What is the IRS Form 5471?
The IRS Form 5471 reports (annually) information about US persons’ partial or complete ownership of foreign corporations or foreign corporation-equivalent entities.
Failing to file the Form 5471 exposes you to enormous penalties. Form 5471 penalties begin at $10,000 per violation, and can easily reach six figures for those US persons (a term which covers individuals and entities) who didn’t file these Forms for ten or more years continuously.
The triggers to the Form 5471 foreign corporation filing obligation are broad and – to be absolutely clear – extremely complex. This is illustrated by the Form’s five different reporting Categories, by the Form’s fourteen different Schedules which may be attached to the Form, and by its 29 pages of Instructions which (in theory) explain and guide compliance with this sprawling reporting regime.
Rather than recite, at great length, the technical triggers to each of those five reporting Categories, we recommend consulting with a Form 5471 tax attorney if you have a substantial ownership of any foreign entity (even if you don’t believe the entity is a corporation).
We define substantial ownership in a foreign corporation at 10% of shares or voting power. While not every US person who owns such a substantial interest in a foreign corporation will owe the IRS a Form 5471, anyone meeting that relatively low threshold should seek professional advice on possible foreign asset reporting obligations in the US.
It’s difficult to understand how to report your foreign assets – or if you even need to do so. Thankfully, there is a simple way to meet this challenge. If you have any ownership or beneficial economic relationship with any kind of foreign entity, take a free consultation with international tax attorney Andrew L. Jones, who can promptly help you determine whether you have to file any of the following:
- Form 3520 and/or 3520-A (to report a relationship with a foreign trust),
- Form 5471 (to report a relationship with a foreign corporation),
- Form 8865 (to report a relationship with a foreign partnership),
- Form 8938 (to report a beneficial interest in specified foreign financial assets, or
- FinCEN Form 114 (FBAR) (to report title, interest, or signatory authority over foreign financial accounts).
Form 5471 Tax Attorney and Form 5471 Tax Lawyer
If you failed to file a Form 5471, or filed one that was incorrect, incomplete, or late/delinquent, your tax return is now potentially subject to a ‘frozen’ statute of limitations. This special rule gives the IRS unlimited time to detect and punish your noncompliance, rather than the standard three to six year statute of limitations for most tax errors and omissions.
The failure to file a Form 5471 also means that the IRS can always demand unpaid tax from any year (from 2007 forward), both from the earnings of the foreign corporation that should have been reported on a Form 5471, and from any other kind of error or omission on the entire income tax return.
We invite you to read onward, but the surest way of determining if you have a Form 5471 problem is to actually talk with Form 5471 tax attorney and tax lawyer Andrew L. Jones. Call (415) 745-1924 now to determine:
- Did you actually have a Form 5471 filing obligation?
- If you did, has the Form 5471 deadline passed?
- If you filed before the deadline, was your Form 5471 filing incorrect or incomplete?
- And, whether you filed an incorrect or incomplete Form 5471, or didn’t file one at all, are you subject to Form 5471 penalties?
- Reasonable cause is a total defense to Form 5471 penalties, and a Form 5471 tax lawyer is best equipped to gather the relevant facts to that determination, and then write the explanatory attachment arguing against Form 5471 penalties. Additionally, if the IRS imposes a Form 5471 penalty, the Form 5471 tax attorney can represent you in the Form 5471 audit and negotiations with the IRS to remove the Form 5471 penalty assessment.
- If your specific facts and circumstances prevent you from making an effective Form 5471 reasonable cause argument to avoid penalties, you still have options. Your Form 5471 tax lawyer can advise you about making an IRS voluntary disclosure of your Form 5471 noncompliance through the Streamlined Domestic Offshore Procedures or the Streamlined Foreign Offshore Procedures.
- Finally, Form 5471 tax attorney Andrew L. Jones can also work with you to consider a final, critical question: should you file a delinquent/late or amended Form 5471 – or should you simply begin complying on a ‘go-forward’ basis, doing nothing about prior noncompliance?
In working with a Form 5471 tax expert, all options are on the table, and your discussions with tax attorney Andrew L. Jones – who will be your direct point of contact – are protected by the robust attorney-client privilege.
Call (415) 745-1924 for an immediate, free and completely confidential conversation with experienced Form 5471 tax lawyer Andrew L. Jones.
