The IRS recently published published an internal guideance on who must report interests in foreign corporations and the penalties for non-compliance. The timing of the guideance is important as the first “information exchange” and “information reporting” under the Foreign Account Tax Compliance Act, “FATCA” occurred September 30,2015. The IRS and Justice Deptartment will now be able to cross check the data provided through the infomation exchanges with filed returns and initiate civil examans and in some cases criminal investigations against non-filers. It is no longer a matter of if non-filers will be discovered, but when.
Who must report:
“Certain U.S. persons (singularly “USP”) are required to file Form 5471 (Information Return of U.S. Persons with Respect to Certain Foreign Corporations) with respect to their ownership interests in certain foreign corporations. Form 5471 is attached to a USP’s income tax return (or, if applicable, partnership or exempt organization return) (e.g., Forms 1040, 1120, 1041, 1065 or 990), and must be filed by the due date (including extensions) for that return. The information reported on a Form 5471 relates to the annual accounting period for the foreign corporation that ends within USP’s tax year.
The instructions to Form 5471 set forth four categories of USPs that are required to file Form 5471. Internal Revenue Code (“IRC”) §6038 contains the requirement for two categories of filers, and IRC § 6046 contains the requirements for the other two categories offilers. Congress enacted IRC § 6038 to curb tax abuses that occurred because the Internal Revenue Service (“IRS”) was unable to obtain information necessary to evaluate a domestic corporation’s interests in, and transactions with, its foreign subsidiaries. (106 Cong. Rec. 11416, 86th Cong. 2d Sess. (1960)).
Failure to file Form 5471 can result in civil and criminal penalties and an extended statute of limitations period, as well as a reduction in foreign tax credits for certain categories of filers. These penalties also can apply if a Form 5471 is filed late or is timely filed but is not substantially complete. IRC § 6038 provides penalties that apply only to USPs that are required to file under IRC § 6038.”
What are the penalties for not filing?
The initial penalty for for not filing a Controlled Foreign Corporation REturn, FOrm 5471, is $10,000. The initial penalty is accompanieed by a “pattern letter” that advises the taxpayer that penalties will increase by $10,000 per month up to $50,000 for each Form 5471 per unfiled or late filed year. The Form 5471 is filed with the taxpayer’s income tax return.
What are the Defenses to Penalties?
Reasonable cause is gournds for not imposiing penalties for late filing or incomplete filing. Reasonable Cause was defined by the U.S. Supremen Court and applied as follows:
“In United States v. Boyle, the Supreme Court noted that Treas. Reg. § 301.6651(c)(1) (1984) required UST to demonstrate that it “exercised ordinary business care and prudence but nevertheless unable to file the return within the prescribed time.” And “Thus, the Service’s correlation of ‘reasonable cause’ with ‘ordinary business care and prudence’ is consistent with Congress’ intent, and over 40 years of case law as well.”
How do I know if my conduct was reasonable?
There are several tests for determining if a taxpayer’s ocnduct was reasonable. We at MillarLaw can determine the best approach to penatly avoidance and penalty minimization.