Further IRS Clarifications Regarding Automatic Penalties for Late Forms 1120 and Forms 5471s
As we reported in a prior e-alert dated 9/5/08 (link?), starting January 1, 2009, IRS will automatically assess $10,000 penalties for each late filed Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, and late filing penalties for related Forms 1120 (even if no tax is due).
IRS has provided further clarification for the AICPA regarding various issues and concerns related to this shift in policy.
1. The automatic penalties letter will only apply to Forms 1120 (and Forms 1120 suffixes – i.e., Forms 1120F) and associated Forms 5471 filed late. Not to other types of returns. The automatic program is not going to be able to pick up “substantially incomplete” Form 5471. It appears that the IRS computer (not IRS personnel) will identify late Forms 1120 accompanied by Forms 5471, and the computer will generate the correspondence/notice.
2. IRS Service Centers will be in charge of this process/issuing the notices.
3. IRS will first send a Notice to Respond. Taxpayers can respond with a reasonable cause penalty abatement/waiver request. IRS Examinations group will then decide to waive the penalty or assess the penalty. If not waived, the taxpayer will then have to pay and file for refund claim.
4. If the taxpayer filed a Form 1120, but has delinquent Forms 5471, the taxpayer needs to file an amended Form 1120 with Forms 5471 and a reasonable cause statement.
5. The reasonable cause statement needs to be submitted at the same time as the amended or late return is submitted. The reasonable cause statement for e-filed amended returns needs to be submitted to a specific address - Internal Revenue Service, ARKA Monterrey Park, 1973 N. Rulon White Blvd, Mail Stop 6552 (ARKA) - Attn: AM Clerical, Ogden, UT 84404. The reasonable cause statement can also be attached to the return, but needs to also be submitted separately to this Ogden address.
6. To file an amended efiled return, the taxpayer needs to efile at a minimum:
a. Check off the amended return box.
b. Include the first 4 pages of the corrected Form 1120 (or appropriate Form 1120 series).
- Include the attached Forms 5471.
d. Include a Form 1120X and relevant schedules and forms to support the changes.
e. Include a statement in the text area about Filing Forms 5471.
- Send separate Reasonable Cause statement to the Ogden ARKA address.
- Taxpayers can also include the reasonable cause statement with the return, but MUST SEPARATELY send the reasonable cause statement to the Ogden ARKA address.
7. Taxpayers who have trouble with efiling amended returns, should follow Notice 2005-88 (http://www.irs.gov/irb/2005-48_IRB/ar08.html) and request a Technological Waiver, listing the software problems and reasons why the technology will not allow to efile at this time. The detailed statement with a contact name and email/fax/phone number has to be faxed to the ehelpdesk as in the notice – fax: (801) 620-7622.
8. E-filing the amended return is currently required if the original return was required to be e-filed, even for 2006 returns. However, the IRS continues to look at possible (i.e., paper) options for amending originally required e-filed returns.
9. Substantially incomplete Form 5471issues and potential adjustments to foreign tax credits will be handled by exams in the context of an examination, not by the service centers automatically.
10. Form 5471 and its instructions require financial information in accordance with US GAAP, so if the Form 5471 has IFRS or other non-GAAP financials, it is deemed substantially incomplete.
11. Penalties may also apply to late Forms 5472, 8858, and 8865 if reasonable cause cannot be established, but as of now, the automated notice process will only be sent for late filed corporate returns (i.e., Forms 1120/1120S, etc.) that include a Form 5471.
12. IRS will try to get out guidance to the public and all corporations.
13. IRS efile group will post to their website guidance on amended returns with omitted Forms 5471 as well as information on the technology waiver for efile.
A Form 5471 Guide is available to Tax Section members as a resource to further explain the issues involved with this information reporting requirement. Additional information is also available on the filing requirements and instructions for the Form 5471.
Download First Update on Automatic Penalties
Download IRS Letter