Forms 5471 – Automatic Assessment of Penalties under IRC Section 6038(b)(1)
In August, 2008, the Internal Revenue Service began issuing letters to some taxpayers to alert them to an upcoming procedural change relative to the automatic assessment of penalties. These letters were issued to taxpayers who may not have timely filed their corporate return and/or not timely filed their Forms 5471.
IRC Section 6651(a)(1) provides a penalty for the failure to file income tax returns (Form 1120) by their due date (including extensions). The penalty is 5% of the tax required to be shown on the income tax return for each month (or fraction thereof) during which such failure continues. The amount of the penalty shall not exceed 25%.
In addition, a separate penalty may apply to each Form 5471 which is filed after the due date of the income tax return. These penalties will apply even if no tax is due on Form 1120.
IRC Section 6038(a) requires information reporting with respect to certain foreign corporations (Form 5471) and describes the information required to be submitted via this form. IRC Section 6038(b)(1) provides for a monetary penalty of $10,000 for each Form 5471 that is filed after the due date of the income tax return (including extensions) or does not include the complete and accurate information described in Section 6038(a).
IRC Section 6038(c) provides for a 10% reduction of the foreign taxes available for credit under IRC Sections 901, 902 and 960. Per IRC Section 6038(c)(3), this reduction to the foreign taxes can be applied in addition to the monetary penalty.
Beginning January 1, 2009, the Internal Revenue Service Center will automatically assert appropriate penalties on late filed Forms 1120 with Forms 5471 attached. For general filing requirements and specific Form 5471 instructions please see Certain Taxpayers Related to Foreign Corporations Must File Form 5471.
Taxpayers are encouraged to submit delinquent Forms 5471 prior to January 1, 2009. For those taxpayers who are required to electronically file their income tax return under Treasury Decision 9363, they are also required to e-file any amended returns for tax years 2006 and 2007. Similarly, these taxpayers may voluntarily e-file an amended return for the tax year 2005. Please see our guidance on e-filing amended returns under Amended and Superseding Returns. Please note that guidance is provided by tax year.
Taxpayers who are experiencing difficulties with e-filing their amended returns and/or forms may request a waiver from the requirement to electronically file. These taxpayers should follow the procedures as outlined in Notice 2005-88. It is important for these taxpayers to provide a thorough explanation of the constraints that prevent them from electronically filing their amended returns. This will allow the Service to give proper consideration to their request.