Declaring Foreign Business Interests
Navigating the U.S. tax code can feel like tiptoeing through a minefield, especially when you throw in international dealings.
If you’re a U.S. person or corporation with foreign business interests, two forms in particular—Forms 5471 and 5472—might already haunt your dreams.
Dubbed the “Terrible Twosome” by some beleaguered taxpayers, these forms come with stringent filing requirements and draconian penalties for non-compliance.
Here’s why you should never forget to file these forms, what the consequences of forgetting are, and some recent developments that might surprise you.
What Are Forms 5471 And 5472?
Form 5471 is essentially an information return that must be filed by certain U.S. citizens and residents who are officers, directors, or shareholders in certain foreign corporations.
The form requires detailed disclosure about the foreign corporation’s income, assets, and shareholders.
Form 5472 on the other hand, is used by U.S. corporations that are at least 25% foreign-owned, or by foreign corporations engaged in a U.S. trade or business.
This form requires disclosure of reportable transactions between the reporting corporation and related foreign parties.
While both forms may seem like just another piece of paperwork, failure to file them—or filing them incorrectly—can lead to massive penalties.
The Fines:
Staggering and Unforgiving The IRS takes non-compliance with Forms 5471 and 5472 very seriously, with penalties that could make even the most seasoned tax veteran wince.
For Form 5471 the penalty starts at $10,000 per year per foreign corporation.
If the taxpayer fails to correct the omission within 90 days of being notified by the IRS, additional penalties of $10,000 accrue every 30 days, up to a maximum of $50,000.
Form 5472 penalties are even harsher, starting at $25,000 for each accounting period the form is not filed.
After the IRS sends a notice of failure, an additional $25,000 penalty kicks in for each subsequent 30-day period of non-compliance, with no cap on the penalties.
These penalties apply whether the non-compliance was willful or due to an innocent mistake, although options for relief exist in cases of non-willful conduct.
However, this relief is often difficult to obtain and requires demonstrating reasonable cause for the failure.
No Statute Of Limitations? Yes, You Read That Right
One of the most terrifying aspects of failing to file these forms is that it can leave your entire tax return open to scrutiny indefinitely.
Normally, the IRS has three years from the date you file your return to audit it.
However, if you fail to file Forms 5471 or 5472, that statute of limitations does not apply. The IRS could theoretically go back and audit that return 10, 15, or 20 years later.
Recent Developments: A Small Ray of Hope?
A recent Tax Court case, Farhy v. Commissioner, had thrown a wrench into the IRS’s penalty regime.
In April 2023, the court ruled that the IRS did not have the statutory authority to assess penalties under Section 6038(b) for failing to file Form 5471.
The IRS had been enforcing these penalties for years, but the court found that there was no legal basis for these assessments.
However this Tax Court Ruling was subsequently overturned by the United States Court of Appeals, District of Columbia Circuit on 3 May 2024.
Conclusion: Don’t Tempt Fate
If you have foreign business interests and think you might need to file Form 5471 or 5472, the best advice is simple: file them.
Even if the forms are a headache and the rules seem complex, the potential costs of non-compliance—financial and otherwise—are simply too high to ignore.
And as the Farhy case shows, while there may be occasional victories against the IRS, they are the exception rather than the rule.
So, stay vigilant, keep those forms in mind, and avoid becoming another cautionary tale in the annals of tax non-compliance.
The “Terrible Twosome” might be formidable, but with careful attention and professional guidance, they don’t have to be your undoing.
