Sam Brotman, JD, LLM, MBA December 16, 2013 5 min read

IRS Penalties - Part Three

Penalties and Failure to Provide Foreign Information

Taxpayers who own shares in a controlled foreign corporation are required to file Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. This form must be filed for each controlled foreign corporation. The penalty for failure to file timely ranges from $10,000 to $50,000 per form. The taxpayer may also lose foreign tax credits. “U.S. corporations more than 25% owned, directly or indirectly, by foreign persons must file Form 5472 to report such ownership and all transactions with related parties” (Wikipedia.org, “IRS Penalties,” 9/11/2013). The use of 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 under sections 6038A and 6038C. The penalty for failure to file Form 5472 is $10,000 per required form. The penalty may be increased by $10,000 per month for continued failure (Wikipedia.org, “IRS Penalties,” 9/11/2013). Penalties may also be assessed for a taxpayer’s failure to report changes in those foreign taxes used as credits.

Additional penalty restrictions apply for both U.S. citizen and resident taxpayers (including entities) “who are beneficiaries of a foreign trust or make transfers of property to a foreign trust” (Wikipedia.org, “IRS Penalties,” 9/11/2013). Beneficiaries must report information about the transfer. Failure to file Form 3520[1] or Form 3520-A[2] will result in assessed penalties of up to 35 percent. A transferor to a foreign corporation must file Form 926, Filing Requirement for U.S. Transferors of Property to a Foreign Corporation. A penalty of 10% is typically assessed when the value of the transfer is up to $100,000. Lastly, a penalty of $500,000 plus jail is assessed for “failure to file Treasury Department Form TD F 90-22.1[3] each year by owners of or signatories to foreign bank or securities accounts” (Wikipedia.org, “IRS Penalties,” 9/11/2013).

Penalties and Excise Taxes

Federal excise taxes are typically imposed on goods and services. Taxes under this category may require a purchase of tax stamps or evidence of advanced payment of tax. Retailers may be required to collect the tax. Whether the entity is required to purchase tax stamps or collect the tax, the manufacturers’ and retailers’ goods and services are subject to an assortment of penalties. In addition, there are penalties that apply that are in the form of an excise tax. “Excise taxes are taxes paid when purchases are made on a specific good, such as gasoline. Excise taxes are often included in the price of the product. There are also excise taxes on activities, such as on wagering or on highway usage by trucks” (IRS.gov, “Excise Tax,” 9/11/2013). Charities and private foundations are responsible for paying excise taxes. Lastly, penalties in the form of excise taxes may be assessed against pension and benefit plans.

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[1] Form 3520, Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts

[2] Form 3520-A, Annual Information Return of Foreign Trust With a U.S. Owner (Under Section 6048(b)

[3] Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts (http://www.treasury.gov/services/Pages/TD-F-90-22.1-Report-of-Foreign-Bank-and-Financial-Accounts.aspx).

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Sam Brotman, JD, LLM, MBA

Owner and Director of Legal
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