Penalty amounts by form
| Form | Code section | Initial penalty | Continuation penalty | Cap |
|---|---|---|---|---|
| 5471 (foreign corporations), 8865 (foreign partnerships) | IRC 6038(b) | $10,000 per form, per foreign entity, per year | $10,000 per 30 days (or part) after the 90-day period | $50,000 continuation; $60,000 total per form per year (IRM 20.1.9.3.4) |
| 5472 (25% foreign-owned U.S. corporations, foreign corporations in a U.S. business) | IRC 6038A(d) | $25,000 per related party per year ($10,000 for tax years beginning before 2018) | $25,000 per 30 days after the 90-day period | None for continuation (IRM 20.1.9.5.4) |
| 3520, Parts I and III (transfers to and distributions from foreign trusts) | IRC 6677(a) | Greater of $10,000 or 35% of the gross reportable amount | $10,000 per 30 days after the 90-day period | Total cannot exceed the gross reportable amount |
| 3520-A (foreign trust with a U.S. owner) | IRC 6677(b) | Greater of $10,000 or 5% of the trust assets treated as owned by the U.S. person | $10,000 per 30 days | Gross reportable amount |
| 3520, Part IV (large foreign gifts) | IRC 6039F(c) | 5% of the gift for each month the failure continues | Built into the monthly rate | 25% of the gift |
| 8938 (specified foreign financial assets) | IRC 6038D(d) | $10,000 | $10,000 per 30 days after the 90-day period | $50,000 continuation |
These amounts are as stated in the Code sections and the current form instructions. Two features drive exposure. First, the penalty applies per form: one U.S. shareholder with four controlled foreign corporations who misses a year has four Form 5471 failures. Second, an incomplete return is treated as a failure. The Form 5472 instructions say it directly: “Filing a substantially incomplete Form 5472 constitutes a failure to file Form 5472.” Form 8938 adds an accuracy-related consequence: the instructions describe a penalty equal to 40% of an underpayment attributable to an undisclosed specified foreign financial asset (see the accuracy-related penalty guide).
How the IRS asserts the penalties
None of these penalties goes through deficiency procedures. IRM 20.1.9.2 says “Deficiency procedures under Subchapter B of Chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) do not apply to penalties discussed in this section.” There is no notice of deficiency and no Tax Court petition before assessment.
There are two assessment tracks:
- Field assertion. An examiner (international examiner, revenue agent, tax compliance officer and others) develops the case, gets written supervisory approval under IRC 6751(b), and assesses on Form 8278 with an explanation on Form 886-A. The penalty posts to a civil penalty module (MFT 55 for individuals, MFT 13 for businesses) and the taxpayer receives a CP15 or CP215. See supervisory approval under IRC 6751(b).
- Systemic assertion at the campus. A Form 5471 attached to a late Form 1120 or Form 1065 can generate the initial penalty automatically (PRN 599 or 712), and a Form 5472 attached to a late Form 1120 can generate PRN 711. This is why a late corporate or partnership return with international forms attached often produces a $10,000 or $25,000 penalty notice per form shortly after processing.
The examiner's file has to show the return was required and was not timely filed with complete and accurate information. IRM 20.1.9.2 lists what supports a presumption that the form was required, including the taxpayer's own testimony, a late-filed return, and filed returns showing forms due for other years or related entities.
The 90-day notice and continuation penalties
Penalties under IRC 6038, 6038A, 6038C, 6038D, 6677 and 6679 have notice letter provisions. If the required return or information is not received by the 90th day after the IRS mails the notice, continuation penalties begin and accrue per 30-day period until the information is filed or the maximum is reached. The IRM is unambiguous about timing: “There is no provision in the IRC or Treas. Regs. for an extension of the 90-day period described in the notice letter.”
The IRM recommends that, when there is no response, the initial assessment be prepared on or after day 125 and before day 150 after the notice letter, with one Form 8278 for the initial penalty and a second for two months of continuation penalty. For one delinquent Form 5471 that means $10,000 (PRN 623) plus $20,000 (PRN 619), with later assessments in three-month blocks ($30,000) after day 215 until the cap. Every 90-day notice letter in a client file should be calendared to the day.
A notice letter also opens the door to argue the form was not required or to request reasonable cause for the initial penalty, which is the most useful thing a practitioner can do with it.
Reasonable cause: what the IRS requires and rejects
Reasonable cause can remove an initial penalty, but the international rules are tighter than the general ones in IRM 20.1.1:
- File everything first. IRM 20.1.9 recommends that reasonable cause not be considered for any year until all delinquent returns for open years are filed. An examiner who sees two later years still missing is unlikely to grant relief for the first.
- Write it, and sign under penalties of perjury. “For penalties within this IRM, requests for abatement due to reasonable cause should contain a declaration that it is made under the penalties of perjury.” For Form 5471, Treas. Reg. 1.6038-2(k)(3) requires an affirmative showing of all facts in a written statement.
- Know the rejected reasons. IRM 20.1.9.2 says reasonable cause should not be granted merely because a foreign country would penalize disclosure, a foreign trustee refuses to provide information, or “The taxpayer relied on another person to file returns.”
