{"id":4165,"date":"2022-01-19T17:22:00","date_gmt":"2022-01-19T17:22:00","guid":{"rendered":"https:\/\/patellawoffices.com\/blog\/?p=4165"},"modified":"2022-01-18T17:25:20","modified_gmt":"2022-01-18T17:25:20","slug":"penalty-relief-for-international-information-forms-5471-5472-and-8865","status":"publish","type":"post","link":"https:\/\/patellawoffices.com\/blog\/planning-for-tax-minimization\/penalty-relief-for-international-information-forms-5471-5472-and-8865\/","title":{"rendered":"Penalty relief for International Information Forms 5471, 5472, and 8865"},"content":{"rendered":"\n

US tax law imposes large penalties for the failure to timely file international information returns on Form 5471,\u00a0Information Return of U.S. Persons With Respect to Certain Foreign Corporations<\/em>; Form 5472,\u00a0Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business<\/em>; and Form 8865,\u00a0Return of U.S. Persons With Respect to Certain Foreign Partnerships<\/em>.<\/p>\n\n\n\n

However, there are several\npenalty abatement strategies to mitigate penalties for delinquent or unfiled Forms\n5471, 5472, and 8865. In recent years there has been an increase in penalty\namount for Form 5472 and updated IRS Internal Revenue Manual (IRM) language on\npenalty abatement, tax advisors must know the procedures for the assessment and\nabatement of these penalties.<\/p>\n\n\n\n

International information return reporting\nrequirements and penalties<\/strong><\/p>\n\n\n\n

Code section 6038\nrequires every U.S. person to furnish, for any foreign business entity that\nperson controls, the information listed in Code section 6038(a)(1). The\ninformation is reported on Form 5471 or Form 8865, as applicable. Code section\n6038A requires any domestic corporation that is 25% foreign-owned to\nfurnish the information listed in Code section 6038A(b)(1). That information is\nreported on Form 5472.<\/em> Code section 6038C provides for additional\ninformation about foreign corporations engaged in U.S. business to be reported\non Form 5472, and Code section 6038B provides for additional information\nregarding certain transfers to foreign persons to be reported on\nForm 8865.<\/p>\n\n\n\n

Failure to timely file a\nForm 5471 or Form 8865 is generally subject to a $10,000 penalty per\ninformation return, plus an additional $10,000 for each month the failure\ncontinues, beginning 90 days after the IRS notifies the taxpayer of the\nfailure, up to a maximum of $60,000 per return. Where a Form 8865 fails to\nproperly report a transfer or contribution of property, the applicable penalty\nis 10% of the value of the transferred or contributed property not reported, up\nto a maximum of $100,000 (unless the failure is due to intentional disregard).\nA failure to timely file a Form 5472 is subject to a $25,000 penalty per\ninformation return, plus an additional $25,000 for each month the failure\ncontinues, beginning 90 days after the IRS notifies the taxpayer of the\nfailure, with no maximum penalty.<\/p>\n\n\n\n

Failure to timely file a\nForm 5471, 5472, or 8865 also lengthens the statute of limitations under Code\nsection 6501(c)(8), which provides that the period of limitation on assessment\ndoes not begin to run until the information required to be reported is\nfurnished to the IRS, after which date a three-year assessment period\nbegins. However, if the failure to timely file is due to reasonable cause and\nnot willful neglect, the period of limitation on assessment is extended only\nfor the item or items related to the failure.<\/p>\n\n\n\n

Penalty relief<\/strong><\/p>\n\n\n\n

Where a penalty for\nfailure to timely file an international information return either has been\nassessed by the IRS, or may be assessed, several potential strategies for\npenalty relief should be explored.<\/p>\n\n\n\n

