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Chaya Kundra

Attorney Chaya Kundra Presents on the Substantial Compliance Rules for Forms 5471/International Filing Requirements

On Behalf of | May 25, 2021 | blog |

Form 5471 Substantial Compliance

Penalties

Failure to file information required by section 6038(a) (Form 5471 and Schedule M)

  • Failing to timely and accurately file Form 5471 may result in civil and criminal penalties, a reduction to foreign tax credit and the potential of your statute of limitations not beginning to run. A $10,000 penalty is imposed for each annual accounting period of each foreign corporation for failure to furnish the information required by section 6038(a) within the time prescribed. If the information is not filed within 90 days after the IRS has mailed a notice of the failure to the U.S. person, an additional $10,000 penalty (per foreign corporation) is charged for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000 for each failure.
  • Any person who fails to file or report all of the information required within the time prescribed will be subject to a reduction of 10% of the foreign taxes available for credit under sections 901, 902 (with respect to foreign corporate tax years beginning before January 1, 2018), and 960. If the failure continues 90 days or more after the date the IRS mails notice of the failure to the U.S. person, an additional 5% reduction is made for each 3-month period, or fraction thereof, during which the failure continues after the 90-day period has expired. See section 6038(c)(2) for limits on the amount of this penalty.

Failure to file information required by section 6046 and the related regulations (Form 5471 and Schedule O).

Any person who fails to file or report all of the information requested by section 6046 is subject to a $10,000 penalty for each such failure for each reportable transaction. If the failure continues for more than 90 days after the date the IRS mails notice of the failure, an additional $10,000 penalty will apply for each 30-day period, or fraction thereof, during which the failure continues after the 90-day period has expired. The additional penalty is limited to a maximum of $50,000. These penalties may apply to each required Form 5471 on an annual basis. Criminal penalties may also apply for failure to file the information required by IRC 6046.

Criminal penalties.

Criminal penalties under sections 7203, 7206, and 7207 may apply for failure to file the information required by sections 6038 and 6046.

Section 6662(j).

Penalties may be imposed for undisclosed foreign financial asset understatements. No penalty will be imposed with respect to any portion of an underpayment if the taxpayer can demonstrate that the failure to comply was due to reasonable cause with respect to such portion of the underpayment and the taxpayer acted in good faith with respect to such portion of the underpayment. See sections 6662(j) and 6664(c) for additional information.

The Beard Test – IRS International Practice Unit Cites

The Beard Test, 82 T.C. 777 (1984).

  • In Beard the Tax Court has summarized the requirements for a tax return to be considered valid for purposes of beginning the statute of limitations on assessment:
    • It provides sufficient data to calculate tax liability.
    • The document must purport to be a return.
    • There must be an honest and reasonable attempt to satisfy the requirements of the tax law.
    • The taxpayer must sign the return under penalties of perjury.

A return that meets these four requirements will be considered valid and trigger the running of the statute of limitations even if it contains other inaccuracies or omissions.

Substantial Compliance Doctrine

The substantial compliance doctrine is a narrow equitable doctrine that courts use to avoid taxpayer hardship if the taxpayer establishes that he or she intended to comply with a provision, did everything reasonably possible to comply with the provision, but did not comply with the provision because of a failure to meet the provision’s specific requirements. Bedrosian v. Commissioner, 143 T.C. 83, 100 (2014)

The substantial compliance doctrine says that taxpayers do not need to be perfect, but they need to act in good faith and substantially comply with requirements in a statute or regulation.

In order for it to be effective, the element of intent must be present: “We have examined the cases as to what constitutes a statement of election under various provisions of the Internal Revenue Code and have found that… a submitted return and its attached schedules must evidence an affirmative intent on taxpayer’s part to make the required election and be bound thereby. Failure to manifest such intent has repeatedly resulted in taxpayer’s alleged election being rejected.” * * * [Fischer Indus., Inc. v. Commissioner, 87 T.C. at 122 (quoting Atl. Veneer Corp. v. Commissioner, 85 T.C. 1075, 1082-1083 (1985), aff’d, 812 F.2d 158 (4th Cir. 1987)); citations omitted.]

“A taxpayer may well have intended to make an election, but as a result of an error or omission the taxpayer did not fully comply with the requirements to make an election. In such a situation a taxpayer might be deemed to have substantially complied. But aggregating footfaults [*103] eventually moves away from compliance, beyond substantial compliance, and all the way to noncompliance.” Bedrosian v. Commissioner, 143 T.C. 83, 102-03 (2014)

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