Contents
- 1 Form 5471 Statute of Limitations
- 2 Due Date for Filing Form 5471
- 3 26 U.S.C. 6501
- 4 Relevance of 6038, 6046, and Form 5471
- 5 26 U.S. Code 6038 – Information reporting for foreign corporations and partnerships
- 6 26 U.S. Code § 6046 – Returns as to foreign corporations and as to acquisitions of their stock
- 7 The Statute of Limitations for Form 5471 Penalties Can be Extended
- 8 Always Try to Show Reasonable Cause
- 9 Current Year vs Prior Year Non-Compliance
- 10 Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
Form 5471 Statute of Limitations
In general, the IRS has three years to assess taxes and penalties against a Taxpayer — which starts from the filing of the tax return. In some situations, the time to assess taxes and penalties is extended to six (6) years (such as when more than $5,000 of gross income is generated from certain foreign assets). When it comes to international tax matters, it can get even more complicated due to the complexities of foreign penalty assessments which fall outside of the traditional deficiency procedure process. More specifically, the IRS takes the position that even when a US Taxpayer files a timely tax return, if they did not timely file the correct international information reporting forms (such as Form 5471 or form 3520) — the statute of limitations does not begin to run as to the international reporting form, even if the tax return was filed. This was the crux of the case in Fairbank — although the primary issue involved foreign trust reporting and Form 3520. We recently summarized how the IRS Statute of Limitations works in international tax matters, and specifically how the statute of limitations impactsinternational penalty assessments under 6501(c)(8) for Forms 3520, 3520-A, 5471, and 5472. This article will focus specifically on Form 5471 and how the statute of limitations for non-compliance can be extended indefinitely.
*We have a separate article detailing the statutory extension for Forms 3520 and 3520-A penalty enforcement as well.
Due Date for Filing Form 5471
As provided by the IRS:
Form 5471
“Attach Form 5471 to your income tax return (or, if applicable, partnership or exempt organization return) and file both by the due date (including extensions) for that return.”
26 U.S.C. 6501
(a) General rule
Except as otherwise provided in this section, the amount of any tax imposed by this title shall be assessed within 3 years after the return was filed (whether or not such return was filed on or after the date prescribed) or, if the tax is payable by stamp, at any time after such tax became due and before the expiration of 3 years after the date on which any part of such tax was paid, and no proceeding in court without assessment for the collection of such tax shall be begun after the expiration of such period. For purposes of this chapter, the term “return” means the return required to be filed by the taxpayer (and does not include a return of any person from whom the taxpayer has received an item of income, gain, loss, deduction, or credit).
(8) Failure to notify Secretary of certain foreign transfers
(A) In general
In the case of any information which is required to be reported to the Secretary pursuant to an election under section 1295(b) or under section 1298(f), 6038, 6038A, 6038B, 6038D, 6046, 6046A, or 6048, the time for assessment of any tax imposed by this title with respect to any tax return, event, or period to which such information relates shall not expire before the date which is 3 years after the date on which the Secretary is furnished the information required to be reported under such section.
(B) Application to failures due to reasonable cause
If the failure to furnish the information referred to in subparagraph (A) is due to reasonable cause and not willful neglect, subparagraph (A) shall apply only to the item or items related to such failure.
Relevance of 6038, 6046, and Form 5471
Sections 6038 and 6046 are referenced above under 6051(c)(8), as follows (in pertinent part):
26 U.S. Code 6038 – Information reporting for foreign corporations and partnerships
(a) Requirement
(1) In general
Every United States person shall furnish, with respect to any foreign business entity which such person controls, such information as the Secretary may prescribe relating to—
(A) the name, the principal place of business, and the nature of business of such entity, and the country under whose laws such entity is incorporated (or organized in the case of a partnership);
(B) in the case of a foreign corporation, its post-1986 undistributed earnings (as defined in section 902(c));
(C) a balance sheet for such entity listing assets, liabilities, and capital;
(D) transactions between such entity and—
(i)such person,
See AlsoPenalties | FinCEN.gov(ii)any corporation or partnership which such person controls, and
(iii)any United States person owning, at the time the transaction takes place—
(I) in the case of a foreign corporation, 10 percent or more of the value of any class of stock outstanding of such corporation, and
(II) in the case of a foreign partnership, at least a 10-percent interest in such partnership;
26 U.S. Code § 6046 – Returns as to foreign corporations and as to acquisitions of their stock
(a) Requirement of return
(1) In general
A return complying with the requirements of subsection (b) shall be made by—
(A) each United States citizen or resident who becomes an officer or director of a foreign corporation if a United States person (as defined in section 7701(a)(30)) meets the stock ownership requirements of paragraph (2) with respect to such corporation,
(B) each United States person—
(i) who acquires stock which, when added to any stock owned on the date of such acquisition, meets the stock ownership requirements of paragraph (2) with respect to a foreign corporation, or
(ii) who acquires stock which, without regard to stock owned on the date of such acquisition, meets the stock ownership requirements of paragraph (2) with respect to a foreign corporation,
(C) each person (not described in subparagraph (B)) who is treated as a United States shareholder under section 953(c) with respect to a foreign corporation, and
(D) each person who becomes a United States person while meeting the stock ownership requirements of paragraph (2) with respect to stock of a foreign corporation. In the case of a foreign corporation with respect to which any person is treated as a United States shareholder under section 953(c), subparagraph (A) shall be treated as including a reference to each United States person who is an officer or director of such corporation.
