the tax return. Reasonable cause relief is available to taxpayers under Sec. 6038(c)(4). If a taxpayer fails to file a Form 5471 for more than 90 days after the IRS notifies the taxpayer of the failure to file, an additional $10,000 penalty can be imposed under Sec. 6038(b)(2) for each 30-day period (or fraction thereof) the failure to file continues, with a maximum penalty of $50,000. Moreover, Sec. 6038(c) provides a 10% reduction of the foreign taxes available for credit under Secs. 901, 902, and 960 for any failure to file Form 5471.

Description of New Policy

The Service implemented its new policy beginning January 1, 2009 (see www.irs. gov/businesses/corporations/article/0,, id=188039,00.html). In its current form, the new policy applies only to late-filed Forms 1120 (and returns in the Form 1120 series) with Form 5471 attached. The new penalty policy does not apply to individual income tax returns (Form 1040, U.S. Individual Income Tax Return) or partnership returns (Form 1065, U.S. Return of Partnership Income). In addition, the policy applies to late-filed but not incomplete or inaccurate Forms 5471.

Further, the new policy is limited to Forms 5471 and does not apply to other forms that...