Penalty Relief for International Tax Forms 5471, 5472 & 8865?
A common question our International Tax Lawyers receive is whether or not a US Person Taxpayer can seek relief from IRS International Information Reporting Penalties resulting from noncompliance with international information reporting Forms 5471, 5472, and 8865.
Form 5471: Information Return of U.S. Persons With Respect To Certain Foreign Corporations under 26 USC 6038 and 26 USC 6048
Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business under 26 USC 6048
Form 8865: Return of U.S. Persons With Respect to Certain Foreign Partnerships under 26 USC 6038 and 26 USC 6048
While these particular forms do not focus specifically on foreign accounts or assets, they are required for any US person who meets the particular category of filer required to submit the form(s). Unlike form 5471 and 8865 – Form 5472 is required for taxpayers who live abroad and are non-US persons who are conducting business in the United States through an entity or disregarded entity. Let’s go through the basics of penalty relief for international tax forms 5471, 5472, and 8865.
Penalty Relief for International Reporting Forms 5471 & 8865?
Here is a list of various penalty relief procedures:
Delinquent FBAR Submission Procedures (DFSP)
When a Taxpayer does not have to make any substantive changes to their tax return involving unreported income, they may qualify for the Delinquent FBAR Submission Procedures. This program is typically limited to Taxpayers who have no unreported income and are not required to file other delinquent forms in addition to the FBAR. For Taxpayers who qualify for these submission procedures, there is generally no penalty applied for prior-year noncompliance.
Delinquent International Information Return Submission Procedures (DIIRSP)
Up until November of 2020, Taxpayers who had no unreported income (but missed filing international information reporting forms) could sidestep any offshore penalties by filing delinquent forms under DIIRSP. In November of 2020, the IRS rules changed and the IRS does not guarantee that filing delinquent forms will circumvent penalties — although with the right set of facts and circumstances, the Taxpayer may avoid penalties by showing reasonable cause (see further below).
Streamlined Domestic Offshore Procedures (SDOP)
The Streamlined Domestic Offshore Procedures are IRS procedures designed for Taxpayers who do not qualify as foreign residents, are non-willful, and filed their original tax returns timely. Under these procedures, a Taxpayer can opt to pay a 5% Title 26 Miscellaneous Offshore Penalty in lieu of all the other delinquent FBAR and FATCA penalties.
Streamlined Foreign Offshore Procedures (SFOP)
The Streamlined Foreign Offshore Procedures are probably the best of all the offshore tax programs for Taxpayers who qualify as eligible. This is because if a Taxpayer qualifies as a foreign person and is non-willful, they can avoid all offshore penalties under these procedures. In addition, Taxpayers can file original tax returns.
IRS Voluntary Disclosure Program (VDP) for Delinquent FBAR & FATCA
The IRS Voluntary Disclosure Program (VDP) has been in existence for many years. From 2009 to 2018, there was an offshoot of the VDP program — which was referred to as the Offshore Voluntary Disclosure Program (OVDP) — and was primarily for Taxpayers with undisclosed foreign income and assets. In 2018, the IRS closed this program — but also expanded the traditional voluntary disclosure program on matters involving foreign and offshore income and asset disclosures.
Under the prior version of OVDP for delinquent FBAR, FATCA, etc. — even non-willful Taxpayers would submit to the program in order to both receive a closing letter and almost always avoid an audit (unless they opted-out). The new version of the VDP program is geared primarily for Taxpayers who are willful or are unable to certify under penalty of perjury that they are non-willful. It is still a great program in which Taxpayers can almost always avoid criminal prosecution — and it rarely if ever would have any impact on a person’s immigration status (unless the Taxpayer was also “criminally” willful and the government pursued that criminality against the Taxpayer, which is extremely rare).
Reasonable Cause for Delinquent FBAR and FATCA
In general, a Taxpayer cannot be subject to penalties for missing the filing of delinquent FBAR and other international information reporting forms if they can show reasonable cause and not willful neglect. This is not a program per se but rather an alternative submission package in which the Taxpayer seeks to avoid or minimize penalties without formally going through the programs listed above — while also avoiding making a quiet disclosure. If you are considering a reasonable cause submission, you should speak with a Board-Certified Tax Lawyer Specialist about your different options.
Penalty Relief for Form 5472
Unlike Forms 5471 and 8865, the penalty for Form 5472 is different — because the applicant is not a US Person, and therefore there is generally no ongoing US tax and filing requirement unless they are conducting certain business in the United States. Therefore, typically in order to apply for penalty relief for a Form 5472 penalty – or to avoid a form 5472 penalty – the taxpayer will submit a reasonable cause statement.
Golding & Golding: About Our International Tax Law Firm
Golding & Golding specializes exclusively in international tax, and specifically IRS offshore disclosure.
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