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The IRS recently released a new International Practice Unit (IPU) providing guidance to its examiners on monetary penalties applicable to Category 4 and Category 5 filers that fail to comply with Form 5471 reporting requirements. Penalties under Internal Revenue Code (IRC) Section 6038 may apply when a Form 5471 is filed late, substantially incomplete or not at all. Referencing prior rulings and other guidance, the IPU addresses the meaning of “substantial” Form 5471 compliance for purposes of assessing and collecting such penalties. 


Certain U.S. persons who are officers, directors or shareholders in certain foreign corporations are required to file Form 5471. The U.S. person’s relationship to the foreign corporation as well as the percentage and duration of stock ownership determine category filer status. Category filer status determines what information the person is required to include in and attach to Form 5471. Category 4 filers include U.S. persons who controlled a foreign corporation for at least 30 days during the taxable year. Category 5 filers include U.S. persons who owned at least 10 percent of a foreign corporation considered a controlled foreign corporation for at least 30 days during the taxable year and who owned the stock on the last day of the year. 

In the event a U.S. person’s Form 5471 is filed late, substantially incomplete or not at all, Section 6038 provides for an initial penalty of $10,000 per Form 5471 per year. A continuation penalty of $10,000 per Form 5471 per year also may be assessed for every 30-day period beginning 90 days after the person was notified a failure exists, with a maximum continuation penalty of $50,000 per form per year. The statute of limitations for assessing and collecting penalties ends three years after a substantially complete Form 5471 has been filed.

“Substantially” Complete

Since the term “substantially” complete isn’t defined in the IRC or Treasury Regulations for purposes of Form 5471 reporting, the IPU provides specific examples to IRS audit examiners where a Form 5471 may be considered not substantially complete. These include information on Page 1 of Form 5471, common situations and specific designations previously addressed in field service or chief counsel advice.  

Filings without the following Form 5471 information aren’t 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) and reference ID number (only for tax years beginning after 2012 and only when the EIN isn’t provided)
  • Schedules required to be attached aren’t included, e.g., Schedule J or M

Common situations referenced where a Form 5471 isn’t considered substantially complete include:

  • 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 following IRS advice provides specific situations where a Form 5471 isn’t considered substantially complete (in cases where the specific situations articulated above aren’t relevant):

  • 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
  • CCA 200645023:  Balance sheet and income statement aren’t in accordance with generally accepted accounting principles and not in both functional and U.S. currencies

In addition, the IRS has requested its auditors review the U.S. person’s Form 5471 for any schedules required (based on their filing category) but not prepared. If the Form 5471 doesn’t contain any of the required schedules, Section 6038 isn’t substantially complied with. Section 1.6038-2(k) discusses the failure to furnish required information. In determining whether a Form 5471 is substantially complete, it may be necessary to review this regulation in addition to the guidance set forth in the IPU.

Form 5471 Category 4 and 5 filers should use the above examples and references to determine whether an error or omission was significant enough to consider their Form 5471 filing(s) as substantially incomplete for purposes of applying penalties that may apply under Section 6038.

If you feel you may have a Form 5471 filing requirement or would like additional information, contact your BKD advisor.

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