Form 5471 is one of the most complex international tax forms required by the IRS, and getting it wrong—or not filing it at all—can result in steep automatic penalties.
If you’re a U.S. person with interests in certain foreign corporations, failure to timely file Form 5471, filing it incorrectly, or omitting required information can lead to automatic, compounding penalties — regardless of whether you owe any tax. These are some of the most severe information return penalties imposed by the IRS.
The IRS uses Form 5471 to enforce compliance with U.S. international information reporting rules. Because of the form’s complexity and the broad definition of foreign corporations, individual taxpayers and domestic corporations frequently make filing mistakes — or don’t file at all. Unfortunately, the Internal Revenue Service does not excuse these errors lightly, and penalties apply swiftly.
What Triggers Form 5471 Penalties?
Form 5471 penalties are governed by Internal Revenue Code section 6038(b). A person required to file Form 5471 must furnish information about certain foreign corporations with respect to which they are a U.S. shareholder, officer, or director.
Penalties are assessed if:
- You fail to file the form by the due date (including extensions),
- You fail to include all required information,
- You fail to file the correct and proper form, or
- You fail to respond to an IRS request for missing information.
Even filing the wrong annual accounting period, using the wrong schedules, or not including a reportable transaction can be considered such failure.
Breakdown of Form 5471 Penalties
1. Initial Penalty – $10,000 Per Form, Per Year
The IRS will automatically assess a $10,000 initial penalty for each foreign corporation if Form 5471 is late, incomplete, or incorrect.
This penalty applies per form, per year, and per foreign entity. If you’re a shareholder in three foreign corporations and miss a single tax year, your initial penalties could total $30,000.
2. Additional Penalties – Up to $50,000 Per Form
If the failure continues for more than 90 days after the IRS mails notice, the IRS will impose an additional penalty of $10,000 for each 30-day period (or part of a 30-day fraction thereof) until the information requested is provided.
- Maximum penalty per form: $50,000
- Total maximum penalties including initial fine: $60,000 per form, per year
These penalties imposed are per entity, not per return — meaning multiple foreign corporations trigger multiple penalty stacks.
3. Loss of Foreign Tax Credits
Under §6038(c), if you fail to comply with Form 5471 reporting, you may face a 10% reduction in your ability to claim foreign taxes as credits. If the failure continues, the IRS may deny 100% of your foreign tax credit. This can create substantial additional U.S. tax liability, even for expats living abroad who otherwise pay full foreign tax.
4. Statute of Limitations Remains Open
If you fail to file Form 5471 or submit an incorrect version, the statute of limitations on your entire tax return for that year remains open indefinitely. That means the IRS’s authority to assess tax, penalties, and interest does not expire — a serious risk under IRS’s authority to enforce late filing penalties.
5. Potential Criminal Penalties
While rare, criminal penalties may apply in cases of willful noncompliance, especially where the taxpayer acted fraudulently or deliberately withheld information. This includes charges under:
- IRC §7203 – Willful failure to file
- IRC §7206 – Fraud and false statements
- IRC §7207 – Fraudulent returns
Such cases may be prosecuted in tax court, the United States Court of Federal Claims, or even escalate to the Supreme Court if necessary.
Can Penalties Be Removed?
Yes, the IRS may grant relief from Form 5471 penalties if you can demonstrate reasonable cause and good faith. However, the threshold is high. The IRS rarely grants abatement unless the person required to file can clearly show that:
- They relied on professional advice,
- They made an honest mistake in selecting the correct and proper form, or
- The failure was due to circumstances beyond their control.
You must typically submit a detailed reasonable cause statement with your late filing, citing applicable facts, reliance on advisors, and attempts to comply with the reporting requirements.
The National Taxpayer Advocate has previously criticized the IRS’s ability to assess penalties without review and has urged more flexibility for individual taxpayers, particularly expats unfamiliar with complex U.S. tax laws related to foreign trusts, foreign gifts, and foreign bank ownership.
Recent Legal Interpretations and Challenges
Form 5471 penalties have been upheld repeatedly in federal courts, including in decisions by the DC Circuit and Tax Court. In some cases, a circuit’s decision has been reversed on appeal, but the tax court’s decision generally aligns with the IRS’s aggressive interpretation of 6038(b).
For example, the courts have affirmed that the IRS may assess penalties without proving actual tax loss or willfulness — simply failing to file the correct form on time is enough.
Why U.S. Expats Must Treat Form 5471 Compliance Seriously
If you are a U.S. person with ownership in certain foreign corporations, you must file Form 5471 completely, accurately, and on time. Otherwise, you expose yourself to:
- $10,000–$60,000 per entity, per year
- Loss of foreign tax credits
- An open audit window with no expiration
- Potential criminal penalties in egregious cases
- Long, expensive battles in tax court or worse
Form 5471 is not just a checkbox — it’s a high-stakes disclosure with real legal and financial consequences. Given the complexity and risk, it is critical to file the correct and proper form, supported by accurate data and compliant with the time prescribed by the IRS.
If you’re behind or unsure whether you’re subject to certain penalties, consult a qualified international tax advisor, and consider whether streamlined procedures may apply. Failure to file Form 5471 correctly — even with no tax due — is enough to trigger serious problems with the Internal Revenue Service.
