» W. H. Simon - IRS Updates

BEWARE OF IRS 2009 'DIRTY DOZEN' TAX SCAMS. CLICK HERE FOR MORE INFORMATION

INTERNAL REVENUE SERVICE CHANGES THEIR POLICY FOR EACH FORM 5471 INCLUDED WITH A LATE FILED FORM 1120 TO AUTOMATICALLY ASSERT A $10,000 PENALTY

Effective January 1, 2009, the Internal Revenue Service will automatically assert penalties on U.S. Corporation Income Tax Returns (Form 1120) that include Information Return of U.S. Persons with Respect to Certain Foreign Corporations (Form 5471). Notice letters sent by the Internal Revenue Service to certain late filers of these forms contained this significant change. It is interesting to note that this change does not preclude the Service from asserting penalties prior to January 1, 2009 or from asserting additional penalties if the failure to file is not corrected within the time allotted.

When a person has a foreign financial corporate interest Form 5471 must be filed with a U.S. person’s tax return whether or not the person has a prescribed level of direct and/or indirect control over a foreign corporation. Form 5471 requires disclosure of pertinent information about the taxpayer as well as the foreign entity and must be filed with the taxpayer’s U.S. tax return by the due date, including extensions of time to file tax returns. Even if tax is not due on the U.S. tax return, the penalty for filing a late Form 5471 still applies. Until now, the Internal Revenue Service has not automatically asserted Section 6038 penalties.

For each Form 5471, Section 6038(b)(1) $10,000 penalty applies to each form filed with a late U.S. tax return. Furthermore, Section 6038(c) provides for a 10 percent reduction of the foreign taxes available for credit under Sections 901, 902 and 960. In some instances, by showing that reasonable cause existed in failing to file Form 5471 timely, Section 6038 states that penalties may be avoidable.

At this time, it is unknown if the Internal Revenue Service will expand the focus to consider other information reporting forms such as Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities, Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships or to taxpayers other than U.S. Corporations.