Can I Be Audited Because of Incorrect Filing of Form 5471?

 Posted on October 27, 2020 in Tax Audits

The U.S. tax code is very complex, and taxpayers are required to file a wide variety of forms correctly when completing their tax returns. This is especially true for those who own foreign assets or earn income from foreign sources. Failure to meet these requirements can result in tax audits, and taxpayers may face hefty penalties for their failure to comply with their tax requirements. 

The Large Business & International (LB&I) division of the Internal Revenue Service maintains a number of “campaigns” meant to address ongoing concerns about misreporting of assets and income and noncompliance with tax obligations. One notable campaign addresses “loose filing” of Form 5471, (Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

Requirements for Filing Form 5471

Form 5471 is used to evaluate the extent of a taxpayer’s foreign assets while also tracking the profits earned by a foreign corporation and any changes in a company’s structure or ownership that may affect the taxes it pays. There are several categories of filers that are required to submit Form 5471, including shareholders of specified foreign corporations (SFCs) or controlled foreign corporations (CFCs), officers or directors of foreign corporations in which a U.S. person has at least 10% ownership stake, or a U.S. person who had control (more than 50% of stock or voting power) of a foreign corporation during the relevant tax accounting period.

The specific issue that the IRS’s campaign is addressing is the “loose filing” of Form 5471. When this form is filed, it should be attached to an applicable income tax return, including an individual tax return or a tax return for a partnership or exempt organization. The form should also be filed by the due date for the return to which it is attached. Some taxpayers have filed Form 5471 on its own, without attaching it to a tax return. 

Taxpayers who have filed Form 5471 incorrectly can file an amended tax return with Form 5471 attached. However, since filing a loose Form 5471 is considered noncompliance with foreign tax reporting requirements, this could trigger a tax audit. Misfiling of tax forms may invite further scrutiny of a taxpayer’s foreign assets and income, and a person or organization may be subject to penalties, such as a $10,000 penalty for failure to file Form 5471 or other forms correctly or a 40% penalty on underpayment of taxes due to undisclosed foreign financial assets.

Contact a San Jose, CA Tax Audit Lawyer

If you have questions about whether or how you should file Form 5471 or 5471A or are facing an IRS audit related to taxes on foreign assets or income, John D. Teter Law Offices can help you understand what steps you can take to become compliant with the IRS’s requirements, and we will work to help you avoid or minimize tax penalties. Contact our San Jose tax compliance attorney at 408-866-1810 to set up a consultation today.

Sources:

https://www.irs.gov/businesses/corporations/lbi-active-campaigns

https://www.irs.gov/instructions/i5471