(2) Stock ownership requirements
A person meets the stock ownership requirements of this paragraph with respect to any corporation if such person owns 10 percent or more of—
(A) the total combined voting power of all classes of stock of such corporation entitled to vote, or
(B) the total value of the stock of such corporation. (b)Form and contents of returns The returns required by subsection (a) shall be in such form and shall set forth, in respect of the foreign corporation, such information as the Secretary prescribes by forms or regulations as necessary for carrying out the provisions of the income tax laws, except that in the case of persons described only in subsection (a)(1)(A) the information required shall be limited to the names and addresses of persons described in subparagraph (B) or (C) of subsection (a)(1).
The Statute of Limitations for Form 5471 Penalties Can be Extended
Regarding the code sections and IRS forms identified above, if the taxpayer does not file the form, the three-year statute of limitations does not begin to run. This may result in a Taxpayer being severely penalized several years after the statute limitations would have already expired for a timely filed return – if the return had been filed by the taxpayer. Noting, if the taxpayers are able to show reasonable cause and not willful neglect, they may be able to avoid penalties.
Always Try to Show Reasonable Cause
Practitioners should keep in mind that the Faribank court made a specific note that taxpayers did not make a sufficient claim for reasonable cause. Thus, Taxpayers may have been able to avoid the penalties if they could show reasonable cause:
“In a 2010 amendment to section 6501(c)(8), Congress added a reasonable cause exception for failure to furnish the information required under this section, effective for returns filed after March 18, 2010. Petitioners did not adequately raise the issue of reasonable cause for their failure to comply with the reporting obligations under section 6048.”
Current Year vs Prior Year Non-Compliance
Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making aquiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialistthat specializes exclusively in these types of offshore disclosure matters.
Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)
In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties.
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Form 5471 is a crucial document in international tax compliance, particularly for U.S. taxpayers with interests in foreign corporations. The nuances surrounding its filing, statute of limitations, and penalties demand an in-depth understanding.
The statute of limitations for IRS assessments generally spans three years from the filing date of a tax return, but certain circ*mstances extend it to six years. In international tax matters, this complexity expands due to the necessity of filing accurate international information reporting forms like Form 5471 or Form 3520. Notably, failure to file these forms can indefinitely extend the statute of limitations, enabling the IRS to assess penalties years after the standard period.
Sections 6038 and 6046 of the U.S. tax code mandate reporting requirements for foreign business entities controlled by U.S. persons. These sections necessitate furnishing information related to foreign corporations' details, earnings, transactions, and ownership. Failure to comply with these reporting requirements can trigger extended statute of limitations for tax assessments.
Notably, demonstrating "reasonable cause" can be a crucial defense against penalties. However, the burden lies on taxpayers to prove reasonable cause for non-compliance. The case of Fairbank highlights the significance of adequately establishing reasonable cause to avoid penalties for failure to comply with reporting obligations under section 6048.
Furthermore, for taxpayers with prior year non-compliance issues, simply starting to file in the current year without addressing past reporting lapses can be risky. A consultation with a specialized Tax Law Specialist becomes essential before undertaking any untimely foreign reporting filings to mitigate the risks associated with quiet disclosures.
Distinguishing between willful and non-willful behavior is pivotal in choosing the appropriate IRS disclosure program. Willful non-compliance necessitates submission under the Voluntary Disclosure Program, while non-willful cases can opt for Streamlined Procedures. However, submitting false information even under Streamlined Procedures, especially for willful cases, can lead to severe fines and penalties.
Given the intricate nature of international tax law and compliance, seeking assistance from specialized firms like Golding & Golding, focusing exclusively on international tax law and IRS offshore disclosure, is highly recommended for effective guidance and resolution of compliance issues.