What Is a Foreign Corporation?
It would be difficult to list every foreign country corporation or company equivalent, but the Treasury Regulations at 26 CFR 301.7701-2 presents a substantial list of foreign entity types treated as corporations for US tax purposes. A corporation is also characterized (usually, but not always) by the following characteristics:
- Separate taxation of the entity, separate from its owners
- Ownership in the form of ‘stock’ or a similar term
By contrast, a partnership is characterized by limited liability for its partners, but the taxable activities of the entity typically ‘flow through’ to the partners, without a separate level of taxation.
Finally, a trust is characterized by the focus on one person (the trustee) managing or acting on assets for the benefit of a small class of individuals (beneficiaries), under a particular set of instructions (the trust) given by the grantor (the person who was the source of the funds that are now held in trust).
Form 5471 Deadline and Form 5471 Statute of Limitations
The Form 5471 is filed as an attachment to the US person’s annual income tax return. It is due, therefore, on April 15 (or, if properly extended, October 15) of the year following the reporting year.
The Form 5471 statute of limitations (the period of time in which the IRS may assess penalties for noncompliance with this reporting requirement) typically expires 3 years from that April 15th date – or the later date if the due date of tax return was timely extended.
This means that even if the IRS later has questions or concerns about the Form 5471, as long as it was filed timely and correctly, once this three-year statute of limitations has passed, the IRS cannot assess failure-to-file penalties.
Finally, from the 2007 reporting year and onward, if the required Form 5471 was never filed, the statute of limitations for both that Form 5471 and the entire tax return to which it is attached will never expire. The statute for the Form 5471 and the overall tax return itself, will thus only expire three years after that Form 5471 is filed late or delinquent.
The only defense to this ‘frozen statute of limitations’ provision is that if the failure to file the Form 5471 was due to reasonable cause, then only the statute of limitations for the Form 5471 (rather than the entire tax return) will be frozen as described.
Finally, in a related matter, if a US person fails to report $5,000 or more of income derived from a specified foreign financial asset (like a Form 5471-reportable ownership of a foreign corporation), then the tax return’s statute of limitations is extended to six years.
Late Form 5471 and Delinquent Form 5471
As described above, the Form 5471 is late or delinquent if it was due but not filed timely. It will always be due until filed, and from 2007 forward, a taxpayer who failed to file a Form 5471, or filed a delinquent Form 5471, can always be assessed the major IRS penalties described below.
However, the late-filing or non-filing of a Form 5471 may not be penalized if the taxpayer can make a showing of reasonable cause – something a Form 5471 tax attorney is best equipped to do, as discussed below.
Form 5471 Audit and Form 5471 Examination
A Form 5471 filing may be audited by the IRS at any time within the statute of limitations. While extremely unlikely, a timely-filed Form 5471 could be found so incomplete or inaccurate that it could be treated as a failure to file and subject the US person to Form 5471 penalties.
Such a Form 5471 examination can also occur when a person obligated to file the Form 5471 didn’t file the Form 5471 when he or she should have.
In all cases (filing or non-filing), the IRS’ focus in a Form 5471 audit is whether the failure to file a timely, correct and complete Form 5471 is excused by reasonable cause. If reasonable cause exists, the IRS may not impose a Form 5471 penalty.
This means, implicitly, that the Form 5471 penalty regime is indifferent to whether the failure to file the Form 5471 was willful or negligent. This is in sharp contrast to the Foreign Bank Account Report penalty regime, in which a negligent failure to file is treated very differently from a willful failure to file.
In essence, the failure to timely file a complete and correct Form 5471 is a penalizable act/omission unless the taxpayer had reasonable cause for his noncompliance.
Form 5471 Penalty and Form 5471 Fine
The failure to timely file a Form 5471 (or timely filing a Form 5471, but one which was incorrect or incomplete) is subject to a $10,000 penalty for each year of noncompliance.
As an example of the enormous potential size of Form 5471 penalties, consider a US person who has owned a foreign corporation for the last ten reporting years, and failed to file the Form in each of those years.
If this failure to file the required Form 5471 is negligent, the $10,000 Form 5471 negligence penalty may be imposed for each of the last ten years. The IRS could therefore assess and collect penalties totaling $100,000. This enormous penalty is possible, of course, because while the taxpayer may have filed Form 1040 tax returns in each of the last ten years, he did not file the Form 5471. This failure to file the Form 5471 means that from 2007 forward, the statute has never expired, both as to the Form 5471 and the tax return itself.
