The Price of Non-Compliance: IRS Penalties for Unfiled International Information Returns – and How to Fight Back

U.S. taxpayers with foreign business interests, ownership stakes in foreign entities, or offshore financial assets face significant international information reporting obligations. Failure to file (or incomplete filing) of Forms 5471, 5472, 8938, 926, 8858, and 8865 can trigger severe IRS penalties, often reaching tens or hundreds of thousands of dollars per year. Critically, these are information return penalties, meaning they apply regardless of whether any tax was actually owed.

The Penalties at a Glance

• Form 5471 (U.S. persons with interests in foreign corporations): $10,000 per form, per year, plus continuation penalties of up to $50,000 if the failure persists after IRS notification.
• Form 5472 (25% foreign-owned U.S. corporations and foreign corporations in U.S. trade or business): $25,000 per form, per year, one of the steepest in the Code, with an additional $25,000 per month for continued non-compliance, with no statutory cap.
• Form 8938 (specified foreign financial assets under FATCA): $10,000 per year, plus up to $50,000 in continuation penalties and a potential 40% accuracy-related penalty on any related income understatement.
• Form 926 (U.S. transferors of property to foreign corporations): 10% of the fair market value of property transferred, up to $100,000.
• Form 8858 (foreign disregarded entities and foreign branches): $10,000 per form, per year, with continuation penalties mirroring those applicable to Form 5471.
• Form 8865 (U.S. persons with interests in foreign partnerships): $10,000 to $100,000 or more per year, depending on the nature of the filing failure.

Two Paths to Penalty Relief

Reasonable Cause.

The IRS will abate penalties where a taxpayer demonstrates that the failure resulted from reasonable cause and not willful neglect. Successful arguments typically involve good-faith reliance on a qualified tax advisor, genuine lack of knowledge of a highly technical obligation, or inability to obtain necessary information from a controlling foreign party. A compelling reasonable cause submission requires a carefully drafted narrative, supported by documentary evidence, that directly addresses the IRS’s standard of ordinary business care and prudence.

First Time Abatement (“FTA”).

Taxpayers with a clean three-year compliance history may qualify for FTA, a streamlined administrative procedure that does not require demonstrating the reason for the failure. While the IRS has historically taken the position that FTA does not apply to certain international information return penalties, requests are sometimes granted in practice, particularly at the examination level. In many cases, the strongest approach is to pursue both arguments simultaneously, reasonable cause as the primary basis and FTA as an alternative where the compliance history supports it.

How a Tax Attorney Can Help

The penalty framework for international information returns is designed to compel compliance, and the financial exposure for non-filers can be significant. An experienced tax attorney can assess a client’s full filing obligations, quantify existing penalty exposure, prepare voluntary disclosures where appropriate, and craft abatement submissions that maximize the likelihood of relief. Engaging counsel early, before penalties compound and before the IRS’s posture hardens, is essential. If you or your clients have received IRS penalty notices related to international information returns, contact our firm to assess your options and develop a penalty mitigation strategy. This blog is intended for informational purposes only and does not constitute legal or tax advice. Readers should consult a qualified tax professional regarding their specific circumstances.