Correcting Common Form 5471 Errors

Currently, the US government has 5 solutions to correct Form 5471 errors.

Participation in the most disclosure programs is permitted only if the funds held in the foreign financial account(s) are from a legal source (and not the proceeds of an illegal activity) and if the IRS is not already in a position to know of the person’s noncompliance.

1. You Can File an Amended Form 5471 BUT DO NOT File a LATE Form 5471

According to the Form 5471 instructions, a person who previously filed an Form 5471 but mistakenly provided incomplete or inaccurate information on the form can file an amended Form 5471.

HOWEVER, filing a delinquent or late Form 5471 outside one of the IRS’s penalty relief programs provides NO penalty protection and therefore requires very careful consideration. THERE IS AN AUTOMATIC COMPUTER-GENERATED $10,000 PENALTY THAT WILL BE ASSESSED. This approach is NOT recommended due to the lack of penalty protection.

2. File Pursuant to the IRS’s Delinquent International Information Return Submission Procedures (DIIRSP)

A person who has not previously filed an Form 5471, but who has properly filed federal income tax returns that fully reported the income from any foreign source(s), may be eligible for the IRS’s DIIRSP. Under the DIIRSP, the IRS will not impose a penalty for the failure to file the delinquent Form 5471s if you properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign sources reported on the delinquent Form 5471, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent Form 5471 are submitted.  Therefore, there can be NO previously unreported income. If any unreported income, then you cannot use this solution.

Under the DIIRSP, the U.S. person must file the delinquent Form 5471 and include a statement that persuasively explains why the Form 5471 is being filed late. Legal counsel is recommended for drafting such statement. Although not required by the procedures, the explanation should also reference that the Form 5471 is being filed pursuant to the “IRS’s Delinquent International Information Return Submission Procedures.”

3. File Pursuant to the IRS’s Streamlined Filing Compliance Procedures: Streamlined Domestic Offshore Procedure (SDOP)

The IRS’s Streamlined Domestic Offshore Procedure (SDOP) is available for a resident U.S. person who non-willfully failed to file an Form 5471 and/or failed to report on a U.S. tax return income related to foreign financial account(s). Note that a taxpayer currently under examination is not eligible for the streamlined program.

In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or Form 5471 was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) with Form 5471 for 3 prior years and applicable FBARs for 6 prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, Form 5471 and information return penalties, as well as criminal liability. The IRS carefully reviews and scrutinizes every certification.  Legal counsel is recommended for drafting such certification.

The IRS will also impose a penalty equal to 5% of the maximum aggregate balance in the unreported foreign financial account(s) during the 6 year period.

4. File Pursuant to the IRS’s Streamlined Filing Compliance Procedures: Streamlined Foreign Offshore Procedure (SFOP)

The IRS’s Streamlined Foreign Offshore Procedure (SFOP) is available for a nonresident U.S. person who mistakenly failed to file an Form 5471 and/or failed to report on a U.S. tax return income related to foreign financial account(s). These procedures are also available for a nonresident U.S. taxpayer who failed to file a federal income tax return (i.e., Form 1040). Note that a taxpayer currently under examination is not eligible for the streamlined program.

In general, a taxpayer is eligible to participate in the streamlined program if his or her failure to file a U.S. tax return and/or Form 5471 was not willful. The streamlined program requires a participant to file federal income tax returns (or amended returns) with Form 5471 for 3 prior years and applicable FBARs for 6 prior years, along with a persuasive declaration (signed under penalties of perjury) attesting that his or her failure to file was not willful. A false certification could expose a disclosing taxpayer to potential civil fraud, Form 5471 and information return penalties, as well as criminal liability. The IRS carefully reviews and scrutinizes every certification. Legal counsel is recommended for drafting such certification.

In general, the IRS will not impose any penalties on a participating nonresident taxpayer. Hence this is a 0% penalty solution.

5. Apply to Participate in the IRS’s Offshore Voluntary Disclosure Program (OVDP)

In general, the OVDP requires a taxpayer to file 8 prior years’ tax returns with Form 5471 and any applicable FBARs, provide detailed information regarding any unreported foreign financial account(s), and pay all taxes, accuracy penalties, delinquency penalties, and interest due for the 8 year period. In addition, the IRS imposes a civil penalty equal to 27.5% of the single maximum aggregate balance in the unreported foreign financial accounts during the 8 year period. The penalty is increased to 50% if the IRS or DOJ has initiated an investigation of the financial institution in which the accounts are held. Nevertheless, this program remains a potentially attractive option for a U.S. person otherwise exposed to even greater civil penalties or possible criminal prosecution.