I Missed Forms 5471, 5472, 3520 or 8938. What Penalties Apply and Is Relief Available?

The main penalties

• Form 5471 (U.S. persons with interests in certain foreign corporations): $10,000 per form, per year, with an additional $10,000 for each 30-day period the failure continues more than 90 days after an IRS notice, up to $50,000 in continuation penalties
• Form 5472 (25 percent foreign-owned U.S. corporations and foreign-owned disregarded entities): $25,000 per form, per year, with a similar continuation penalty after notice
• Form 3520 (foreign gifts and bequests): 5 percent of the amount of the gift for each month the failure continues, up to 25 percent
• Form 3520 and 3520-A (foreign trusts): generally the greater of $10,000 or a percentage of the amount involved — 35 percent of reportable distributions or contributions, or 5 percent of the trust's assets for Form 3520-A
• Form 8938 (specified foreign financial assets): $10,000, with continuation penalties after notice, and a 40 percent accuracy penalty on understatements attributable to undisclosed assets

Amounts above reflect the statutory framework. The current-year form instructions should be checked for the specific rules that apply to the year involved.

The statute of limitations stays open

Under section 6501(c)(8), when certain international information returns are not filed, the statute of limitations on assessment for the entire tax return can remain open until three years after the missing information is provided. If the failure was due to reasonable cause, the extension is generally limited to the items related to the missing form. This is one of the most important and least understood consequences of an unfiled information return.

How the penalties are assessed

When a late Form 5471 or 5472 is attached to a return, or a late Form 3520 is filed, the IRS has in many cases assessed the penalty systematically, with a notice arriving months later. A reasonable cause statement filed with the late form may or may not be considered before assessment. For that reason, the response to the notice — including the timing of any appeal — matters as much as the original filing.

First-time abatement generally does not help

The IRS's first-time abatement policy covers failure-to-file, failure-to-pay and certain other penalties. It generally does not extend to international information-return penalties under sections 6038, 6038A, 6039F, 6677 and 6038D. Relief from these penalties is usually requested under a reasonable cause standard, which requires showing that the taxpayer exercised ordinary business care and prudence and that the failure was not due to willful neglect.

What a reasonable cause statement should show

• The specific facts that led to the failure, in chronological order
• The steps the taxpayer took to learn about and comply with filing obligations, including reliance on a professional who was given complete information
• Why the facts establish ordinary business care and prudence
• When and how the failure was discovered, and how promptly it was corrected
• Supporting documents, such as engagement letters or correspondence

A statement that simply says the taxpayer was unaware of the requirement is rarely sufficient on its own. Ignorance of the law can be one factor, but it is weighed alongside the taxpayer's education, sophistication and prior filing history.

The delinquent international information return submission procedures

Taxpayers who do not need the Streamlined Filing Compliance Procedures or the Voluntary Disclosure Practice, are not under civil examination or criminal investigation, and have not already been contacted about the delinquent forms may use the delinquent international information return submission procedures. Since late 2020, these procedures require a reasonable cause statement with each late form; the IRS does not automatically waive the penalty simply because the form was filed through this channel.

When the IRS has already assessed

Once a penalty notice arrives, options generally include a written request for abatement based on reasonable cause, an appeal to the IRS Independent Office of Appeals, and in some cases litigation. The IRS has also, at times, offered broader administrative relief — for example, Notice 2022-36 provided automatic relief from certain information-return penalties for 2019 and 2020 returns filed within a specified period. Whether any such relief applies depends on the year and the form.

Practical order of operations

• Identify every missing form across all open years, not only the one that prompted concern
• Determine whether any unreported income is also involved, which changes the correct procedure
• Prepare accurate forms and a fact-specific reasonable cause statement
• File through the appropriate channel and keep proof of submission
• Calendar deadlines for responding to any notice that follows

Sources and official references

• IRS — Delinquent International Information Return Submission Procedures
• IRS — Instructions for Form 5471
• IRS — Instructions for Form 3520
• IRS — Penalty relief for reasonable cause
• IRS — Notice 2022-36