The frozen statute of limitations for the tax return itself is a major risk. It allows the IRS to assess any other penalty, and any amount of unpaid tax, from every tax return year from 2007 forward. The most common financial danger from this provision is that under US tax law, foreign corporations are often quite profitable and would have (if properly reported) been required to report and pay significant income tax. Under normal circumstances, the IRS is barred from collecting tax three years (and more rarely, six years) after the tax return was filed. However, in this scenario, the failure to file the Form 5471 froze the statute of limitations back to 2007.
Form 5471 Criminal Penalties
Under Internal Revenue Code Section 7203, the intentional (willful) failure to file a required Form 5471 can, if successfully prosecuted, result in a prison sentence of up to one year and a penalty (for individuals) of up to $25,000. Under IRC 7206, any person who filed a Form 5471 filing that was fraudulent or false may, if successfully prosecuted, be sentenced up to three years in prison and face a penalty (for individuals) up to $100,000.
In the alternative, any person who filed a Form 5471 that was fraudulent may, if successfully prosecuted, be sentenced up to a year in prison and pay a penalty (for individuals) of up to $10,000.
Failure to File Form 5471: Was It Negligence (Non-Willful) or Reasonable Cause?
If you filed a late, incomplete, or incorrect Form 5471 – or didn’t file one at all – you face penalties. A reasonable cause argument can help you avoid those penalties – but that argument is best written by a Form 5471 expert tax attorney who has gathered relevant facts, analyzed the error, and can make a winning argument to the IRS.
Involving a Form 5471 tax lawyer will ensure that you have an expert working for you – an expert who knows what facts matter for determining whether your Form 5471 filing violation was (1) willful, (2) negligent (also referred to as non-willful), or (3) occurred for reasonable cause.
Remember that whether a Form 5471 violation was willful or negligent does not change the penalty outcome. (Although a willful failure to file a Form 5471 may be penalizable under other general Internal Revenue Code provisions, such as a fraudulent return filed with the IRS, a false statement to the IRS, etc.)
Instead, the only way to avoid a $10,000-per-year Form 5471 penalty is making a winning reasonable cause argument.
Negligent Failure to File Form 5471
To understand reasonable cause, it will be helpful to contrast it against the legal concept of negligence. Generally stated, negligence (in missing a legal obligation) is characterized by:
- ‘Missing’ clues,
- ‘Failing to put two and two together’ or ‘connect the dots’ and/or
- Failing to make reasonable inquiries or otherwise failure to be aware of generally known facts or law.
Reasonable Cause for Failure to File Form 5471
By contrast, reasonable cause can (generally and simplistically) be said to exist where there was no reasonable pathway to become aware of an obligation. At a bare minimum, it requires that the taxpayer have missed no reasonably-apparent clues to his or her obligation, particularly clues that he or she documentably encountered at any point.
Additionally, the IRS views certain obligations (like the existence of the annual income tax return Form 1040) as so universally known to individuals of average sophistication that failure to comply cannot generally occur for reasonable cause. By contrast, quality fact-gathering and argumentation can convince the IRS that a taxpayer who failed to comply with more obscure Form filing obligations (like the Form 5471) nonetheless did meet the reasonable cause standard of exercising ‘ordinary business care and prudence.’
Interestingly, we think that the actions of the average US taxpayer would not meet this ‘ordinary business care and prudence’ standard. In our view, the average US taxpayer is routinely sloppy and non-diligent and makes errors on his tax returns (or fails to report or file certain income items altogether).
For this reason, we can say (again, generally and simplistically) that the reasonable cause standard requires the taxpayer behave in an above-average manner – arguably in a manner well above that of the average US taxpayer.
As should be apparent even from this brief discussion, whether the reasonable cause defense to the Form 5471 penalty exists, and whether it can be proven to the IRS is a hyper-technical matter. The fact-gathering, analysis, and (ultimately) write-up for IRS review is thus best left to a Form 5471 tax lawyer.
In short, the reasonable cause defense is beyond the limits of self-advice or self-help – get a professional involved.
