The IRS recently released a new International Practice Unit (“IPU”) on failures to file form 5471. IPUs are meant to act as a guide for IRS examiners and give insight to taxpayers as to how the IRS will evaluate certain tax situations. The unit specifically deals with penalties associated with Internal Revenue Code § 6038, which assess a $10,000 penalty when certain forms are filed late, substantially incomplete, or not filed at all. Though the IPU specifically relates to Form 5471, Form 5472 is subject to the same penalties under the same code provision.
Form 5471 is filed by U.S. taxpayers with respect to certain interests and transactions related to their ownership in foreign corporations. Conversely, Form 5472 is filed by either U.S. corporations with some foreign owners or a foreign corporation which engages in a U.S. trade or business. The Form 5472 filing obligation is triggered by certain transactions.
The IPU focuses specifically on what information qualifies Form 5471 as being “substantially complete.” It is important to note that neither the Internal Revenue Code nor the Treasury Regulations define “substantially complete” for the purposes of Form 5471, but the IPU does provide situations and examples to illustrate the concept. The IPU states that Forms 5471 without the following information are not considered substantially complete:
- Item B: Category of filer
- Item C: Total percentage of the foreign corporation’s voting stock owned at the end of the annual accounting period (omitted or incorrect)
- Item 1a: Name and address of foreign corporation
- Item 1b(1) and 1b(2): Employer identification number (EIN). If omitted, at least the reference ID number is required (this number is chosen by the taxpayer to associate with distinct foreign corporations and has been required for tax years beginning after 2012)
- Schedules required to be attached aren’t included, e.g., Schedule J or M
The following situations are also listed as examples of an incomplete submission:
- Stating that required information will be furnished upon request or audit
- Providing computer-generated Form(s) 5471 that weren’t IRS-approved and don’t conform to requirements
- Failing to provide financial statements for controlled foreign corporations
- Providing consolidated financial statements of two or more foreign corporations
The IPU also provided reference to guidance which would result in a Form 5471 not being substantially complete:
- FSA 1997 WL 33381431: Related-party purchases were significantly understated and/or sales were reported and significant inconsistencies were reported for earnings and profits.
- CCA 200429007: This advice provides a seven-factor facts and circumstances test for “substantially” complete for over and underreporting. The factors are as follows:
1) The magnitude of the under reporting, or of the over-reporting, of the erroneous reported transaction(s) in relation to the actual total amount of that reported type of transaction(s);
2) Whether the reporting corporation has reportable transactions other than the erroneous reported transaction(s) with the same related party and correctly reported such other transactions;
3) The magnitude of the erroneous reported transaction(s) in relation to all of the other reportable transactions as correctly reported;
4) The magnitude of the erroneous reported transaction(s) in relation to the reporting corporation’s volume of business and overall financial situation;
5) The significance of the erroneous reported transaction(s) to the reporting corporation’s business in a broad functional sense;
6) Whether the erroneous reported transaction(s) occur(s) in the context of a significant ongoing transaction relationship with the related party; and
7) Whether the erroneous reported transaction(s) is (are) reflected in the determination and computation of the reporting corporation’s taxable income.
- CCA 200645023: Balance sheet and income statement aren’t in accordance with generally accepted accounting principles and not stated in both functional and U.S. currencies.
When completing Forms 5471 and 5472 it is imperative to provide all necessary information so that the form will be considered “substantially complete.” If the form is filed but it is deemed not “substantially complete,” the taxpayer may be subject to a $10,000 penalty for each form filed which is not “substantially complete.”