TSG (Tax Specialist Group) - Form 5471 Penalty (Automatic Penalty)

Form 5471 Penalty

Subject: Automatic Penalty
Number: 09-16
Date: 7/24/2009

The $10,000 penalty will be assessed automatically against corporate taxpayers

The Internal Revenue Service (“the IRS”) may impose a penalty of US $10,000 on a corporation for failure to file a timely and complete form 5471, “Information Return of U.S. Persons With Respect to Certain Foreign Corporations.” Form 5471 is used to report a United States shareholder’s interest in a Controlled Foreign Corporation and is due at the same time as the taxpayer’s U.S. income tax return, including extensions.

The IRS announced that, effective January 1, 2009, the $10,000 penalty will be assessed automatically against corporate taxpayers. A similar statement has not yet been made in respect of those individuals who are required to file Form 5471.

Corporate taxpayers who have already been assessed a penalty may apply for an abatement of the penalty by submitting a “Reasonable Cause statement” to the Director of the Service Centre where the corporate tax return was filed. The abatement, however, is not guaranteed. The taxpayer must show that the failure to file was not due to intentional failure or reckless indifference, referred to as “willful neglect.” The IRS recommends that corporate taxpayers should not file a Reasonable Cause statement until advised by the IRS that penalties are being proposed, or have been assessed.

If a US corporate tax return has already been filed, but Form 5471 was excluded, the IRS will accept a late filed return under their Voluntary Disclosure Program, provided that all income related to the foreign corporation has been reported and taxed.

In this case, Form 5471 should be filed, with an amended corporate tax return showing no change to the tax liability, by September 23, 2009. The IRS is on record as stating that they will not impose a penalty for failure to file this return provided it is filed during this limited time voluntary disclosure period.

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