IRS Form 5471 Penalty

U.S. citizens or residents who are officers or directors of a foreign corporation (e.g. a Canadian corporation) often overlook their U.S. filing obligations, and it is important to understand the stiff penalties for not properly disclosing foreign interests.

If a U.S. citizen or resident is an officer or a director of a foreign corporation in which a U.S. person has: 1) acquired 10% or more of votes or value of the corporation during the year or 2) acquired an additional 10% or more of votes or value of the corporation during the year, the officer/director is required to report as a Category 2 filer on Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations).  Reporting is required whether or not the officer/director owns shares in the foreign corporation and regardless of whether the foreign corporation is a controlled foreign corporation (“CFC”).

Failure to file, or filing an incomplete Form 5471, can result in penalties of $10,000 per foreign corporation, unless a reasonable cause defense exists. At any time, the IRS may issue a written request to file Form 5471 within 90 days. If not filed, the continuous penalty applies at $10,000 per month to a maximum of $50,000. The combined penalty is capped at $60,000.

Other information returns that are either filed late or incomplete may attract initial and similar continuous penalties and are summarized as follows:

 

Form Initial Penalty Continuous Penalty Maximum Penalty
Form 8938, Statement of Foreign Financial Assets $10,000 per return Additional $10,000 penalty per month that the failure continues, beginning 90 days after initial notice Maximum continuous penalty of $50,000 for a combined penalty of $60,000
Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Greater of $10,000 or 35% of the gross reportable amount

 

In the case of greater than $100,000 of foreign gifts received, the penalty is 5% of the value of the gift per month.

Additional $10,000 penalty per 30-day period, or a fraction thereof, that the failure continues beginning 90 days after initial notice Gross reportable amount plus initial penalty

 

 

 

 

Maximum penalty of 25% of the value of the gift

Form 3520-A, Information Return of a Foreign Trust with a U.S. Owner Greater of $10,000 OR 5% of the gross value of trust assets owned by the U.S. person Additional $10,000 penalty per 30-day period, or a fraction thereof, that the failure continues beginning 90 days after initial notice Gross reportable amount plus initial penalty

 

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation 10% of the value of the property transferred Not applicable $100,000

 

No maximum if due to intentional disregard

Form 8865, Return of U.S. Persons with Respect to Foreign Partnerships $10,000 for failure to file

 

 

 

Plus, 10% of the value of any unreported transferred property

Additional $10,000 penalty per month that the failure continues beginning 90 days after initial notice Maximum continuous penalty of $50,000 for a combined penalty of $60,000

 

 

$100,000

Form 5472, Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business $25,000 per foreign corporation ($10,000 prior to 2018) Additional $25,000 penalty per month that the failure continues beginning 90 days after initial notice NO MAXIMUM PENALTY
Form 114, Foreign Bank Account Report Willful penalty of the higher of $100,000 or 50% of the total balance of the foreign financial account per violation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-willful penalty of up to $10,000 per account per year

 

 

 

 

Not applicable. Aggregate of all accounts that does not exceed $50,000, penalty is greater of $1,000 per violation on 5% of the maximum account balance in the calendar year

 

Aggregate balance of more than $50,000 but no more than $250,000, penalty is the greater of $5,000 per violation or 10% of the maximum account balance

 

Maximum aggregate balance is greater than $250,000 and less than $1,000,000, penalty is greater of 10% of the maximum account balance or 50% of the closing balance in the account on the last day for filing the FBAR

 

If the account exceeds $1,000,000, the penalty is the greater of $1,000,000 or 50% of the closing balance of the account

 

In most cases, the total penalty amount for all years under examination will be limited to 50% of the highest aggregate balance.  Although penalty may be higher or lower, the total penalty should not exceed 100% of the highest aggregate balance.

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Aggregate of all accounts that does not exceed $50,000, penalty is $500 per violation not to exceed $5,000

 

Aggregate of all accounts that exceed $50,000 but less than $250,000, penalty is lesser of $5,000 or 10% of the highest balance in the account during the year

 

For violations regarding an account exceeding $250,000, the maximum penalty is $10,000 per violation.

 

In no event will the penalties for non-willful violations exceed 50% of the account balances.