Penalty relief for International Information Forms 5471, 5472, and 8865 – Tax, Estate Planning & Probate Law Center (2024)

Penalty relief for International Information Forms 5471, 5472, and 8865

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

However, there are severalpenalty abatement strategies to mitigate penalties for delinquent or unfiled Forms5471, 5472, and 8865. In recent years there has been an increase in penaltyamount for Form 5472 and updated IRS Internal Revenue Manual (IRM) language onpenalty abatement, tax advisors must know the procedures for the assessment andabatement of thesepenalties.

International information return reportingrequirements and penalties

Code section 6038requires every U.S. person to furnish, for any foreign business entity thatperson controls, the information listed in Code section 6038(a)(1). Theinformation is reported on Form 5471 or Form 8865, as applicable. Code section6038A requires any domestic corporation that is 25%foreign-ownedtofurnish the information listed in Code section 6038A(b)(1). That information isreported on Form 5472.Code section 6038C provides for additionalinformation about foreign corporations engaged in U.S. business to be reportedon Form 5472, and Code section 6038B provides for additional informationregarding certain transfers to foreign persons to be reported onForm8865.

Failure to timely file aForm 5471 or Form 8865 is generally subject to a $10,000 penalty perinformation return, plus an additional $10,000 for each month the failurecontinues, beginning 90 days after the IRS notifies the taxpayer of thefailure, up to a maximum of $60,000 per return. Where a Form 8865 fails toproperly report a transfer or contribution of property, the applicable penaltyis 10% of the value of the transferred or contributed property not reported, upto a maximum of $100,000 (unless the failure is due to intentional disregard).A failure to timely file a Form 5472 is subject to a $25,000 penalty perinformation return, plus an additional $25,000 for each month the failurecontinues, beginning 90 days after the IRS notifies the taxpayer of thefailure, with no maximumpenalty.

Failure to timely file aForm 5471, 5472, or 8865 also lengthens the statute of limitations under Codesection 6501(c)(8), which provides that the period of limitation on assessmentdoes not begin to run until the information required to be reported isfurnished to the IRS, after which date athree-yearassessment periodbegins. However, if the failure to timely file is due to reasonable cause andnot willful neglect, the period of limitation on assessment is extended onlyfor the item or items related to thefailure.

Penalty relief

Where a penalty forfailure to timely file an international information return either has beenassessed by the IRS, or may be assessed, several potential strategies forpenalty relief should beexplored.

Delinquent International Information Return Submission Procedures (DIIRSP):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,Amended U.S. Corporation Income Tax Return) and attach areasonable–causestatement 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 informationreturn: “Penalties may be assessed in accordance with existingprocedures…penalties 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 causeinformation. 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 informationreturn.

Streamlined FilingCompliance Procedures (SFCP):The IRS’sStreamlined Filing Compliance Procedures are available to taxpayers who cancertify that their failure to report foreign financial assets and pay all taxdue on those assets did not result from willful conduct on their part. Theprocedures are designed to provide taxpayers in such situations with a“streamlined” process for filing amended or delinquent returns aswell as terms for resolving their tax and penalty obligations; the procedures,therefore, encompass the ability for a taxpayer tolate-fileForm5471, Form 5472, or Form 8865. The streamlined procedures are available only toindividual taxpayers (including estates) and are not available if the taxpayeris under civil or criminal examination. There are two distinct sets ofprocedures, one for U.S. residents (Streamlined Domestic Offshore Procedures)and one fornon-U.S. residents (Streamlined Foreign Offshore Procedures).The notable distinction between the domestic procedures and the foreign proceduresis that taxpayers eligible under the domestic procedures are subject to a 5% miscellaneousoffshore penalty, while those eligible under the foreign procedures are notsubject to anypenalty. Note that the streamlined procedures are distinctfrom the IRS Criminal Investigation Voluntary Disclosure Practice (see IRM§9.5.11.9 (9/17/20),Voluntary Disclosure Practice), which is typicallyfor willful taxpayers.

Reasonable cause:The penalty provisions in Secs. 6038, 6038A, 6038B, and 6038Cprovide that if a failure is due to reasonable cause and not to willfulneglect, the penalty will not be imposed. If none of the other abatement ormitigation strategies discussed above are available, a taxpayer may assertreasonable cause to counter penalties assessed on alate-filedForm5471, 5472, or 8865. Thereasonable-causedetermination is made onacase-by-casebasis, taking into account all pertinent facts andcirc*mstances (see Regs. Sec. 1.6038A-4(b)(2)(iii); see also Regs. Secs.1.6038-2(k)(3)(ii) and 1.6038-3(k)(4)). The IRM statesthatreasonable-causerelief is generally granted when the taxpayerexercised ordinary business care and prudence in determining his or her tax obligationsbut was nevertheless unable to comply with those obligations (IRM §20.1.1.3.2(11/21/17),Reasonable Cause, ¶1).TheCOVID-19pandemic has resulted inlonger-than-averageprocessingand review times for penalty abatement requests, emphasizing the importance oftaxpayers’ determining the appropriate avenue to seek penalty relief.

First-timepenaltyabatement:The IRS’s First Time Abate (FTA) policyprovides an additional avenue for penalty relief. Under the FTA policy, the IRSwill generally abate certain penalties for a limited universe of forms if thefollowing FTA criteria aremet:

• The taxpayer has not been required to file the same return, or no tax modules for the same return are delinquent, for the three years preceding the penalized tax period;
• If required to file the same return during the preceding three years, there are no unreversed penalties (except an estimated tax penalty) or penalties manually suppressed or reversed using FTA or tolerance criteria;
• The taxpayer has filed, or filed a valid extension for, all required returns currently due; and
• The taxpayer has paid or arranged to pay, any tax currently due (see IRM §20.1.1.3.3.2.1 (10/19/20),First Time Abate (FTA)).

FTA does NOT applytoevent-basedfiling requirements, such as Form 5471 or Form 5472.However, the IRM provides that FTA applies to Forms 5471 and 5472 forwhichlate-filingpenalties have been systematically assessed,provided the additional following criteria aremet:

• The failure-to-file penalty on the related Form 1120,U.S. Corporation Income Tax Return, or Form 1065,U.S. Return of Partnership Income, filing is abated under the FTA provisions (or would have been eligible for FTA, but a failure-to-file penalty was not assessed because there was no tax due or it was a fully-paid return);
• The taxpayer had no similar penalties in the 3 prior periods; and
• The related Form 1120 or Form 1065 was not filed late in the three prior periods

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