IRS crackdown on Form 5471: a sign of things to come?

• Author: Goldberg, Walter S.

In August 2008, the IRS began sending "soft" letters to corporate taxpayers warning that beginning in 2009, the Service would automatically assert penalties on any late-filed Forms 1120, U.S. Corporation Income Tax Return, that include a Form 5471. Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, is required for certain U.S. persons who are officers, directors, or shareholders of controlled foreign corporations. (For more on preparing Form 5471, see Jacobs and Pasmanik, "Tips for Preparing the Form 5471 for Controlled Foreign Corporations," p. 114.)

Penalty Exposure

The penalties involved can be quite substantial. Sec. 6651(a)(1) provides a monthly penalty of 5 % of the tax required to be shown on the return up to 25% for failure to file an income tax return (including a Form 1120) by the due date. For the Sec. 6651(a)(1) penalty to apply, a tax must be due.

In addition, Sec. 6038(b)(1) provides for a $10,000 monetary penalty for each Form 5471 filed after the due date of the income tax return (including extensions). This penalty also applies if the return does not include the complete and accurate required information. In addition to the monetary penalty, Sec. 6038(c) imposes a 10% reduction of the foreign taxes available for credit under Secs. 901, 902, and 960 for a late Form 5741. A tax need not be due for the penalty under Sec. 6038(c) to apply.

Reasonable Cause

Corporate taxpayers can ask for reasonable cause relief from the IRS for such late filings. It is not entirely clear what impact this new approach of automatic penalties will have on the IRS's consideration of reasonable cause requests for late-filed Forms 5471. The applicability of the reasonable cause exception to a penalty...