Form 5471 Penalty Abatement and Form 5471 Amnesty
‘Standard’ IRS penalty abatement is available for three types of common Form 1040 penalties – the failure-to-file, failure-to-pay, and failure-to-deposit tax penalties. They are routinely granted on a ‘just this once’ basis, provided a handful of other conditions of good tax-related behavior are met.
Penalties for failure to timely and correctly file the Form 5471 are, by contrast, not granted on a similar ‘for the asking’ or ‘just this one time only’ basis.
Instead, Form 5471 penalties can only be ‘abated’ by a finding that they are not legally justified. The grounds for not assessing a Form 5471 or granting Form 5471 amnesty is a finding by the IRS that the failure is due to reasonable cause, a legal concept described immediately above.
In summary, Form 5471 abatement or Form 5471 amnesty are not truly correct terms to describe the actual law (for defending against Form 5471 penalties). They are also not truly correct terms for describing defense against penalties on the grounds of reasonable cause.
Instead, we mention them here to aid the layman in understanding that it is possible to obtain a no-penalty outcome for delinquent or incorrect/incomplete Form 5471 filing. This requires proving reasonable cause.
Form 5471 Amendment
While Form 5471 amendments are rare, there are certain instances in which it might become necessary or at least advisable to amend an original and timely-filed Form 5471 – perhaps the filer receives corrective source documents from the foreign corporation, or discovers that his calculations of income (as originally reported) were incorrect.
Filing a Form 5471 amendment is a problematic act, insofar as the IRS’ automated systems are generally set up to detect a ‘late’ filing (here, the amendment itself) and to automatically assess the Form 5471 penalties outlined here.
For this reason, we typically recommend that when submitting a Form 5471 amendment, the filer also submit (physically attached to the amendment) a detailed legal argument for why it is not the filer’s fault that the original filing contained inaccurate, incomplete, or missing information.
Such a statement should cite to the concepts of reasonable cause as outlined above – indeed, we can call it, for simplicity, a reasonable cause statement.
This statement is a legal argument with large IRS penalties at stake. For this reason, the person filing an amended Form 5471 should strongly consider consulting with and/or hiring a Form 5471 tax lawyer. This attorney will first consider the critical question of whether to file an amendment at all. If this is the best path, the attorney will also gather facts, apply the law to these facts, and ultimately write the necessary reasonable cause statement to avoid Form 5471 penalties.
Form 5471 Voluntary Disclosure
A Form 5471 voluntary disclosure is a filing of an amended or delinquent/late Form 5471 to the IRS. Very literally, the person is voluntarily disclosing a failure to either file a timely Form 5471 by the deadline, or voluntarily disclosing that an earlier, timely-filed Form 5471 contained substantial errors or omissions.
Any US person considering submitting a late/delinquent or amended Form 5471 to the IRS should strongly consider hiring a Form 5471 voluntary disclosure attorney to draft a reasonable cause statement as a defense to the penalties the IRS might impose for the late or amended filing.
Knowing that (1) a Form 5471 voluntary disclosure submitted late and without a reasonable cause statement is likely to be met with an automatically-assessed penalty and knowing that (2) you’ll want to fight back against that penalty by making an argument of reasonable cause, it makes logical sense to simply submit a reasonable cause statement at the same time you submit the late Form 5471.
To do anything else is simply delaying the inevitable confrontation, and wasting your time and mental bandwidth.
Form 5471 Quiet Disclosure and Form 5471 Silent Disclosure
In a Form 5471 quiet disclosure or Form 5471 silent disclosure, the filer will submit an amended or late Form 5471, and hope that the IRS simply (somehow) doesn’t notice the delinquency or assess a penalty.
The IRS is increasingly aware of late or amended Form 5471 filings and has programmed its data management systems to assess penalties for late filings which contain no explanation of why the IRS shouldn’t assess the penalty. Thus, simply stated, Form 5471 quiet disclosure and Form 5471 silent disclosure doesn’t work.
The smart choice is working – from the beginning – with a Form 5471 tax attorney who can make a winning Form 5471 reasonable cause argument. Every single client for whom Andrew Jones has submitted a delinquent or amended return and a reasonable cause statement has avoided IRS penalty assessments.
Expertise is at a premium here. Make the call and speak now – for free – with Form 5471 expert Andrew L. Jones at (415) 745-1924.