AICPA asks IRS for penalty relief on CFC returns

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The American Institute of CPAs is asking the Internal Revenue Service to provide relief from tax penalties to taxpayers who are required for the first time to file information returns related to Controlled Foreign Corporations.

In a letter Thursday to the IRS’s associate chief counsel, AICPA Tax Executive Committee chair Annette Nellen asked the IRS to immediately provide prospective penalty relief to any first-time filer of Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations, whose filing obligation comes solely from the imposition of so-called “downward attribution” under the recently enacted Tax Cuts and Jobs Act.

“Downward attribution” allows stock owned by a foreign person to be attributed to a U.S. person for purposes of creating a Controlled Foreign Corporation, or CFC.

The AICPA pointed out that IRS Notice 2018-13 eliminated the requirement for certain U.S. shareholders of CFCs to file a Form 5471. The relief was a “welcome acknowledgement of the unnecessary burden otherwise imposed on many taxpayers” by the Act’s repeal of Internal Revenue Code section 958(b)(4), the AICPA wrote.

Nevertheless, the AICPA noted, “Many other taxpayers will face a new requirement to file Form 5471 without realizing it.” The exception for filing Form 5471 according to Notice 2018-13 doesn’t apply to an unrelated third party who is a U.S. person and who owns stock in a CFC. Those taxpayers need to receive immediate prospective penalty relief because the requirement to file Form 5471 applies to tax year 2017, as well as all future years, the AICPA argued.

“Failure to timely file Form 5471 results in immediate imposition of a $10,000 penalty by the IRS,” Nellen wrote. “Taxpayers have historically faced difficulties in having this penalty abated, even when taxpayers believed they had reasonable cause.”

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