U.S. taxpayers who are officers, directors or shareholders in a foreign corporation must file a Form 5471 (Information Return of U.S. Persons With Respect to Certain Foreign Corporations) as part of a timely filed corporate tax return or face a $10,000 penalty. In assessing this penalty, the Internal Revenue Service (IRS) does not distinguish between large public multinational companies and small companies, or companies that may only have insignificant overseas operations.
“This one-size-fits-all approach inadvertently places undue hardship on smaller corporations that do not have the same financial resources as larger corporations,” the American Institute of CPAs (AICPA) said in its comments to the IRS and Treasury. “While taxpayers are entitled to appeal the imposition of the penalty, the process is difficult and costly. The process poses a significant burden on many small taxpayers in particular.”
One important change the IRS should make, the AICPA said, is to provide taxpayers a 30-day grace period from the time the IRS provides written notice for a taxpayer to submit a request for reasonable cause relief. In some cases, the AICPA told the agencies, taxpayers may file late because of circumstances outside of their control, a misunderstanding of the complex area of international tax law or an inadvertent error.
The AICPA also suggested that the IRS and Treasury:
Promulgate regulations or administrative guidance to provide an automatic six-month extension of time to file Form 5471, similar to the automatic six-month extension provided for other types of returns.
Ensure requests for reasonable cause relief are given consistent and adequate consideration upon initial submission to the IRS.
Provide consistent administration of reasonable cause relief based on all stated facts and circumstances.
The AICPA said if the IRS adopted the recommendations to provide taxpayers relief from penalty assessments for late filing of Form 5471, it would “promote the fair and efficient administration of the international penalty provisions of the Internal Revenue Code.”