- Relief on the income tax return is not enough. “The fact that reasonable cause relief was granted to the related income tax return does not automatically provide relief for the failure to timely file the information returns.”
- Continuation penalties. For IRC 6038(b) and 6038A(d), the IRM states there is no reasonable cause exception for the continuation penalty. Under the 6038A regulations, reasonable cause generally cannot extend past 90 days after the IRS notification.
Form 5472 has one favorable rule. Treas. Reg. 1.6038A-4(b)(2)(ii), as summarized in IRM 20.1.9.5.5, says reasonable cause will be applied liberally for a small corporation (gross receipts of $20,000,000 or less) that had no knowledge of the requirement, has limited U.S. presence, and promptly complies with requests to file and to furnish records. There is no small corporation exception from filing, only a more liberal reasonable cause standard. General reasonable cause standards are in the reasonable cause guide.
First Time Abate: the derivative rule for 5471 and 5472
FTA does not apply to event-based filings, and IRM 20.1.1.3.3.2.1 lists Forms 3520, 3520-A, 5471 and 5472 among the returns for which FTA is not applicable, with a cross-reference to an exception in IRM 20.1.9. That exception covers only the systemically assessed initial penalties: if the failure-to-file penalty on the related Form 1120 or Form 1065 is abated under FTA (or would have qualified but was not assessed because no tax was due or the return was fully paid), the Form 5471 penalty under PRN 599 or 712, or the Form 5472 penalty under PRN 711, may be abated under FTA as well, provided:
- the taxpayer had no similar penalties (PRNs 599, 623 or 712 for Form 5471; PRNs 625 or 711 for Form 5472) in the three prior periods, and
- the related Form 1120 or 1065 was not filed late in the three prior periods.
The same subsections allow a parallel reasonable cause abatement: if the related return's failure-to-file penalty was abated with a penalty reason code other than FTA and there were no similar penalties in the prior three periods, the systemic international penalty may be abated with the same code. And since January 1, 2016, if an extension posts after the related return, Master File reverses the systemic Form 5471 penalty automatically. Field-asserted penalties (PRN 623, 625 and the trust penalties) get none of these shortcuts. See First Time Abate.
Abatement requests, Appeals and the statute
Only the unit that assessed the penalty can abate it. IRM 20.1.9.2.4 states that payment of claims or abatement of these penalties must be approved by the assessing organizational unit, and that Collection personnel and campus examination personnel lack delegated authority to abate penalties assessed by field examiners. Delinquent information returns submitted with an abatement request are referred to the Examination function that assessed the penalty. Send requests to the address on the notice and expect them to be routed.
When a request is denied, the case can go to Appeals as a post-assessment penalty appeal; IRM 20.1.1.3.5.1 even has a specific closing code to stop collection notices on modules with PRN 668 international penalties while the case is transferred. For Forms 3520 and 3520-A, the IRM notes the disallowance Letter 854-C may arrive before the CP15 or CP215. See appealing a penalty abatement denial. After Appeals, the remaining route is to pay and sue for a refund (refund claims for paid penalties).
The statute matters in two directions. IRC 6501(c)(8), as described in IRM 20.1.9, keeps the assessment period open until three years after the required information is furnished, both for these penalties and for related items on the income tax return. Filing the delinquent forms starts that clock. IRM 20.1.9 itself was last revised in January 2021, so check for interim guidance before relying on its procedural details. For the assessment statute generally, see assessment statute of limitations.
Questions practitioners ask
A client's late Form 1120 had three Forms 5472 attached and the IRS assessed $75,000. Is that right?
It can be. The Form 5472 penalty is $25,000 per related party per year for tax years beginning after 2017, and the campus can assert it systemically (PRN 711) when Form 5472 is attached to a late Form 1120. If the corporation qualifies for FTA on the Form 1120 failure-to-file penalty and has no similar penalties or late returns in the prior three periods, the derivative FTA rule in IRM 20.1.9.5.5 can remove it.
Can we ask for more time to answer a 90-day notice letter?
The IRM says there is no provision in the Code or regulations to extend the 90-day period. File the delinquent forms, or at minimum a written reasonable cause statement, before day 90.
Does reasonable cause for the late income tax return cover the Forms 5471?
Not automatically. IRM 20.1.9.2 says relief on the related income tax return does not by itself relieve the information return penalty. The exception is the derivative rule for systemically assessed Form 5471 and 5472 penalties.
Is the reliance-on-preparer argument available?
It is weak for these penalties. IRM 20.1.9.2 lists reliance on another person to file returns among the reasons that, by themselves, should not establish reasonable cause, because it is the taxpayer's responsibility to make sure the returns are filed.
Can a campus employee or revenue officer abate a field-assessed Form 5471 penalty?
No. IRM 20.1.9.2.4 limits abatement to the organizational unit that assessed the penalty. Collection and campus examination staff lack delegated authority to abate penalties asserted by field examiners.
Does filing late Form 5471 extend the statute on the income tax return?
Yes, for related items. Under IRC 6501(c)(8), the assessment period for items related to the required information stays open until three years after the information is furnished.