More and more individuals are receiving unduly, severe and threatening letters from the IRS. This is largely due to the increase in the number of penalties that are being automatically assessed on individuals by the IRS.
The penalties are generally significant and come as a surprise to most individuals who are late in filing certain U.S. information forms. The penalties are particularly unfair as they are often issued on individuals or corporations who do not realize or fully understand all of their U.S. filing obligations until it is too late and they are assessed a late filing penalty.
These significant penalties are of particular concern to Canadian-based businesses because more and more Canadian companies, with no previous filing requirements to the U.S., are engaging in cross-border transactions exposing them to U.S. filing obligations.
Two common forms that owners of Canadian corporations may be required to file are Form 5471 and Form 5472. The penalty for failing to file either one of these forms by the deadline is $10,000 per form. This penalty is now automatically being assessed for each failure to file by the filing due date.
Below is a brief discussion of the filing requirements and due dates for both forms. The filing requirements can be very complex, so we recommend that you discuss your potential filing requirements with one of our qualified professionals.
Requirement to File Form 5471
Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations, is required to be filed by all U.S. persons who fall into one of the “Categories of Filers” described in the form’s instructions, which can be found here.
Generally, if a U.S. person owns more than 10% of the shares of a foreign corporation (e.g. Canadian Corporation), the U.S. person is required to file Form 5471 and any required schedules.
Form 5471 Due Date
The due date for filing Form 5471 is the same due date as the individual’s U.S. income tax return (including extensions).
Form 5471 Penalties
An automatic $10,000 penalty will be assessed on any taxpayer or foreign corporation that fails to file Form 5471 by the filing due date. The penalty will also be assessed if the reporting party fails to properly maintain records as required by the IRS, or if a substantially incomplete Form 5471 is filed.
In addition to the $10,000 penalty, if the information is not filed within 90 days after notification by the IRS, an additional $10,000 penalty can be charged for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period has expired.
Requirement to File Form 5472
Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business, is required to be filed as an attachment to Form 1120 or Form 1120-F (and certain other Forms or Returns) if the reporting corporation had a reportable transaction with a foreign or domestic related party. A link to Form 5472’s instructions can be found here.
A reporting corporation is generally either a 25% foreign-owned U.S. corporation or a foreign corporation engaged in a trade or business within the U.S.
A corporation is 25% foreign owned if it has at least one direct or indirect 25% foreign shareholder at any time during the tax year.
A related party is defined as any direct or indirect 25% foreign shareholder of the reporting corporation or any person who is related to the reporting corporation as defined by U.S. tax law.
A reportable transaction is defined as the following:
- any type of transaction listed in Part IV of Form 5472 between the reporting corporation and the foreign related party (e.g. sales, rents, loans, etc.) for which monetary consideration (including U.S. and foreign currency) was the sole consideration paid or received during the reporting corporation’s tax year, or
- any transaction or group of transactions listed in part IV of Form 5471, if:
- any part of the consideration paid or received was not monetary consideration, or
- less than full consideration was paid or received.
Form 5472 Due Date
The due date for filing Form 5472 is the same due date as the corporation’s U.S. income tax return (including extensions).
Form 5472 Penalties
An automatic $10,000 penalty will be assessed on any reporting corporation that fails to file Form 5472 by the filing due date. The penalty will also be assessed if the reporting corporation fails to properly maintain records as required by the IRS, or if a substantially incomplete Form 5472 is filed.
In addition to the $10,000 penalty, if the information is not filed within 90 days after notification by the IRS an additional $10,000 penalty (per related party for which a failure occurs) is charged for each 30-day period (or part of a 30-day period) during which the failure continues after the 90-day period has expired.
Taxpayers should review their previously filed returns and consult with their tax advisors, if necessary, in order to determine if they are in compliance with their U.S. income tax filing obligations. If it is determined that you are not in complete compliance, then the taxpayer should consult with their tax advisors to determine what filing options are available to bring their prior year tax filing obligations into compliance.
Our qualified professionals are available to assist taxpayers with any questions that they may have.