When an Irvine software company contacted LSL CPAs for help, their IRS Form 5471 tax problems turned out to be much more serious than they thought. A few years prior to working with LSL, they had setup a satellite company in India to conduct business in that country. Since the Indian Corp did not conduct business in the United States and did not generate income, the owners figured it didn’t matter whether they filed IRS Form 5471 or not.
Since the corporation was losing money, the Irvine software company believed that they did not need to bother with IRS Form 5471 disclosure requirements. Why would the IRS care if there was no tax liability and the foreign company wasn’t making any money? What the owners of the Irvine software company did not realize was how seriously the Internal Revenue Service takes such disclosure requirements. The question is not whether the foreign investment is making money, but whether the foreign investment exists in the first place.
The penalty for failing to file IRS form 5471 is $10,000.00 per each form that was required to be filed but was not. After seven years of overseas business the penalty, if assessed, would have added up to over $70,000. The owners of the US parent also failed to realize that the penalties could be assessed against them as the majority shareholders of the foreign-based business.
The Irvine software company was smart enough to contact LSL CPAs for help before the non-disclosure penalty had been assessed by the IRS. If they had come after the assessment of the penalty, the outcome would have been quite different. Employing the Offshore Voluntary Disclosure Program, the international tax consultants were able to file amended returns to include IRS Form 5471 for the company under a very specific clause in the OVDP (the acronym for the Offshore Voluntary Disclosure Program ) code.
In the OVDP’s frequently asked questions (FAQs), question 13 provides a guideline that allows a company to avoid the IRS Form 5471 failure to disclose penalties if they file under the umbrella of the OVDP. Once the voluntary disclosure was made, the company was no longer subject to the non-disclosure penalties and the $70,000.00 potential assessment was voided. This huge savings was based on a technicality that only an experienced international tax accountant would know. If your company is in a similar position, please contact LSL CPAs for help
This content contains accurate information. It is inherently limited, however, on account of the length of the article and the complexity of the foreign disclosure issues being discussed. It is important to note that this article presents only a partial view of the subject matter.