Delinquent International Information Return Submission Procedures (DIIRSP)<\/em>:\u00a0<\/strong>The IRS’s Delinquent International Information Return Submission Procedures offer taxpayers a path for mitigating exposure to international information return penalties, in cases where taxpayers (1) have identified the need to file delinquent international information returns; (2) are not under an IRS civil examination or criminal investigation; and (3) have not already been contacted by the IRS about the delinquent information returns. In these cases, a taxpayer may file the delinquent information return(s) through amended return filing procedures (for example, attached to Form 1120X,\u00a0Amended U.S. Corporation Income Tax Return<\/em>) and attach a\u00a0reasonable–<\/em>cause\u00a0statement to each delinquent information return filed for which reasonable cause is being asserted. In those cases, the IRS states that during the processing of the delinquent information\u00a0return: \u201cPenalties may be assessed in accordance with existing\u00a0procedures\u2026penalties may be assessed without considering the attached reasonable cause statement. It may be necessary for taxpayers to respond to specific correspondence and submit or resubmit reasonable cause\u00a0information. Information returns filed with amended returns will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns.” Note that the use of “information returns filed with amended returns” indicates that these procedures are available to a taxpayer who filed a timely original income tax return but now needs to file an amended income tax return to include an original international information\u00a0return.<\/p>\n\n\n\n

Streamlined Filing\nCompliance Procedures (SFCP)<\/em><\/strong>:<\/strong> The IRS’s\nStreamlined Filing Compliance Procedures are available to taxpayers who can\ncertify that their failure to report foreign financial assets and pay all tax\ndue on those assets did not result from willful conduct on their part. The\nprocedures are designed to provide taxpayers in such situations with a\n“streamlined” process for filing amended or delinquent returns as\nwell as terms for resolving their tax and penalty obligations; the procedures,\ntherefore, encompass the ability for a taxpayer to late-file Form\n5471, Form 5472, or Form 8865. The streamlined procedures are available only to\nindividual taxpayers (including estates) and are not available if the taxpayer\nis under civil or criminal examination. There are two distinct sets of\nprocedures, one for U.S. residents (Streamlined Domestic Offshore Procedures)\nand one for non-U.S. residents (Streamlined Foreign Offshore Procedures).\nThe notable distinction between the domestic procedures and the foreign procedures\nis that taxpayers eligible under the domestic procedures are subject to a 5% miscellaneous\noffshore penalty, while those eligible under the foreign procedures are not\nsubject to any penalty. Note that the streamlined procedures are distinct\nfrom the IRS Criminal Investigation Voluntary Disclosure Practice (see IRM\n\u00a79.5.11.9 (9\/17\/20), Voluntary Disclosure Practice<\/em>), which is typically\nfor willful taxpayers.<\/p>\n\n\n\n

Reasonable cause<\/em><\/strong>: <\/strong>The penalty provisions in Secs. 6038, 6038A, 6038B, and 6038C\nprovide that if a failure is due to reasonable cause and not to willful\nneglect, the penalty will not be imposed. If none of the other abatement or\nmitigation strategies discussed above are available, a taxpayer may assert\nreasonable cause to counter penalties assessed on a late-filed Form\n5471, 5472, or 8865. The reasonable-cause determination is made on\na case-by-case basis, taking into account all pertinent facts and\ncircumstances (see Regs. Sec. 1.6038A-4(b)(2)(iii); see also Regs. Secs.\n1.6038-2(k)(3)(ii) and 1.6038-3(k)(4)). The IRM states\nthat reasonable-cause relief is generally granted when the taxpayer\nexercised ordinary business care and prudence in determining his or her tax obligations\nbut was nevertheless unable to comply with those obligations (IRM \u00a720.1.1.3.2\n(11\/21\/17), Reasonable Cause<\/em>, \u00b61). \nThe COVID-19 pandemic has resulted in longer-than-average processing\nand review times for penalty abatement requests, emphasizing the importance of\ntaxpayers’ determining the appropriate avenue to seek penalty relief.<\/p>\n\n\n\n

First-time penalty\nabatement<\/em><\/strong>:<\/strong> The IRS’s First Time Abate (FTA) policy\nprovides an additional avenue for penalty relief. Under the FTA policy, the IRS\nwill generally abate certain penalties for a limited universe of forms if the\nfollowing FTA criteria are met:<\/p>\n\n\n\n