Foreign reporting rules should encourage voluntary compliance.

• Author: Elgin, Evelyn

Taxpayers currently face a confusing morass of foreign reporting requirements, with stiff penalties (e.g., $10,000) for each failure to comply. These penalties should be revised so that they will not apply if the taxpayer files the requisite form (e.g., Form 5471, Information Return of US. Persons With Respect To Certain Foreign Corporations, or Form 5472, Information Return of a 25% Foreign-Owned US. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business (Under Sections 6038A and 6038C of the Internal Revenue Code)) before first being contacted by the Service in connection with an examination of the return for the year to which the form relates. This type of "qualified amended return rule" is used in other areas (e.g., for purposes of the Sec. 6,662 taxpayer accuracy-related penalty). Penalty relief for returns filed before IRS contact encourages voluntary compliance with the tax laws, by providing an incentive for taxpayers to correct errors at the earliest possible date and by making the laws fairer.

Current Penalty Regime

Sec. 6679(a), as amended by the Taxpayer Relief Act of 1997 (TRA '97), generally imposes a $10,000 penalty for each failure to timely file a complete Form 5471 for information required by Secs. 6035 (returns of officers, directors and shareholders of foreign personal holding companies (FPHCs)) and 6046 (returns as to organization or reorganization of foreign corporations and as to acquisition of their stock). The penalty increases if the information is not provided within 90 days after notice from the Service (to a maximum of $50,000 per form). (A special rule in Sec. 6679(a)(3) limits the penalty to $1,000 for failing to file a return relating to an FPHC.) There is a reasonable cause exception to the penalty in Sec. 6679(a)(1).

Sec. 6038 (as amended by the TRA '97) also imposes information reporting requirements and penalties with respect to interests of U.S. persons in certain foreign business entities. The penalty for failure to timely file a complete Form 5471 is generally $10,000 for each annual accounting period with respect to which the failure occurs (increasing to $50,000 per failure if the information is not provided within 90 days after IRS notice), plus a 10% reduction in taxes that otherwise would be taken into account in computing a foreign tax credit (FTC) under Secs. 901, 902 and 960; see Sec. 6038(b) and (c). The reduction in taxes otherwise taken into account in computing a FTC also...